Robert Vitale, Waldemar Pfoertsch, Joseph Giglierano - Business To Business Marketing-Pearson (2010)

Business-to-Business
Marketing: Analysis
and Practice
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Marketing: Analysis
and Practice
Robert P. Vitale
San Jose State University
Joseph Giglierano
Waldemar Pfoertsch
China Europe International Business School
Prentice Hall
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Library of Congress Cataloging-in-Publication Data

Vitale, Robert P.
Business-to-Business Marketing : Analysis and Practice / Robert Vitale, Joseph Giglierano,
Waldemar Pfoertsch.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-13-605828-1
ISBN-10: 0-13-605828-0
1. Industrial marketing. I. Giglierano, Joseph J. II. Pfoertsch, Waldemar. III. Title.
HF5415.1263.V582 2011
658.8'04—dc22
2010004856
10 9 8 7 6 5 4 3 2 1
ISBN 10: 0-13-605828-0

ISBN 13: 978-0-13-605828-1
To our families,
who have tolerated this effort
BRIEF CONTENTS
Foreword xxvii
Preface xxix
Acknowledgments xxxi
Chapter 1 Introduction to Business-to-Business Marketing 1
Chapter 2 Business-to-Business Environment: Customers, Organizations,
and Markets 28
Chapter 3 Organizational Buying and Buyer Behavior 52
Chapter 4 The Legal and Regulatory Environment 79
Chapter 5 Concepts and Context of Business Strategy 103
Chapter 6 Market Research and Competitive Analysis 124
Chapter 7 Segmenting, Targeting, and Positioning 148
Chapter 8 Developing the Product, Service, and Value of the Offering 173
Chapter 9 Innovation and Competitiveness 200
Chapter 10 Pricing in Business-to-Business Marketing 218
Chapter 11 Business Development and Planning 253
Chapter 12 Business-to-Business Selling: Developing and Managing the
Customer Relationship 279
Chapter 13 Business-to-Business Branding: Creating and Fostering
the Brand 308
Chapter 14 Channel Relationships and Supply Chains 334
Chapter 15 Communicating with the Market 367
Chapter 16 Business Ethics and Crisis Management 399
Cases
Case 1 LastMile Corporation II: Choosing a Development Partner 423
Case 2 B2B E-Commerce in China: The Story of Alibaba.com 427
Case 3 Dow Corning Success in China 442
Case 4 Marketing Plastic Resins: GE and BW II 453
Case 5 Automotive Headlamps II: The Paradigm Shift from Standardized Glass
Sealed Beams to Today’s Plastic Custom Designs 464
Case 6 Makrolon: The High-Tech Material 473
Case 7 SENSACON Corporation: High Technology Evolves to High
Volume 486
Index 493
vii
CONTENTS
Foreword xxvii
Preface xxix
Acknowledgments xxxi
Chapter 1 Introduction to Business-to-Business Marketing 1

Introduction 3
Marketing Fundamentals in Business-to-Business Markets 3
The Marketing Mix 4
PRODUCT 4
PRICE 5
PLACE 6
PROMOTION 7
Marketing Philosophy and Culture 7
Further Differences Between Business Marketing and Consumer
Marketing 8
Derived Demand and Business-to-Business Supply Chains 8
THE BULLWHIP EFFECT 8
VOLATILITY 11
Complexity—A Rationale for Relationship Marketing 12
OPPORTUNITIES THROUGH RELATIONSHIPS 13
Market Structure 13
Integrated versus Networked Supply, Brand Identity 14
Some International Considerations 15
An Examination of Value 18
The Value Chain 19
Direct versus Support Activities 20
Misunderstanding of the Value and Value Chain Concepts 21
Trends and Changes in Business Marketing 22
HYPERCOMPETITION 22
FORMATION OF PARTNER NETWORKS 23
ADOPTION OF INFORMATION TECHNOLOGY AND THE INTERNET 23
SUPPLY CHAIN MANAGEMENT 23
TIME COMPRESSION 24
Thoughts to Take with You into the Next Chapter 24
Key Terms 25 • Questions for Review and Discussion 25 •
Endnotes 26
ix
x Contents
Chapter 2 Business-to-Business Environment: Customers,

Organizations, and Markets 28
Introduction 30
Practical Application of Market Generalizations 30
Types of Organizational Customers 31
Commercial Enterprises 31
INDUSTRIAL DISTRIBUTORS 31
VALUE ADDED RESELLERS 31
ORIGINAL EQUIPMENT MANUFACTURERS 32
USERS OR END USERS 32
Government Units 33
Nonprofit and Not-for-Profit Organizations 33
Producer Types 33
RAW MATERIALS PRODUCERS 33
COMPONENT PARTS AND MANUFACTURED MATERIALS PRODUCERS 34
CAPITAL GOODS MANUFACTURERS 34
CUSTOMER SPECIFICATIONS 35
Customer Needs Influenced by Classification of Markets 35
Classifying the Business-to-Business Market Environment 35
Publics 35
FINANCIAL PUBLICS 36
INDEPENDENT PRESS 36
PUBLIC INTEREST GROUPS 36
INTERNAL PUBLICS 37
The Macroenvironment 37
THE DEMOGRAPHIC ENVIRONMENT 37
THE ECONOMIC ENVIRONMENT 38
THE SOCIOCULTURAL ENVIRONMENT 38
THE NATURAL ENVIRONMENT 38
THE TECHNOLOGICAL ENVIRONMENT 39
THE COMPETITIVE ENVIRONMENT 39
Usefulness of Classification 41
Value Networks and Supply Chains 41
Supply Chain Management as a Form of Value Network
Management 43
Using the Value Network and Supply Chain Concepts 43
VALUE NETWORKS AND COMPETITION 44
Changes in Markets Over Time 44
The Product Life Cycle 45
The Technology Adoption Life Cycle 47
BRIDGING A CHASM 47
ACROSS THE CHASM AND INTO THE TORNADO 48
Contents xi

Endnotes 51
Chapter 3 Organizational Buying and Buyer Behavior 52

Introduction 54
The Nature of Buying 55
The Consumer Buying Decision Process 55
Organizational Buying 55
The Buying Center 56
Organizational Buyers’ Decision Process: A Stepwise Model 58
Intricacies of the Buying Decision Process 58
INDIVIDUAL ROLES AND PERSONAL NEEDS 58
THE BUYING PROCESS IS SIMULTANEOUS, NOT SEQUENTIAL 58
RELATIONSHIPS AND LOYALTY 59
THREE KINDS OF NEEDS 59
CLUSTER OF STAKEHOLDERS’ VALUES 59
Organizational Buyers Decision Process: A Process
Flow Model 59
Stage 1: Definition 60
THE MEANING OF A SPECIFICATION 61
THE SPECIAL CASE OF AN INTEGRATED SUPPLY CHAIN 62
Stage 2: Selection 63
DISTINCTION FROM PUBLIC SECTOR PURCHASING 64
BUYERS SEEK SELLERS WITH BEST TOTAL OFFERING AND CAPABILITIES 64
Stage 3: Solution Delivery 65
SUPPLY CHAIN IMPLICATIONS 66
Stage 4: Endgame 66
Two Examples of Buying Decision Processes 66
Discussion of Examples 67
Transition of Buying Decision Process—New Task Becomes
Rebuy 70
Influences that Shape the Buying Decision Process 71
Other Organizational Influences 72
Other Interpersonal and Individual Influences 72
Implications for Business Marketing 72
The Variability of Rational Buying Decisions 73
Human Factors in Business Decisions 73
Mutual Dependence and Customer Loyalty 74
A Brief Psychology of this Process 74
APPLICATION IN BUSINESS RELATIONSHIPS 75
xii Contents

Endnotes 78
Chapter 4 The Legal and Regulatory Environment 79

Introduction 80
Business Regulation in a Free Market 81
Enforcement Responsibilities 81
The Legislative Acts that Affect Marketing 82
Sherman Antitrust Act (1890) 82
Clayton Act (1914) 83
Federal Trade Commission Act (1914) 83
Robinson-Patman Act (1936) 85
Celler-Kefauver Act (1950) 85
Consumer Goods Pricing Act (1975) 85
Securities Laws 86
Sarbanes-Oxley Act and Its Offspring 86
The Uniform Commercial Code 86
Business Legislation Issues 87
Intercorporate Stockholding 87
Interlocking Directorates 87
Price Maintenance 87
Refusal to Deal 89
Resale Restrictions 89
Price Discrimination 89
Quantity Discounts 92
Substantiality Test 94
Company Size 95
Some International Implications 95
FOREIGN CORRUPT PRACTICES ACT (FCPA) 95
BASIC PROVISIONS OF THE FCPA 96
Supply Chain Implications 96
Intellectual Property 96
Antitrust Implications of Intellectual Property 97
Cross Licensing 98
Joint Ventures 99
Confidentiality Agreements 99
Political Framework of Enforcement 100
Pacific Drives Revisited 100
Contents xiii

Endnotes 102
Chapter 5 Concepts and Context of Business Strategy 103

Introduction 104
What is Strategy? 105
Strategy-Making and Strategy Management Processes 107
Performing Strategic Management in the Business-to-Business
Company 107
A Critique of the Model 110
Key Strategy Concepts 111
Strategic Resource Allocation 112
Strategic Business Unit Management 112
Tools for Designing Strategy 113
The Growth-Share Matrix 114
RETHINKING THE MATRIX 115
Multifactor Portfolio Matrix 116
INCOMPATIBILITY OF CULTURES WITHIN ORGANIZATIONS 117
PORTFOLIOS AND VALUE 117
The Balanced Scorecard 118
Taking an Entrepreneurial Approach to Marketing Strategy 118
The Organization Mission 119
FOSTERING OWNERSHIP 119
Changing the Rules 120
Special Issues in Business Strategy 120
Strategy Implications of Value Networks and Integrated
Supply Chains 120
Strategy Development and the Internet 120
Strategic Implications of Market Ownership 121
Strategy Development in New Businesses 121
Endnotes 123
Chapter 6 Market Research and Competitive Analysis 124

Introduction 126
Market Research 127
Market Research Fundamentals 128
DEFINE THE PROBLEM AND RESEARCH OBJECTIVES 129
DESIGN THE RESEARCH METHOD TO ACHIEVE THE RESEARCH OBJECTIVES 129
xiv Contents
COLLECT THE DATA 130

ANALYZE THE DATA AND DRAW CONCLUSIONS 130
PRESENT THE FINDINGS 130
Implications of Types of Decision Support 130
RESEARCH TO SUPPORT TARGETING DECISIONS 130
RESEARCH TO SUPPORT DESIGN DECISIONS 132
RESEARCH TO SUPPORT GO/NO-GO DECISIONS 133
Designing the Research—Differences from Market Research
in Consumer Markets 134
CONCENTRATED MARKETS 134
DIVERSITY OF INTERESTS IN THE BUYING CENTER 134
TECHNICAL EXPERTISE 134
Designing the Research Approach—Other Special Circumstances
in Market Research 135
TIME COMPRESSION 135
UNCERTAINTY 135
MARKET RESEARCH FOR ENTREPRENEURIAL MARKETING 136
MARKET RESEARCH WITH ONLINE DATA COLLECTION AND ANALYTICS
SOFTWARE 136
Practical Advice for Performing Market Research in
Business-To-Business Markets 136
CONDUCTING PERSONAL INTERVIEWS 137
ADDRESSING THE TOUGHER ISSUES 138
APPROPRIATE USE OF SURVEYS IN BUSINESS-TO-BUSINESS MARKETS 139
MANAGING UNCERTAINTY 139
MINIMIZE IMPACT OF TIME COMPRESSION 139
INTERACTIONS OF THE BUYING CENTER 140
Summary of Market Research 140
Competitive Analysis 140
The Nature of Competition 140
The Six Sources of Competition 141
Information to Collect on Individual
Competitors 142
COMPETITOR GOALS 142
COMPETITOR STRATEGIES 143
COMPETITOR CAPABILITIES 143
COMPETITOR ASSUMPTIONS 143
Sources of Competitive Information 144
THE CUSTOMER 144
THE INTERNET 144
BUSINESS AND TRADE PRESS 145
TRADE SHOWS 145
OTHER SOURCES 145
Summary of Competitive Analysis 145
Contents xv

Endnotes 147
Chapter 7 Segmenting, Targeting, and Positioning 148

Introduction 150
The Relationship Between Segmenting, Targeting, and Positioning 150
Market Segmentation 151
Basic Framework of Segmentation 151
FINDING GROUPS WITH SIMILARITIES IN WHAT THEY BUY OR HOW
THEY ACT 151
NEED FOR MEASURABILITY CREATES INFORMATION NEEDS 152
TYPICAL BASES FOR BUSINESS-TO-BUSINESS SEGMENTATION 152
Value-Based Segmentation 153
The Process of Determining Segmentation 154
ANALYTIC APPROACH TO DETERMINE A SEGMENTATION FRAMEWORK 155
SEGMENTATION BY INNOVATION TRANSLATION 158
Summary of Segmentation 160
Choosing Target Segments 160
Attractiveness of Segments 160
MARKET ATTRACTIVENESS 161
COMPETITIVE ATTRACTIVENESS—CHOOSING YOUR BATTLES 161
CHANNEL ATTRACTIVENESS 162
COMPETITIVE ATTRACTIVENESS—SUPPLY CHAINS AS A DISTINCTION 162
INTERNAL ATTRACTIVENESS—PLAYING TO YOUR STRENGTHS 163
ATTRACTIVENESS—OTHER CONSIDERATIONS 163
Choosing Targets 163
PROCESS FOR CHOOSING TARGET SEGMENTS ANALYTICALLY 163
UNCERTAINTY AND TIME COMPRESSION—THE NEED TO USE ANALYSIS
AND TRANSLATION TOGETHER 166
Positioning 166
Further Issues in Segmentation, Targeting, and Positioning 167
Segmentation and Positioning Based on the Technology Adoption
Life Cycle 168
Positioning a Product Line 169
Endnotes 171
Chapter 8 Developing the Product, Service, and Value

of the Offering 173
Introduction 174
The Product Life Cycle 175
xvi Contents
The Product Life Cycle and Life Stages of Offerings 176

Offering Development Stage 176
Offering Introduction Stage 177
Offering Growth Stage 178
PRODUCT ACCEPTANCE 178
PRODUCT DIFFERENTIATION 179
ECONOMIES OF SCALE 179
Offering Maturity Stage 181
Offering Decline Stage 181
PRODUCT ELIMINATION CONCERNS 182
Basic New Product Development Process 182
STAGE 1: IDEA GENERATION 182
STAGE 2: PRODUCT SCREENING 182
STAGE 3: BUSINESS CASE ANALYSIS 183
STAGE 4: PRODUCT/STRATEGY/PLAN DEVELOPMENT 183
STAGE 5: TEST MARKET 183
STAGE 6: PRODUCT LAUNCH 184
STAGE 7: HAND OFF TO THE INNOVATION TRANSLATION/CUSTOMER
EDUCATION TEAM 185
Customer/Market Orientation 185
Team Approach 186
Invest in the Early Stages 186
Stage Gates and Phase Reviews 187
Concurrent Development 187
No Shortcuts 188
The Role of Marketing in the Product Development Process 188
Marketing Defines the Outcomes 188
Reducing the Risk of New Product Failures 190
Why Do New Products Fail? 190
THE MISSING MARKETING PLAN 190
NO REAL NEED EXISTS 190
THE MARKET SIZE IS OVERESTIMATED OR A “ME TOO” PRODUCT FAILS
TO PENETRATE THE MARKET 190
THE OFFERING FAILS TO MEET NEEDS ADEQUATELY 191
MARKET WILL NOT PAY 191
CONTRARY PERCEPTIONS OF INNOVATION 191
Collaborators 192
Make-or-Buy Decisions 193
Factors in the Decision 194
Supplier Role in the Decision 195
Endnotes 198
Contents xvii
Chapter 9 Innovation and Competitiveness 200

Introduction 202
Marketing Entrepreneurially 202
Changing the Rules 204
Practical Aspects of Creating an Entrepreneurial Orientation 205
HIRING THE RIGHT KINDS OF PEOPLE 205
DIRECTING APPROPRIATE ACTIVITIES 206
REMOVING IMPEDIMENTS 206
PROVIDING INCENTIVES 206
Competing Through Innovation 207
Innovation across the Offering 207
Pursuit of Disruptive Technologies 210
Pursuit of Sustaining Innovation 212
Practical Aspects of Accomplishing Innovation 213
OBTAINING THE RIGHT KINDS OF PEOPLE 213
DIRECTING THE RIGHT ACTIVITIES 213
IMPEDIMENTS AND INCENTIVES 214
Endnotes 216
Chapter 10 Pricing in Business-to-Business Marketing 218

Introduction 220
Pricing Basics 222
Pricing to Reflect Customer Value 223
A VALUE-COST MODEL OF THE CUSTOMER 227
Relevant Costs 228
Contribution Analysis 230
Demand Functions and Pricing 231
Managing Price as Part of Marketing Strategy 233
Strategic Context of Pricing 233
PRICING OBJECTIVES 234
Pricing throughout the Product Life Cycle and the Technology
Adoption Life Cycle 235
Price Models 237
Penetration Pricing and Price Skimming 237
LEARNING CURVE EFFECT 239
CHOICES ARE NOT ALWAYS AVAILABLE 240
Pricing in Translation Mode 240
Pricing for International Marketing Efforts 241
Managing Pricing Tactics 241
BUNDLING 242
xviii Contents
Discounts and Allowances 242

Competitive Bidding 242
INITIATING PRICE CHANGES 244
Summary of Managing Price 245
Pricing Implementation: The Case Of Negotiated
Pricing 246
Two Types of Situations 246
Preparation for Negotiation 247
Last Thoughts on Negotiation 249
Pricing and the Changing Business Environment 249
Pricing, Time Compression, Hypercompetition,
and the Internet 250
Endnotes 252
Chapter 11 Business Development and Planning 253

Introduction 255
Forecasting Markets 256
Forecast Types and Techniques 258
Marketing Operation Forecasts in Depth 259
First-of-a-Kind Application, Translation of a Previous Success,
or Replacement for Existing Business? 264
Managing Products Through The Product Life Cycle 265
Interrelating the TALC and the PLC 265
SUMMARY OF PLC CONCEPT 265
Marketing throughout the Product Life Cycle 268
MARKETING STRATEGY AND BUSINESS DEVELOPMENT
THROUGH THE PLC 268
Organizing to Manage Simultaneous Product Life Cycles 273

Using Specialists 274
Business Development Bands through the PLC 275
Endnotes 278
Chapter 12 Business-to-Business Selling 279

Introduction 281
The Nature of Sales and Sellers 281
Characteristics of Business-to-Business Selling 282
REPEATED, ONGOING RELATIONSHIP 282
SOLUTION ORIENTED, TOTAL SYSTEM EFFORT 282
Contents xix
LONG TIME PERIOD BEFORE SELLING EFFORT PAYS OFF 283

CONTINUOUS ADJUSTMENT OF NEEDS 283
CREATIVITY DEMANDED OF SELLER BY BUYER 283
The Role of Sales in a Modern Organization 283
Relationship Sales and Marketing 283
DEFINING WHAT A RELATIONSHIP IS 284
RELATIONSHIPS AND ATTITUDE 285
RELATIONSHIPS AND LOYALTY 285
RELATIONSHIPS AND CORPORATE CULTURE 285
Four Forms of Seller Roles 286
THE ORDER TAKER 286
THE PERSUADER/SUSTAINER 288
THE MOTIVATOR/PROBLEM SOLVER 289
THE RELATIONSHIP/VALUE CREATOR 290
Other Types of Selling Roles 291
MISSIONARY SELLERS/FIELD MARKETERS 291
POST-SALE CUSTOMER SERVICE 293
Management Perspective 294
The Mutual Needs of Buyer and Seller 295
The Needs of the Job Function 295
The Needs of the Organization 295
The Individual Needs of the Buyer and Seller 297
Selling—the Structure 298
Sales Force Organization 298
Direct Sales Force 299
Sales Force Deployment 299
Sales Force Compensation 300
STRAIGHT-COMMISSION COMPENSATION PROGRAMS 300
STRAIGHT-SALARY COMPENSATION PLANS 301
COMBINATION COMPENSATION PLANS 301
Manufacturers’ Representatives 302
Market Conditions that Favor Manufacturers’ Representatives
or a Direct Sales Force 303
TECHNICALLY COMPLEX PRODUCTS 303
LONG LEAD TIMES 303
SELECTION, TRAINING, AND CONTROL 304
MISSIONARY WORK REQUIRED 304
EXPLICIT CUSTOMER FEEDBACK DESIRED 305
Combinations of Representation 305
Endnotes 307
xx Contents
Chapter 13 Business-to-Business Branding 308

Introduction 311
Holistic Branding 312
Characteristics of Business-to-Business Branding 312
The Role of Business-to-Business Brands 313
THE BRANDING TRIANGLE 314
Branding Dimensions 315
Brand Strategy 317
BRAND ARCHITECTURE 317
Communication and Corporate Identity/Visual Identity Code 318
Measuring Equity and Value 321
Competing Through Branding 323
Importance of Brand in Business-to-Business Buyer Behavior 324
Branding as a Standard 325
FIRST WITH NEW TECHNOLOGY 325
BEING BEST WITH SERVICE 326
INNOVATING THE NEED—NOT THE TECHNOLOGY 326
LIVING THE BRAND 326
Defending the Brand 326
SUBORDINATE BRANDS 327
Building a Strong Brand 328
Building Associations 328
Quality 329
Ingredient Branding 329
Endnotes 332
Chapter 14 Channel Relationships and Supply Chains 334

Introduction 336
The Rationale for Marketing Channels 336
Marketing Channels Deliver Value 338
Economic Utility 338
FORM 338
TIME 338
PLACE 338
POSSESSION 338
Channel Flows and Activities That Create Value 339
Marketing Channels Meet Customer Needs and Expectations 341
Industrial Distributors Serve Industrial End Users 342
Industrial Distributors Serve Industrial Suppliers 344
Contents xxi
Value Networks Are Marketing Channels 345

USER TRAINING 346
PRODUCT INFORMATION 346
PRODUCT SUPPORT AND DELIVERY 346
FINANCING 347
The Elevation of Business Logistics Management to Supply Chain
Management 347
The Physical Distribution Concept—A Cost–Service
Relationship 348
INVENTORY MANAGEMENT 348
TRANSPORTATION 348
WAREHOUSING 349
MATERIAL REQUIREMENTS PLANNING 349
LOGISTICS AS A COMPETITIVE EDGE 349
Economic Utility of Business-to-Business Markets 349
Channel Design 350
Reduce Discrepancy of Assortment 352
When Use of Distributor Channels Is a Good Channel Design 352
MARKETING MIX ISSUES 353
FACTORS FAVORING USE OF DISTRIBUTOR CHANNELS 353
FACTORS NOT FAVORING USE OF DISTRIBUTOR CHANNELS 354
OTHER CIRCUMSTANCES 354
Vertical Integration versus Finding the Right Channel Partner 356
Distribution and the Product Life Cycle 356
Introductory Stage 356
Growth Stage 356
Maturity or Decline Stages 357
Managing Channels of Distribution 357
Selecting and Caring for Distributors 357
TEAM PLAYERS 358
Power and Conflict in Marketing Channels 358
BASES OF POWER 358
Channel Patterns and Control 359
Channels and the Internet 362
The Internet’s Emerging Role in Business-to-Business Marketing
Channels 362
What Has Happened to New Types of Channels 363
Future Adoption of Information Technology for Channel
Management 364
Endnotes 366
xxii Contents
Chapter 15 Communicating with the Market 367

Introduction 369
A Communications Model 370
Losing Meaning in the Translation 370
Media Can Impact the Message 371
Feedback 371
Noise 372
Capabilities of Promotion 372
The Elements of the Promotion Mix 373
Personal Selling 373
Advertising 373
Sales Promotion 374
SALES PROMOTION FOCUSED ON THE SALES TEAM 374
SALES PROMOTION FOCUSED ON CHANNEL INTERMEDIARIES 375
Public Relations 375
PUBLIC RELATIONS ACTIVITIES 376
EFFECTIVENESS IN PUBLIC RELATIONS 376
WHEN THE IMAGE UNRAVELS 377
Promotional Methods in Business-to-Business
Marketing 377
Convergence of the Promotion Mix 379
Print Promotion 379
ADVERTISING IN TRADE JOURNALS 380
DIRECTORY ADVERTISING 380
CONSUMER MEDIA 380
SENSACON APPLICATIONS OF PRINT ADVERTISING 381
Corporate Advertising 382
Direct Mail 383
Sales and Support Literature 383
CATALOGS, PRODUCT BROCHURES, AND DATA SHEETS 383
CAPABILITIES BROCHURES 383
TECHNICAL BULLETINS, TEST REPORTS, AND APPLICATION HISTORIES 384
SENSACON APPLICATIONS OF SALES AND SUPPORT LITERATURE 384
Channel Promotions 384
Promotional Merchandise 385
Public Relations, Trade Shows, Conferences, and Corporate
Positioning 385
Trade Shows and Conferences 385
WHO SHOULD ATTEND 386
HAVING AN EXHIBIT 386
STAGING THE EXHIBIT 387
WHEN THE SHOW IS OVER, CAPITALIZE ON THE EFFORT 387
Contents xxiii
Public Relations and Positioning 388

SENSACON APPLICATIONS OF PUBLIC RELATIONS, TRADE SHOWS,
AND POSITIONING 388
TECHNICAL PAPERS 389
Internet and Web Communications in Business-to-Business
Marketing 390
Web Site 391
Attracting Visitors to a Web Site 392
Opt-in E-mail 393
Newsletters 394
Online Seminars 394
Social Networking and New Media 394
Effective Internet Communications 395
Promotion and the Impact of Trends in Business-to-Business
Markets 395
Promotion and Time Compression 395
Promotion and Hypercompetition 396
Endnotes 398
Chapter 16 Business Ethics and Crisis Management 399

Introduction 402
Ethical Issues and the Marketing Concept 402
The Societal Marketing Concept 403
Societal Marketing as an Ethical Base 404
A Clash of Ethical Standards 404
Ethical Standards Among Different Stakeholders 405
Ethical Standards at Different Levels in the Organization 405
Ethical Standards of the Individual and Performance Standards
of the Organization 407
SITUATIONAL ETHICS 407
ETHICS IN PRODUCT ANNOUNCEMENTS 409
ETHICS IN PRODUCT CAPABILITY CLAIMS 409
ETHICS IN OBTAINING COMPETITIVE INFORMATION 409
OTHER QUESTIONABLE ETHICAL CHOICES AND OPPORTUNITIES 410
Individual Ethical Behavior 410
Win–Win, Win–Lose, and Zero-Sum 410
COMPROMISE AND WIN–WIN 412
Ethical Behavior and Value Networks 413
Ethical Behavior and Value Image 414
Crisis Management 414
xxiv Contents
Crisis Preparation 415

ORGANIZATIONAL STRUCTURE FOR CRISIS MANAGEMENT 415
ASSESSING AND ADDRESSING RISKS 415
PLANNING FOR UNANTICIPATED CRISES 416
INOCULATION AGAINST NEGATIVE MEDIA ATTENTION 417
Media Relations During a Crisis 417
MINOR CRISES: PREPARATION FOR AND HANDLING OF INCIDENTS 418
HANDLING MINOR CRISES IN A YOUNG COMPANY 419
MAINTAINING VIGILANCE WHILE MARKETING ENTREPRENEURIALLY 420
Thoughts to Take with You as You Finish this Chapter 420
Endnotes 421
Cases
Case 1 LastMile Corporation II: Choosing a Development
Partner 423
Overview 423
LastMile’s Dilemma 423
Questions for Discussion 425
Case 2 B2B E-Commerce in China: The Story

of Alibaba.com 427
Difficulties of B2B E-Commerce in China 428
What China Is Doing to Promote B2B E-Commerce 429
Alibaba’s Strategy of Online E-commerce 430
Company History 430
Meet Jack Ma: “The Jack Who Will change
the World” 431
The Supporters 432
Alibaba Today 432
TaoBao and eBay 432
Feedback from Alibaba’s B2B Customers 433
Cultural Differences 433
Innovation 434
AliPay Online Payment Solution 434
Alibaba Enters Strategic Cooperation with
China Post 434
Alibaba Acquired Yahoo! China 435
Future for Alibaba and B2B E-Commerce 435
IPO: Alibaba Aims for 1.3 Billion in Listing 436
China’s B2B E-Commerce Industry and Alibaba 436
Contents xxv
Appendices 437
Key Development Milestones for Alibaba 437
The Companies 438
Chinese Auction Market Share 439
Chinese Search Market Share 439
Chinese Internet Giants 440
Case 3 Dow Corning Success in China 442

Dow Corning 442
The Birth of Xiameter Model 442
Cannibalization? 445
Innovative Brand Strategy Leads to Growth 447
Dow Corning’s Footprint in China 447
Drivers for Future Growth: Differentiation and B2B
E-Commerce 449
Differentiation—Building a Stronger China and Meeting
Consumer’s Demand 449
B2B E-Commerce in China’s Market 450
How to Map Out Dow Corning’s B2B Marketing Strategy
in China? 451
Case 4 Marketing Plastic Resins: GE and BW II 453

Overview 453
Introduction 453
Purchasing Habits 454
The Products 454
Market History 455
Changing Environment 458
Channel Implications 458
Case 5 Automotive Headlamps II: The Paradigm Shift from

Standardized Glass Sealed Beams to Today’s Plastic
Custom Designs 464
Overview 464
Introduction and Company Backgrounds 464
General Electric 464
General Motors 465
Ford Motor Company 465
Regulatory Agencies 465
Professional Organizations 465
xxvi Contents
GEP Organization 465

The History of Forward Lighting—Headlamps 466
The Situation 468
The Marketing Plan 469
Benefits 469
Risks 469
Finding the Right Customer 470
Challenging the Standard 470
Validating the Concept 471
Analysis 472
Case 6 Makrolon: The High-Tech Material 473

Background on Bayer AG 475
The History 475
Organization 477
Bayer MaterialScience AG 477
Background on Makrolon 478
The Market for Polycarbonate 480
Bayer’s Branding Strategy for Makrolon 480
The Example UVEX 482
Case 7 SENSACON Corporation: High Technology Evolves

to High Volume 486
Branding and Positioning the New Company 487
The Business Development Strategy 488
New Market Development 488
One of Many Changes 489
Partners with Different Goals 490
“Under New Management” 491
Innovating the Need—Not the Technology 491
New Channels 491
Allen Chen’s Challenge to His Staff 492
Defending the Market Position 492
Index 493
FOREWORD
In recent years, the importance of marketing in the business-to-business sector has grown. Many
companies operate now in a more volatile and changing market and have to deal with fierce
competition in an increasingly global market. To remain viable and competitive, business-to-
business marketers are increasingly adopting marketing strategies that go beyond previous “price
and ship” tactics.
Business-to-Business Marketing: Analysis and Practice provides a learning platform for
the next generation of managers in industrial companies. In this practitioner oriented and interna-
tional B2B marketing textbook, managers can find concepts and examples that help to take a
more analytical and disciplined approach to sales and marketing of industrial goods.
While all companies claim to deliver superior value, companies particularly serving
business-to-business (B2B) markets must be able to prove such claims. In the increasingly glob-
al world, it is more important than ever to be able to demonstrate in an objective and data-driven
fashion that products, platforms, systems, and services will yield economic benefit to customers,
collaborators, and stakeholders. Companies can deliver this value creation either by reducing
costs or by providing broad-based, solution-oriented offerings. Industrial conglomerates, as well
as small and medium-sized B2B companies, are constantly being challenged, and it is now not
enough to offer “the most scalable, reliable, secure solution available today.”
Many companies, from heavy construction equipment to microprocessor chips, have
moved from technology-assisted selling concepts to marketing concepts offering proven value to
their customers and business partners. The stakes are high and the need for professional
knowledge and advice is predominant. The structured approach and up-to-date case studies of
Business-to-Business Marketing: Analysis and Practice will fulfill the need for more in-depth
understanding of marketing in the twenty-first century. This book explains situations, effects,
and trends and also presents concepts, frameworks, and models in a very comprehensive way. It
offers, for students and professionals alike, an easy way of learning what is needed to be
marketers in the current B2B environment.
The art and science of marketing has evolved well beyond early concepts. The differences
between business-to-business markets and consumer markets have grown such that many
generalizations of one market are not applicable to the other. Yet, the basic precepts, the prod-
uct life cycle, the marketing mix and the promotion mix, to name a few, still apply. Concepts of
customer value, market ownership, and total offering management add new dimensions to
business-to-business marketing. When these ideas are integrated and combined, they provide a
richness and depth to market understanding. However, this integration has not always come
about in a way that is manageable for students. This textbook, Business-to-Business Marketing,
starts with a basic review of concepts and then differentiates the differences between business
and consumer markets. In a down-to-earth fashion, these basics are then integrated in a way that
each supports the other, providing an anchor for the student.
The combined experiences of the authors, Vitale, Giglierano, and Pfoertsch, represent
expertise from academics, consulting, public agencies, and large and small industries, as both
customers and marketers. They deliver an approach that is understandable yet comprehensive,
logical yet enlightening, to both students and professionals of business-to-business marketing.
Real companies in real situations, combined with believable academic exercises, demonstrate
the experience and depth of the authors. Their effort provides an opportunity to understand the
xxvii
xxviii Foreword
complexities of these markets where others have been vague and somewhat arcane. This book
gets to the heart of business-to-business marketing—it’s a good read for students with just the
right nurturing of the subject while it is also a good read for professionals, with just the right
touch of insight to provide “Aha!” for both groups.
In my recent books about marketing principles and the marketing management books,
examination of B2B has claimed an increasingly important position beyond the customary one
chapter of B2B selling and channels. This book covers all subjects and areas of the industrial
business environment and thus is a comprehensive B2B marketing textbook. I wish the authors
and the readers much success.
Evanston, July 2009 Philip Kotler

S.C. Johnson & Son Professor of International Marketing
Kellogg School of Management
Northwestern University
PREFACE
When we began our first business-to-business book, Business to Business Marketing: Analysis
and Practice in a Dynamic Environment, the “parent” edition of this textbook, we felt that our
perspectives as business-to-business practitioners, consultants, and academics over many years
and with different industries, from the high-tech firms of Silicon Valley to the “old economy” of
the automotive industry, created a foundation to develop a text that reflected our experiences
while also being understandable to students whose preparation might be limited to an introduc-
tory course in marketing (and of course experience as consumers!). We emphasized the dynamic
realities of the marketplace while reinforcing the most important principles that one will need to
be effective, competent professionals in the real world. Based on feedback from many adopters
around the world, we succeeded in many ways. Additionally, our continuing effort to improve
both our research in the field and through classroom testing of concepts led us to understand the
areas where we could make improvements.
One of the additions to this textbook is Waldemar Pfoertsch, originally from Pforzheim
University in Germany, now at CEIBS Shanghai (China Europe International Business School).
Waldemar, as an international adopter of our book, provided heartening feedback and critical
suggestions. Waldemar was so enthusiastic about our efforts that he came to California to meet
with us. 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 contri-
butions include the new Chapter 13, as well as classroom-tested case studies.
Several principles that guided the development of our previous book continue here.
Porter’s Value Chain provides the underpinning for the Marketing Concept, and its application
and implementation. The Product Life Cycle and Moore’s Technology Adoption Life Cycle form
the basis for considering the dynamics of market evolution. Hamel and Prahalad’s ideas on
business strategy and Dickson’s thoughts on competitive market behavior form the basis for our
discussion of marketing strategy formulation. The Societal Marketing Concept is a key element
of ethical marketing behavior. In each of these areas, we build on common threads that hold the
whole together.
Each chapter benefits from observations made in real-world situations. We rely again on
our academic and consulting research to contribute ideas and examples in each chapter as well.
Each chapter benefits from the multiple dialogues we have conducted with executives and man-
agers since we began work on this project. Of particular note is the addition of Chapter 11,
focused on Business Development. Forecasting has been shifted from Chapter 6 into this new
Chapter 11, acknowledging its importance to business development efforts and based on the
feedback that Chapter 6 in our first effort was overcrowded.
Other changes in response to feedback include the expansion of Chapters 4 and 16 (origi-
nally Chapter 14). During the review of our original edition, adopters had mixed opinions about
the need for a separate chapter on the legal environment and our business ethics approach as
well. We believe these to be critical issues too often overlooked in business marketing and
included the chapters anyway. Preliminary reviews for this book demonstrated significantly
increased interest in these topics. In response, a discussion of Sarbanes–Oxley and its global
offspring and the Foreign Corrupt Practices Act have been added. Licensing, cross-licensing,
and joint ventures, which are often key to the concept of Value Networks, are also discussed.
Chapter 16, “Business Ethics and Crisis Management,” gives increased coverage of crisis
xxix
xxx Preface
management and examples of ethical decision making in business. Ironically, the opening
vignette of the chapter in the previous book concerned the recommendations that resulted from
the investigation of the crash of TWA 800. We pointed to the incomplete implementation of the
recommendations provided by the investigating task force in 2001. Now, TWA 800 is back as
the opening vignette for this chapter, as seven years after the original task force recommendation,
the Department of Transportation has adopted more stringent rules (see the vignette for details!).
We continue our departure from traditional approaches to textbooks. Our experience has
shown us that a person’s assumptions about business-to-business marketing are often based on
his or her familiarity with consumer marketing. Throughout the text we have compared and con-
trasted between the two fields to bring out their most important differences and to give weight to
the distinguishing characteristics of business-to-business principles and practices. Whenever
possible, we have attempted to use examples from corporations and organizations that are famil-
iar. A notable example of this occurs in the discussion of “Integrated versus Networked Supply”
in Chapter 1. The changing environment of outsourcing versus vertical integration in the auto-
motive industry provides an excellent groundwork to demonstrate to students that while the
consumer brand is on the outside, many corporations’ expertise contribute to the total offering. It
may surprise many students to learn that the auto entertainment system in Ford, Honda, and BMW
might all be manufactured by the same company—but with different consumer identities.
Planning, strategy design, and decision making are important skills that are common to
all current areas of business; we have continued to introduce the basics while quickly showing
real-world connections. A practical and real-world approach is enlivened through interesting
scenarios and sidebars and emphasizes changes brought about by technology, entrepreneurship,
relationships, and globalization.
Robert P. Vitale
Joseph Giglierano
Waldemar Pfoertsch
China Europe International Business School
ACKNOWLEDGMENTS
We would like to thank the following reviewers for their helpful feedback during the develop-
ment of this book:
Peter Reday, Youngstown State University
Robert Green, Lynn University
Jonathan Hibbard, Boston University
Gary Bridi, Bloomsburg University
Kellie McGilvray, Tiffin University
Chickery Kasouf, Worcester Polytechnic Institute
D. Eric Boyd, James Madison University
In addition, the following individuals remain good friends, have contributed valuable feedback,
and serve as important sounding boards for our thoughts: Buford Barr, Connie Zumhagen, Peter
Dickson, Mike Adams, Chuck Erickson, Jeff Kallis, Susan Bayerd, and Allison Giglierano.
xxxi
Marketing: Analysis
and Practice
Chapter 1
Introduction to
Marketing
OVERVIEW
In this chapter, we will introduce you to business-to-business marketing, provide
you with an overview of the differences and similarities between business-to-
business and consumer marketing, and, finally, provide you with an approach for
studying this field that is built around the concept of value for customers. Value
includes both customer benefits and customer costs incurred in realizing these
benefits. We close the chapter by introducing several trends currently changing the
face of business-to-business marketing. These trends, which are important for you
to keep in mind as you progress throughout the book, raise the question of whether
we need to change our ideas about what works in business-to-business marketing.
In the opening example, two transportation companies—UPS and FedEx—take
their partnerships with office services companies to a new competitive level. UPS’s
acquisition of Mail Boxes Etc. and FedEx’s acquisition of Kinko’s, Inc., created new
bundles of services creating differentiated value for their small business clients.
In so doing, they illustrate several of the core concepts that will be examined
in later chapters.
Example: FedEx Kinko’s versus The UPS Stores1

In 2001, United Parcel Service (UPS) bought the company Mail Boxes Etc. This gave UPS much
greater presence in urban areas, neighborhoods, and shopping districts. While much of the business
UPS acquired was retail (consumers), visibility and services were also extended to small busi-
nesses. Offered services went beyond shipping: the former Mail Boxes Etc. stores also gave small
businesses mail drop locations and “suite” business addresses, which lent credibility to their
images. The big increase in value came from offering shipping locations closer to the locations of
many more small businesses since the old UPS locations were typically in industrial or commercial
areas.
Mail Boxes Etc. was a franchise operation with over 4,000 franchised locations. In the
acquisition, UPS became the owner of the central Mail Boxes franchisor operation. Shortly after the
acquisition, UPS worked with a small number of franchisees to test some operational changes and
new alternatives for rebranding the stores. The results favored renaming the chain as The UPS Store.
1
2 Chapter 1 • Introduction to Business-to-Business Marketing
In 2003, the Mail Boxes Etc. franchisees were offered the chance to sign new franchise contracts that
adopted the new name and some changed operating policies, which included new pricing 20 percent
below the existing Mail Boxes price schedule. The franchisees who participated in the test became
advocates for the changes because they had seen the financial impacts to their own operations—in
some cases almost double the sales, with an increase in profitability. Over 90 percent of the
franchisees switched over. Those who held out will operate under the old Mail Boxes Etc. name until
their franchise agreements expire. A lawsuit was filed by some of the franchisees.2 These franchisees
principally have locations in high cost areas and they do not believe the new pricing will allow them
to remain profitable. This suit is still pending.
Three years after the UPS acquisition of Mail Boxes Etc., FedEx responded to this competitive
move by acquiring Kinko’s, Inc., Unlike UPS, FedEx acquired all 1,200 stores outright, thus FedEx
had more control of the stores and their operations (this also cost FedEx a great deal more—FedEx paid
$2.2 billion, while UPS paid only $190 million for Mail Boxes Etc.). FedEx also tested new names for
the Kinko’s stores. They settled on the new name FedEx Kinko’s.
The FedEx Kinko’s stores are targeted toward small businesses that need office and graphics
services combined with shipping. This move was considered by analysts to be a “leapfrog” competitive
move, offering more service and value than UPS’s earlier move with Mail Boxes Etc. Initially, UPS
Stores had a sizable advantage simply in the number of locations they offered. However, even with fewer
stores, FedEx Kinko’s tends to offer more in the way of copying, printing, and graphics—UPS Stores
have added similar services, but FedEx Kinko’s has more capability on-site. Plus, these services were
Kinko’s bread-and-butter. FedEx saw Kinko’s as an attractive purchase target in part because Kinko’s
was good at what it did!
By the fall of 2004, FedEx Kinko’s, through FedEx’s partnership with Microsoft, launched a new
service that gave it even more of a service edge.3 FedEx Kinko’s launched its File, Print FedEx Kinko’s
(FPFK) service, in which a customer can send FedEx Kinko’s a document via the Internet. FedEx
Kinko’s will print it, copy it, bind it, and do whatever else to it the client requests. The client can then
pick up the order at any specified FedEx Kinko’s location or have it shipped elsewhere.
Both companies are offering convenience to small businesses. But they offer different kinds of
convenience. Both will have to innovate to stay in the race. And the competition is not just between
the two of them—Staples, Inc., upgraded its in-store copying/printing services.4 Staples, Inc., of
course, offers office supplies, so this represents a third value bundle now in the competitive mix, and
DHL acquired the ground stations of Airborne Express to get a nationwide access points.
LEARNING OBJECTIVES
By reading this chapter, you will
䊏 Remember the basic marketing principles.
䊏 Gain an appreciation for the main differences between consumer marketing and business-
to-business marketing.
䊏 Understand the marketing concept and its implications for business-to-business marketing.
䊏 Understand the meaning of value.
䊏 Gain a sense of how the value chain is structured and how it is related to the concept
of a supply chain.
䊏 Gain an understanding of the implications of the value chain for business-to-business marketing.
䊏 Obtain a sense of the changing nature of the business environment.

Chapter 1 • Introduction to Business-to-Business Marketing 3
INTRODUCTION
Business markets present different types of challenges and opportunities than those presented by
consumer markets. The concepts of relationships, value, and buyer decision making function in
very different ways than would be expected in consumer markets. The example of the acquisitions
of Mail Boxes Etc. and Kinko’s, Inc., by UPS and FedEx, respectively, illustrates all of these and
more. First, FedEx’s combination of shipping with copying and other office and graphics services
creates a different kind of value for small businesses than does the combination of UPS and Mail
Boxes Etc. Both combinations of services have the potential to create lasting relationships with
their customers. In this case, the customers will engage in extended decision making that contin-
ues well after the initial usage of the service. Both FedEx Kinko’s and The UPS Stores must
understand this and adapt their post-sale service to focus on maintaining customer satisfaction and
reselling the service.
Entrepreneurial marketing is a major emphasis of this text. Entrepreneurial
Entrepreneurial marketing can be practiced by established companies as well as marketing is conducting
by startups. It involves innovation, acting proactively, and controlled risk taking.5 marketing in a way that
involves innovation,
In the opening vignette, both UPS and FedEx have marketed entrepreneurially. acting proactively, and
UPS initially saw an opportunity by offering a combination of services, with taking calculated risks.
Mail Boxes Etc., aimed at a segment of small businesses. FedEx saw a somewhat
different opportunity, a different segment, and addressed it with a different offering. In both cases,
the company had to interpret an existing market condition and see needs that were not fully
addressed. They proactively addressed the market opportunities they thought were there, but they
took risks because they did not know for certain whether their interpretations of the market were
correct. What should the competitors do to deal with this new situation and create a high chance
of turning it into a profitable business activity? As an organization, how should each modify its
behavior to suit these new and different market opportunities? This chapter sets the stage for
answering these questions.
To fully appreciate the differences and similarities between business-to-business and
consumer marketing we need an understanding of marketing basics and how these basics apply
in business-to-business marketing. For those of you who have already taken a marketing
principles course, this will be a review of what you have already learned. These basic marketing
concepts presented in a business-to-business context will ensure that everyone reading this book
starts with approximately the same background—a level playing field.
MARKETING FUNDAMENTALS IN BUSINESS-TO-BUSINESS MARKETS

To see how marketing principles apply in business-to-business markets, an understanding of
what business-to-business markets are and how marketing principles apply in business markets is
required. These definitions and the context in which they are presented are part of the founda-
tions that should be kept in mind throughout the following chapters. Business markets consist of
all organizations that purchase goods and services to use in the creation of their own goods and
services. Their own goods and services are then offered to their customers. Notice that this does
not include transactions for resale. These are considered to be within the purview of managing
transactions within channels. Generally, business markets consist of fewer but larger customers
than consumer markets and are involved in purchases of significantly large value having complex
economic, technical, and financial considerations.
Business marketing, then, is the process of matching and combining the capabilities of
the supplier with the desired outcomes of the business customer. Business marketing is the
creation of value for business customers. The business marketer must understand that business
customers create value for their own customers. Thus the business marketer must define
the “value” he provides in terms of helping the customer provide value for the “customer’s
customer.” The companies in the entire chain, from those that accumulate and process basic raw
materials through those that modify, refine, manufacture, and assemble final consumer
products, do not rely only on the next customer in the chain for their business. Each participant
in the chain must recognize that the value added by its operations has a major impact on its
customers’ ability to satisfy the needs of all downstream participants throughout the chain to
the final consumer. The many facets of the business buying decision process and the needs of
many stakeholders in the buying organization create a behavioral situation usually far more
complex than in the consumer market.
Many students of marketing face difficulties in the study of business-to-business market-
ing because they come into it from their existing viewpoint as consumers. Students, as do most
consumers, often feel inundated by promotional messages from what seems to be an unlimited
number of sources. The volume of these messages can lead consumers to believe that these
messages are all there is to the entire marketing effort. In a business marketing course, students
can begin the process of separating their marketing analysis from their perspectives as
consumers. This is not a suggestion, however, that students abandon their understanding of
consumer behavior. Quite the contrary—decision makers in business-to-business marketing
situations often behave similarly to consumers in buying situations, albeit with different and
often more complex motivations.
The Marketing Mix

Recall the four Ps of the marketing mix: product, price, place, and promotion. These are still the
four Ps of marketing whether operating in a consumer or a business market. There are, however,
some differences that require explanation.
PRODUCT In general marketing theory, the term product refers to a core product (or service)
that can be augmented by additional features and options that will appeal to different buyers. In
a consumer product such as a new car, buyers can add many options to the core vehicle, such as
a premium sound system or a sports suspension package. Beyond those options made available
by the vehicle manufacturer, the dealer may provide options to assist in the ownership process,
such as financing, acceptance of a trade-in, or insurance. Taken together, these options, those that
modify the performance of the vehicle and those that facilitate purchase and ownership, create
the augmented product. Buyers have the choice to customize—to design—their vehicle to their
own tastes and needs.
In contrast, consider the product when an automobile company, such as General Motors
(GM), markets a fleet of new cars to a car rental company, such as Avis Rent-a-car. The core
product is still the cars, but now the quantity and assortment of many different models in the
product line become important as well. The magnitude of the assortment and quantity available
are major concerns for Avis. An arrangement by which GM creates a no-hassle payment plan is
also desirable. In addition, Avis prefers a schedule of deliveries over a manageable period of
time, with an assortment that will provide its customers with several choices. Avis will also have
a need for regular and routine spare parts delivery and training for its service personnel. Avis
may also have previously rented cars it wishes to dispose of—a trade-in deal with GM would be
an attractive part of the offer. Avis isn’t buying just cars; it is interested in a total value package
from GM that includes
• Assorted cars, in large quantities
• Financing terms
• Convenient schedule of deliveries
• Routine and reliable source for parts
• Training for Avis service personnel
• Disposal of old models.
From the viewpoint of GM, each of the above attributes is a necessary part of “the product”
to be competitive in the car rental market. Reluctance on the part of GM to provide all elements
of value sought by Avis would leave an opening for another car manufacturer to
capture the business. In this text, we define the augmented business-to-business Total offering is the
offering that provides
product as the total offering that will provide a complete solution to the buyer’s a complete solution to
needs. This may encompass features such as financing terms and delivery the buyer’s needs. This
options or, based on the buyer’s preference, be simply the core product. The may include financing,
desirability of the augmented portions of the offering will vary among different delivery, service, or based
business-to-business buying organizations, requiring flexibility of the marketer on the buyer’s preference,
only the core product.
and the marketing organization.6
There are often fundamental differences between core product characteristics in business-
to-business and consumer markets. Because business-to-business products are often incorporated
into the buying organization’s offering to its own customers, the products are often defined and
developed to specifically match the buying organization’s requirements. Whether the supplier
regards this as a minor modification to an existing offering to meet a particular customer require-
ment or a major new offering development, the result is an offering created by a partnership
between the buying organization and the marketing organization. This process produces a product
that is specific to the buying organization’s needs while maximizing the value creation capabilities
of the marketer. Because the specifically tailored product is often more technical in nature, it is
often defined by a written specification whose purpose is to maintain a given level of perfor-
mance. The outcome is not just a component manufactured in quantity for volume sales to a busi-
ness customer, but a total offering that matches the capabilities of the supplier with the needs of
the buyer, facilitated by the relationship between the two organizations.
PRICE As in any transaction, price is the mutually agreed-upon amount (of money or some-
thing else of worth) that satisfies both sides in the exchange. Both the buyer and the seller
realize an increase in the value they hold as a result of the transaction. Price, the measure of
value exchanged, is determined by the market—not by the costs associated with the creation of
the offering. In business-to-business markets, price determination can be the final step
in a complex design, development, and negotiation, particularly when the product is the result
of a collaborative effort. For less complex or standardized products, price may be the result of
a competitive bidding process. Only for the most generic of products, or when sold in small
quantities through industrial distribution, will price in business-to-business markets be based
on a “list” price as in consumer markets.
Continuing with the automotive example, the price for the new car is a fixed price based on
the manufacturer’s suggested retail price (MSRP). Each of the options has a list price as well,
and several options may be bundled together and priced as a single package. Automobiles are
relatively unique as consumer products in that price negotiation is acceptable and expected. Most
consumers—in the United States, at least—do not expect to negotiate on price for most other
products that they buy.
Prices for consumers are often fixed and discounted, with some financing provided for
high-cost purchases. Pricing for business customers often varies from fixed price, includes far
more special discounts and allowances, and involves complex financing. Business-to-business
pricing may also involve forms other than a one-time price payment or fee, such as commissions
or profit sharing. Pricing internationally may also be more complex, particularly if the customer
company is multinational.
PLACE In consumer markets, place is about getting the product to the customer in the right form
(size package, quantity, etc.) at a useful time (availability of extended retail hours, short waiting
periods for special orders, etc.) with minimum inconvenience associated with the place of
purchase, and with possession ease (transfer of ownership, such as cash, credit, acceptance of
personal checks). Form, time, place, and possession comprise the four types of economic utility
and are a major part of the value delivered to the customer. In consumer markets, providing
economic utility often appears as satisfaction of consumer preferences in locational convenience,
required purchase quantities/sizes, temporal convenience, and acquisition convenience. In the
automobile example, the car company provides economic utility to consumers by locating dealer-
ships near population centers or heavily trafficked shopping routes (usually clustered with other
dealers—why is this?). The dealerships are set up to routinely process single car purchases in
which the car is available immediately or can be quickly ordered. All the activities that facilitate
purchasing the car (credit check, financing, registration, etc.) make it possible for the buyer to start
the transaction and drive off with the car in a few hours.
Economic utility is a necessary (though not sufficient), pivotal part of the concept of value in
business-to-business markets which often takes on the form of supply chain management, inventory
services, and material resource planning. Businesses design their marketing channels to provide
maximum value to their customers while minimizing costs associated with the creation of economic
utility. This is true for both consumer and business-to-business channels. The major differences lie in
the length and concentration of the channel. The quantities purchased in business-to-business
marketing are substantially larger than consumer purchases with timing of delivery a critical factor,
leading to direct relationships between manufacturer and customer and eliminating
Supply chain channel intermediaries.
management is the In the example of GM marketing to Avis to add to its fleet, the car manufac-
planning, coordination,
and delivery of the place
turer offers cars in appropriate quantities and assortment in the appropriate time
part of the marketing mix. interval. The right cars are shipped to the right locations, perhaps throughout the
Overall, supply chain nation. Spare parts are made available in appropriate quantities as well. They also
management works to are shipped to the right locations at the right times. This is no easy accomplishment
deliver the economic when car companies have production schedules to match with delivery schedules
utility of form, time,
place, and possession as
and the assembly plants are not all located near the myriad of rental company
a minimized cost and at a outlets. The process of coordinating the flow of value and components that make up
maximized value—value the total offering—for example, from the iron ore mine through the steel fabricators,
as determined by the from the rubber tree plantation through the installation of tires on the vehicles—is
customer. This effort referred to as supply chain management. This effort involves many companies,
usually involves many
companies at different
operating as both buyers and sellers, creating value that is ultimately acceptable in
stages of the supply the eyes of the consumer. Seldom is a company fully vertically integrated to own
chain. and manage the entire supply chain.
PROMOTION Business-to-business marketing places different emphasis on the parts of the

promotion mix (advertising, sales promotion, personal selling, and public relations) than is
commonly found in consumer marketing. Consumers are inundated with advertising as manu-
facturers attempt to create awareness of and interest in their products. In consumer markets,
advertising plays the largest role in the promotion mix.
In business-to-business markets, the capabilities of advertising can seldom be leveraged.
Generally, we know advertising as a monologue—a one-way communication.7 Feedback from the
customer is not always encouraged and is not automatic. Advertisers must make a separate and
purposeful effort to know how their customers have responded to promotion campaigns (or wait
for sales results). In the new car example, the carmaker advertises heavily in television, radio,
print, and the Internet to build brand awareness and beliefs. Dealers also advertise in television,
radio, and newspapers to provide information and incentives to buy (sales promotion).
Dealerships have salespeople who work with consumers to help them through the buying process.
The relationship formed is usually a temporary one, focused on completing the transaction and
getting the consumer happily through the first few weeks after acquiring the new car.
In business-to-business markets, personal selling is the most used and effective type of
promotion. Personal selling, as a dialogue, allows rapid and accurate feedback to the marketer.
As noted earlier, products in business-to-business marketing are often the result of collaboration
between the supplier and the customer. This collaboration requires the building of relationships
between individuals in their respective organizations, necessitating a strong personal selling
(dialogue) effort. The carmaker in the example (GM) may have a sales team that manages the
account with the car rental company (Avis). The efforts of the sales team focus on providing
information and personal service to the executives and employees of the car rental company
involved in purchasing, managing, and maintaining the rental car fleet.
Two of the major differences, then, between consumer and business-to-business promotion are
the closeness and the duration of the relationship. In business-to-business marketing the relationship
is often closer and longer lasting than in consumer marketing, with the individuals having developed
personal ties. For many consumer products, contact between the consumer and the marketer is con-
fined to advertising, the relatively short-lived transaction period, and maybe a consumer response to
a follow-up survey.
The marketing concept
states that, to
Marketing Philosophy and Culture be successful, the firm
In the preceding section, we have discussed the traditional four Ps of the market- should be contextually
market sensitive,
ing mix, highlighting the differences between the four Ps in consumer marketing understand customer
and the four Ps in business-to-business marketing. Configuration of the four Ps, needs, meet those needs
whether in consumer marketing or business-to-business marketing, should be in a coordinated way that
driven by the marketing concept. provides value to the
The marketing concept has been the philosophy at the forefront in the field customer, and do so in
a way that meets
of marketing over the last fifty years. It says that, to be successful, a company organizational goals.
should understand customers’ needs, meet those needs with a coordinated set of A firm that is (or claims
activities, and do so in a way that meets organizational goals.8 A firm that operates to be) a market-driven/
under the culture of the marketing concept focuses all of its efforts and resources customer-driven firm is
toward satisfying the needs of its customers. This is distinctly different from applying the marketing
concept, recognizing that
organizations that operate in a production, sales, or marketing department every employee of the
culture.9 In each of these cultures, marketing is a distinct yet dependent part of the firm contributes to the
organization, often viewed as an expense rather than as a generator of margin. marketing effort.
The marketing concept implies that marketing is the driving force in the organization, defining the
roles of other functions in meeting the needs of customers.10
FURTHER DIFFERENCES BETWEEN BUSINESS MARKETING

AND CONSUMER MARKETING
Exhibit 1-1 summarizes several potential differences between business marketing and consumer
marketing. Depending on specific circumstances, all these factors may or may not be present in any
given business situation. While all of these differences are discussed in the follow-
Consumer demand is the
ing chapters, a few are crucial for understanding the context of business-to-business
quantity of goods or
services desired to be marketing and are highlighted in the immediate discussion. The first is the nature
bought, given market of demand; of particular note is the difference between consumer demand and
conditions (usually derived demand.
expressed as a function
of market price).
Derived Demand and Business-to-Business Supply Chains
Derived demand is the
demand experienced by
The demand for nylon fibers by consumers does not exist. Nylon is, however,
the chain of suppliers and demanded to spin yarn because yarn is demanded to weave fabric because fabric
producers that contribute is demanded to make clothes; all of these demands are derived demands—a result
to the creation of a total of the ultimate consumer demand for nylon clothing items. Demand in business
offering. Without initial markets is derived from consumer demand. As we mentioned previously, the
consumer demand, there
will not be any demand
chain of organizations, operations, and transactions traceable back to raw materi-
on the chain of suppliers. als extracted from the earth has come to be known as the supply chain. Supply
chains have become very important to business competition over the last twenty to
Supply chain is the chain thirty years. Manufacturers’ and service companies’ internal operations received
of entities and activities
that results in products
the most attention in the 1980s in order to meet global competition. Through
provided to end-users. It concerted efforts aimed at process improvement, global companies squeezed
starts with raw materials a great deal of cost out of their internal operations, and at the same time realized
and traces the flow of improved product and service quality. With these improvements in place, the cost
materials and sub- of materials, components, and supplies rose to account for well over half the sell-
assemblies through
suppliers, manufacturers,
ing price of products, on average.11 At the same time, variation in supply timing
and channel inter- and vagaries of supply quality accounted for a sizable share of product quality
mediaries to the final problems. So in the late 1980s and early 1990s attention focused on improving
customer. In the eyes of and integrating supply processes.
most organizations, The derived nature of demand has several consequences that characterize
supply chains are stable,
yet flexible enough to
business-to-business markets. Among these are the bullwhip effect and volatility
meet varying market of demand. Supply chain management is intended to mitigate the problems
demands. (Compare caused by these effects and so make the whole supply chain more competitive.
this concept to the value
network, introduced in
THE BULLWHIP EFFECT Because of the derived nature, demand in business
a later chapter.)
markets is leveraged—greater swings occur than in consumer markets—thus the
term volatile in Exhibit 1-1. A small percentage change in consumer markets leads to much
greater changes in business markets.
The volatility of derived demand is partially explained by the bullwhip effect.12 As
consumer demand varies, either as a result of seasonality or other market factors, “upstream”
suppliers of services and components that contributed to the total offering experience a leveraged
impact. This leveraging can cause wide swings in upstream demand as inventory levels, order
Business-to-Business Consumer
Market Structure
• Geographically concentrated • Geographically dispersed
• Relatively fewer buyers • Mass markets, many buyers
• Oligopolistic competition • Monopolistic competition
Products
• Can be technically complex • Standardized
• Customized to user preference • Service, delivery, and availability only some
• Service, delivery, and availability very important what important
• Purchased for other than personal use • Purchased for personal use
Buyer Behavior
• Professionally trained purchasing personnel • Individual purchasing
• Functional involvement at many levels • Family involvement, influence
• Task motives predominate • Social/psychological motives predominate
Buyer–Seller Relationship Expectations

• Technical expertise an asset • Less technical expertise
• Interpersonal relationships between • Nonpersonal relationships
buyers and sellers • Little information exchanged
• Significant info exchanged between between participants on a personal level
participants on a personal level • Changing, short-term relationships
• Stable, long-term relationships encourage encourage switching loyalty
Channels
• Shorter, more direct • Indirect, multiple relationships
• Organization involvement as part • Little/no customer supply chain involvement
Promotion
• Emphasis on personal selling, dialogue • Emphasis on advertising, monologue
Most communications invisible to the consumer • Companies compete for visibility and
• Consumer seldom aware of business-to- awareness by consumer market
business brands and companies
Price
• Complex purchasing process or competitive • Usually list or predetermined prices
bidding, depending on purchase type
Demand
• Derived • Direct
• Inelastic (short run) • Elastic
• Volatile (leveraged) • Less volatile
• Discontinuous
EXHIBIT 1-1 Business-to-Business versus Consumer Marketing Summarizing the Differences

timing, and order quantities adjust to the new level of end-use demand. The initial correction
is usually greater than the difference between the old and new demand levels. This is not solely
a result of human overreaction. The ordering and inventory systems throughout the supply chain
must make rapid adjustments and work through inventories that are too high or add extra product
to inventories that are too low for the new demand conditions.13
A good example of the bullwhip effect can be seen in the story in Exhibit 1-2, a story about
Ford and Firestone. Because of the recall of tires, Ford stopped production in its assembly plants.
This had a ripple effect back through the supply system feeding the assembly plants. Ford
“sneezed,” and the industry “caught a cold.”
In response to the tremendous need to find replacements for 6.5 million tires recalled by Firestone in
August of 2000, Ford Motor Company halted production of its popular Explorer sport utility vehicles
(SUV) and Ranger pickup trucks at three facilities in August, 2000. (Ford recalled an additional
13 million Firestone tires on its own, without Firestone cooperation, in May 2001.) The tires, originally
intended for use in approximately 3 percent of annual production of these vehicles, were redirected to
the replacement market. Most of the recalled tires had been used as original equipment on Ford SUVs
and were also the primary tire installed on current production models. The production shutdown was
estimated to cost Ford $100 million in profits for the quarter. Overall, the Firestone tire recall was
expected to reduce Ford 2000 profits by $500 million. (The added 13 million tires recalled in 2001
pushed the total expense to Ford for the tire problem to near $3 billion.)
Ford and Firestone are not the only companies whose profits suffered from the production
shutdown. Ford builds the largest selling SUVs in their market. Each vehicle is comprised of many
components and systems provided by several major automotive suppliers. Though not common house-
hold names as they are not major participants in consumer markets, companies such as Dana, Eaton,
ArvinMeritor, TRW, Lear, and Visteon are major suppliers to Ford SUVs, many of the items specifically
designed and built for these vehicles and not used by other manufacturers. In a dramatic example of the
volatility of demand in business-to-business markets, all of these suppliers announced reduced
earnings, either partly or substantially a result of the Ford production halt.
Eaton Corporation reported a 49 percent drop in third-quarter net, partly because of the Ford
production cuts (previous reports set the reduction attributable to Ford at 10 percent of quarterly results),
and Dana Corporation said its third-quarter results were 82 percent below the prior year’s results. While
not entirely attributable to the Ford production halt (Dana is a supplier to the heavy truck market, also in
a slump), Dana announced it would cut 2000 jobs from its work force of 80,000 in an effort to boost
fourth-quarter earnings.
The impact of the production shutdown does not end with components and systems. The
International Natural Rubber Organization (INRO) reported that rubber producers who sold rubber to
INRO as buffer stock are now enthusiastic bidders to put the inventory back on the market. The now
defunct INRO had been seeking bidders for its 138,000 metric tons of buffer stock. Heavy rains in
Indonesia had cut raw material supplies at the same time there was an increased demand from tire
makers to replace the recalled tires. Of course, there were additional complications. While rubber
producers were interested in buying back the stock they sold to INRO, they were also concerned about
possible product degradation due to less than ideal storage conditions. The Firestone tire recall had
generated concern about using old rubber to manufacture tires. As a result, any firm that purchased
the material was told that it was INRO buffer stock. One rubber trader related the feeling that INRO
rubber may be old but it could still be used in low-demand applications, such as bicycle tires, canvas
shoes, tires for vehicles used in China (low-speed applications), or on agricultural vehicles.
EXHIBIT 1-2 Assembly Lines (and Tires) Stop Rolling Sources: The Wall Street Journal, various
articles (September–December 2001); Business Week (September 18, 2000).
More recently, a slowdown in orders for U.S. companies’ automobiles has resulted in
bullwhip effects in the auto parts supply chain. Reduced demand and competitive pressures
pushed U.S. automakers to slow down their payments to parts suppliers creating an even tighter
cash situation in the supply chain. Coupled with rising energy costs, many parts suppliers, such
as Collins & Aikman and Metaldyne, sought debt financing at elevated interest rates to survive
the cash crunch. Others, such as Tower Automotive Inc., and Intermet Corp., sought protection
from creditors through Chapter 11 bankruptcy.14 Even Alcoa, Inc., a supplier of aluminum to
the automakers, faced financial pressure, even though Alcoa’s markets are diversified. This
diversification gives Alcoa the ability to balance poor performance in one sector with better
performance in other industries. It also gives Alcoa more leverage in setting prices, since it is
not completely dependent on one industry. Still, reduced demand from automakers and rising
energy prices combined to weaken Alcoa’s performance in early 2005.15
Another factor in the leveraged, discontinuous demand of business Discontinuous demand
markets is the issue of capacity throughout the supply chain resulting from the is the condition in which
desire of manufacturers to closely monitor capacity utilization. When a consumer quantity demanded in
the market makes large
goods manufacturer experiences an increase in demand, additional raw materials changes up or down
and supplies are consumed. Suppliers of these items experience greater demand in response to changes
and are required to increase production capacity. When the demand on suppliers in market conditions.
reaches a level that is the maximum that existing facilities can efficiently produce, The transition from one
the capitalization of new production capability is required, resulting in a disconti- market state to another
occurs in large
nuity in supply capability. If the supplier elects to invest in additional capacity, the increments rather than
addition not only provides increased capacity to the marketplace of the supplier small incremental
but also creates demand in the markets of producers of manufacturing equipment changes in demand.
and other production and infrastructure-related products. In this scenario, the
increased demand for manufacturing capability in the first supply chain impacts the supply chains
for several other markets. Multiply this scenario by all manufacturers who experience an increase
in business and thus increase the supply requirements of all their suppliers, and the power of the
leverage of consumer demand is obvious. A small change in consumer behavior can impact an
entire economic structure, that is, “a rising tide raises all ships.”16
While demand fluctuates more in business markets, it is also inelastic in Elasticity of demand
the short term. Your customer, a manufacturer who has incorporated your prod- refers to the percentage
uct into the design of its own offering to customers may not be able to substitute change in quantity
demanded relative to
another component for that item, particularly if, as a business marketer, you have the percentage change
managed to maintain a significant differentiation from your competitors. If the in price. If a price change
item’s cost is driven up by unforeseen factors, the manufacturer has the choice of produces a change in
continuing production by paying the higher price or ceasing the manufacturing demand that is less in
process, alienating its own customers who may be expecting delivery. Your percentage than the
percentage price change,
customer’s reluctance to alienate its customers is a major source of inelasticity. then demand is said to
If the change in the supply situation that caused the price increase is expected to be inelastic.
continue, the manufacturer eliminates use of the component by design in the next
generation of its product offering.
VOLATILITY The bullwhip effect, or leveraging, described here can help us understand
logistics-oriented supply chain effects on business-to-business demand. The bullwhip effect,
however, is only part of the cause of volatility in business-to-business markets. Because of the
volatility in business-to-business demand, small changes in consumer buying attitudes are
closely watched as potential indicators of changes in our economy. The inelastic nature of
derived demand may lead the uninitiated business marketer to a false sense of security, believing
that the short-term persistence of demand translates into long-term stability.
We have seen many examples in history in which sudden environmental changes have
destabilized entire markets. Rapid changes in the economy can have medium-term—or faster—
impacts on derived demand. The almost 30 percent drop in consumer purchases of large automo-
biles in 1974 and again in 1979, coincident with each oil crisis, is an example of a fast-acting
economic event. Many suppliers to the automotive industry found orders stopping immediately, not
to return until it was financially too late for the supplier to recover. Again, in the Ford and Firestone
example discussed in Exhibit 1-2, the situation in which Ford ceased production of a very prof-
itable, high-volume vehicle was caused by a combination of events. The resulting lower earnings
reported by suppliers of components for the Ford Explorer could not have been anticipated.
A relatively slow-acting event was the “dot.com bust” that occurred in 2001–2002. What
started as some disappointing earnings reports for publicly traded e-commerce companies turned
into a full-scale recession whose impacts lasted several years. When stock prices initially began
falling in the spring of 2001, many analysts felt that this “correction” was necessary and the
“dip” would turn around by year’s end. It didn’t. Other factors and events—the terrorist attacks
of September 2001, scandals at Worldcom and Enron, for instance—exacerbated the worsening
economy. The effects of the downturn spread to other sectors, as well as globally. The effects
were slowed and mitigated within the United States due to lower interest rates and tax cuts,
which kept consumers consuming. Eventually, in 2004, businesses increased their capital
spending and began slowly hiring back workers.
Complexity—A Rationale for Relationship Marketing

One of the major implications of derived demand is that business marketers must understand their
customers’ customers. Only if marketers are customer focused are they able to fully understand
their customers’ network of derived demand. The business marketer can design products and
services to fully benefit customers and, hopefully, anticipate changes in levels of demand insti-
gated by the customers’ market. The impact of the discontinuous nature of demand can be
lessened by business marketers’ participation in the relationship with the customer on a conti-
nuing, ongoing basis. If, as a result of its complacency, a business marketer allows a competitor to
take advantage of its inattention by offering a lower price or better product, the loss of short-term
business could translate into lost opportunities to be the supplier of the customer’s next generation
needs. Consequently, business marketers must be diligent in their efforts to continually reinforce
buying decisions and create more value for their existing customers.
Another factor that separates business-to-business markets from consumer
Outsourcing is the
purchasing of part of the
markets is the complexity created by the various attributes that make up the total
company’s continuing business offering. Partly in response to this complexity is the complex nature of
operations, such as the buying decision process. Complexity on both sides is obvious when one stud-
recruiting or ies the outsourcing of product research and development, the acquisition of such
manufacturing, rather things as computer information systems, manufacturing facilities or equipment,
than investing in the
infrastructure to
or a new power plant. However, on the other end of the spectrum lie products that
accomplish the task are not very complex, such as office supplies. While the products themselves are
internally. not particularly complex, attributes of the offering such as quantity discounts,
complementary products, and delivery schedules create complexity. All in all,
this pervasive complexity reinforces the differences between business-to-business and consumer
marketing. The differences that we have discussed do not stand alone but combine to create
unique difficulties and opportunities.
OPPORTUNITIES THROUGH RELATIONSHIPS In business-to-business markets, additional

product design effort is often needed to ensure that a product’s complexity will enhance
customer value rather than detract from it. The dialogue between customer and marketer must
quickly convey complex concepts that are generally more difficult to understand than those
required in consumer marketing. As already noted, communications in business marketing
must often focus more on personal selling than in consumer marketing. The sales force
becomes the focal point for developing the relationships that will enhance the position of the
selling organization in its attempt to address the complex and diffused buyers’ decision
processes. Marketing based on building close relationships with customers becomes the
glue that holds all the other pieces together to create value by ensuring that the customers’
uniqueness is accommodated. In contrast, relationships in consumer marketing are often part
of “customer service” and are often treated as sources of costs rather than enhancement to
interaction with customers.
One effect of the necessity for close relationships is that switching costs—the costs of
switching suppliers—become very high for both the customer and the supplier. In consumer
markets, switching costs usually are not nearly so constraining. High switching costs in business-
to-business markets can result from the investment that the partners make in matching buying,
ordering, inbound logistics, and delivery systems to each other—the creation of an efficient,
specialized supply chain. High switching costs can also come from the working relationships
established on a personal level, which may be less tangible than the logistical linkages. However,
such personal linkages can be just as close and binding and just as difficult to break. Because
business-to-business customers realize that commitment to a supplier creates such high switching
costs, they become very careful about whom they choose as suppliers and often establish back-up,
second-source relationships with other suppliers. Meanwhile, suppliers seek out other customers so
that they are not so reliant on a single large customer. Once all these primary and secondary
relationships are established, the high switching costs make the supplier–customer relationships
difficult to split, making it difficult for new partners to enter the picture. Partners need to realize,
though, that they cannot abuse these locked-in relationships with poor quality or service or unten-
able demands. Durable partnerships break at times and the aggrieved partner makes it difficult for
the penitent party to re-establish the relationship.
Market Structure
Another major difference between business-to-business and consumer markets is that, usually,
business marketers face markets with a much smaller number of customers than consumer
marketers face. The reasons for this are quite simple. First, there are simply fewer organizations
in existence than there are consumers. Second, organizations differ greatly in what they do and
how they do it. Hence, their needs for products and services differ greatly. This means that many
market segments (discussed in Chapter 7) have relatively few organizations populating them.
Having many market segments with differing needs implies that mass marketing
approaches will not be particularly useful. Our natural instincts as consumers, conditioned to
mass marketing approaches, are often contrary to effective business-to-business marketing
logic. Mass promotion is not particularly efficient or effective as a tool to communicate with
the business-to-business market. In consumer markets, the high cost of mass media is spread
out over a large audience such that cost per contact is low. If mass media do not or cannot
reach enough prospective customers, due to small populations in target segments, then cost per
contact remains high and more efficient means of communications must be sought. This high-
cost business model analogy extends to other aspects of marketing as well. Since business
segments often have a small population of buyers (see the discussion of oligopolistic markets
in Chapter 2) and it is likely that each buyer, from the perspective of one’s organization, has
a different idea of what product provides the best value, marketers tailor offerings to specific
buyer value definitions. At first, it may seem that the proliferation of product variables would
lead to high product costs. However, the large quantities usually purchased by a single buying
organization often allow manufacturing economies of scale to be reached. Without the volume
of large purchases, business-to-business offerings must have significant value built in, such
that the resulting price is accepted by buyers.
Integrated versus Networked Supply, Brand Identity

In consumer markets, consumers believe brands that they know and trust provide more value than
brands that they do not know. Brand identification is important in business-to-business markets as
well. Individuals in business-to-business markets will have knowledge of the reputation and track
record of brands and their suppliers. Just as consumer markets have “go to” brands that are known
as reliable and dependable, so too do business-to-business markets.
What contributes to quality and reliability in consumer markets versus business-to-
business markets can be significantly different, and the well-known brands and companies in
business-to-business markets usually do not have a strong consumer presence. All the parts,
materials, sub-assemblies, and so on that comprise a consumer product are seldom manufactured
by the company whose brand appears on the product. Manufacturers often find it more appropri-
ate to purchase components of their products from other companies rather than integrate into the
manufacture of those components. While there are many brands of refrigerators in the market
place, an examination would likely reveal that there are only two or three prominent brands of
motors for the compressors in the refrigerator. It is also likely that the brands are not well known
in consumer markets.17 The suppliers of motors, for instance, are specialists in the design, devel-
opment, and manufacturing of motors. To support that specialization, they will have invested in
technologies and competencies that make them a better, more competitive motor supplier. The
refrigerator company is not interested in an investment in motor technology, but is interested in
using motors that incorporate new technologies and techniques. The practical outcome is that the
many refrigerator manufacturers will purchase motors from one of a few motor producers, likely
an oligopoly.
The degree to which a company networks, on the supply side, to other companies
(e.g., outsources motors) depends on many factors including
• How long the company has been in business
• The desirability of diversifying, through vertical integration, into another business
• The availability of quality supply choices in the market
• The speed at which technology is changing the market
• The degree of uniqueness or specialization of the supplied or manufactured component.
Historically, many large companies, well known today, are more vertically integrated than
younger companies. This is often out of necessity—early manufacturers were required to
vertically integrate into diverse businesses, as there was not an existing industrial infrastructure
to rely on for supply. In today’s market, newer companies view formal integration as a potential
impediment to flexibility and thus often partner or network (“outsource”) with other similarly
sized companies to complete their offerings.
Exhibit 1-3, Networked versus Integrated Supply, shows several recently introduced car
models and the suppliers for several components. 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. Note also 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 fifteen 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.
Sourcing decisions like those noted in Exhibit 1-3 demonstrate that the choice of
supplier for any given situation depends on many factors not necessarily related to the material
or component to be sourced. A heavily integrated customer will seek to maintain profitable
volumes in its supply divisions, while a smaller, younger, and more flexible company will be
more open to outside sources. These considerations have put many older American industries
at a disadvantage as they face newly structured, recently developed foreign competition.18
Some International Considerations

There are international implications that are part of the differences between business-to-business
and consumer markets. In part because of international standards-setting organizations, the
complexity of doing business beyond one’s own borders is less for business-to-business markets
than for consumer markets. International consumer markets are subject to many more cultural,
language, regulatory, and individual value differences than business-to-business markets. An
exporter of a packaged food product must be concerned not only with packaging, promotion, and
language differences but also with cultural beliefs and values about ingredients, colors, and style as
well as buying habits. Additionally, international standards in foods and packaging of consumer
products vary greatly. Conversely, business-to-business products have fewer hurdles to clear.
While business-to-business products are subject to the same politics of tariffs and other
trade barriers, many materials, supplies, and components meet standards that are agreed to and
consistent across international borders. Plastic materials have been nearly standardized
through the voluntary effort of the Society of Plastic Engineers (SPE); and the transportation
industry, through the Society of Automotive Engineers (SAE), has created performance
standards for vehicle systems. These are but two examples. Steel, plastic, pulp and paper
Consumer Brands Aren’t Always What They Seem
Examine a consumer product that you purchased final product? What values did the producer look for
recently. Did the brand of this product play an impor- (cost, reliability, durability, power consumption, etc.)?
tant role in your selection process? Note the different Review Exhibit 1-3, Networked versus Integrated
components and elements that make up the prod- Supply. Note that the same company often supplies
uct. Did the producer of the consumer product similar components of different vehicle brands. Note
manufacture all of the components or have some also that the suppliers are seldom recognizable by
parts been purchased from other producers? What consumers—they are not familiar brands. As you
considerations did the producer of the consumer make your examination, the number of different
product have when selecting the manufacturer of manufacturers who contributed to the final product
the various components and parts that make up the may surprise you.
16
1990 Ford 2008 2007 2007 2008 2007

Crown 2008 Ford Toyota Saturn 2009 BMW Volvo Honda Lincoln
Component Victoria Taurus Corolla Sky X6 S80 Accord Navigator
Autoliv/
Takata,
Airbags-Various TRW, Key Takata TRW
TRW
Safety
Brakes/Calipers, TI, Honeywell, Honeywell, Federal-
Ford (1) TI, PBR Continental Honeywell
Components, etc Honeywell ITT Hitachi Mogul
Bumpers/Fascias Ford Omnium Omnium Plastal Decoma
Engine Bosch, Bosch,
Ford Visteon Visteon
Management Delphi Denso
Pilkington,
Glass Ford (1) Sekurit
AGC
Half Shafts/ Haldex Haldex
NTN GKN NTN
Drive Shafts AWD AWD
Headlamps Hella Zizala Stanley
HVAC Ford (1) Visteon Air Intern’l Preh Behr
ZF Visteon,
Steering System Ford, TRW Continental
Lenksys. ZF
Panasonic,
Premium Audio Harman/ Alpine/
Ford (1) Harada, Delphi (2) Alpine Clarion
Components Becker Mitsubishi
etc.
Seats Ford Lear Faurecia Lear
Seat Belts Takata Takata
EXHIBIT 1-3 Networked versus Integrated Supply

1990 Ford 2008 2007 2007 2008 2007
Crown 2008 Ford Toyota Saturn 2009 BMW Volvo Honda Lincoln
Component Victoria Taurus Corolla Sky X6 S80 Accord Navigator
Shock
ZF, Cosma
Absorbers/Struts, ArvinMeritor, Thyssen- Mubea, SKD,
Ford Intn’l, Tenneco
Chassis Mubea Krupp Dana NHK
Sachs
Components
Steering wheel Ford (1) Autoliv Autoliv Takata
Auto
Taillamps Ford Visteon Hella Stanley Lighting
Visteon
Transmission/
Ford ZF
Transaxle
Thyssen- Thyssen-
Camshafts Ford (1) Mahle
Krupp Krupp
Draexi-
Wiring Yazaki Yazaki Yazaki Yazaki Yazaki
maier
EXHIBIT 1-3 (continued)

Notes: (1) The Ford divisions that supplied these components have been spun off into Visteon, an independent company.
(2) Delphi is the name of the supply organization created when General Motors spun off its various supply divisions.
Source: Automotive News Car Cutaways, Secondary Research, Author conversations.
17
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 require-
ment of many global firms.
AN EXAMINATION OF VALUE
Throughout this chapter, as well as the rest of this text, a recurring theme is the customer’s
perception of value and that perception’s impact on buying decisions. The notions of value, the
value chain, the networks that build value, and the nature of competition are very powerful in
giving depth to business marketers’ decisions. For example, the role and management of
marketing channels and business logistics become much clearer when value for the final
customer is understood as the necessary outcome of an extended value chain. Value and the
value chain deserve a close look, then, in some detail. In this chapter, we elaborate on the value
chain as described by Porter;19 in Chapter 2 we expand the discussion to better reflect changes
implied by new and emerging business styles and formats.
This brings us to the point where we must make explicit the concept of value. The adage,
consumers who purchase a quarter-inch drill bit do not want a quarter-inch drill bit—they want
a quarter-inch hole—is quite appropriate. As consumers, we do not purchase music compact
discs (CDs) because we like the shiny plastic discs; we buy them because we are interested in the
entertainment value of the music. The disc is merely a container for the value.20 Customers do
not purchase products; they purchase offerings that create solutions and satisfaction. Consumer
and business markets are alike in the exchange process. All parties who are part of an exchange
must leave the transaction believing they acquired more than they gave up. The value of an
offering is determined not by the cost to create it but, rather, by the net value of satisfaction
delivered to the customer.
So what is value? Treacy and Wiersema21 define value as the sum of all of the benefits
that a customer receives in the process of buying and using a product or service less the costs
involved.22
The concept is quite simple, but quickly complicated because lots of things contribute
to benefits and lots of things contribute to costs. All of the customer’s benefits from buying
and using a product or service are not measured in the same units. The same is true for costs
incurred by the customer. There are certainly costs involved in the search for, purchase,
Evaluated price is and maintenance of products, but there are also time costs and aggravation
the total cost of owning costs in the purchasing process, as well. Purchasers encounter hidden costs
and using the product. associated with usage, such as learning time and the cost of mistakes made
This may include
while learning how to use the product. The sum of these costs, the total cost
transportation,
inventory carrying costs, of owning and using a product, is referred to as the evaluated price.
financing costs, Additionally, purchasers’ definitions of what comprises the best value
potential obsolescence, changes with time, experience, technology, and competitive positioning.
installation, flexibility Accordingly, value—which is complex and variable, depending on the view
to upgrade, cost of
of what contributes to it—is often hard to quantify. However, this does not
failure, and obsolescence
of existing products or mean that the concept is not a useful one. Explored in a theoretical sense,
equipment, plus the price the concept of value provides excellent insight about how business marketing
paid to the vendor. works.
The Value Chain

In the mid-1980s, Harvard business professor Michael Porter put forth the idea of a value
chain.23 When the value chain is understood and applied wisely, it is a powerful concept that
can help a company create competitive advantages that competitors often do not even know
exist. As with any management tool however, if misunderstood and misapplied, the results can
sometimes be disastrous. Let us examine the fundamentals and propose an adaptation.
The basic idea is that companies compete with each other to be selected by buyers.
Buyers select from among competitors’ offerings based on the buyers’ perceptions of where
they will receive the most value (subject to the realities of budgets). Each vendor who is com-
peting, then, tries to do so by offering more value, as perceived by the customer, than is
offered by the other vendors. The value chain, then, is the chain of activities that creates
something of value for the targeted customers. The “something of value” is an offering
(which was implied by Porter but not made explicit). The offering is everything that the cus-
tomer or prospect perceives as contributing to benefits and costs. This includes the product
and the service but goes much further. The offering also includes brand image, the economic
utility provided by distribution such as availability and appropriate quantity, and, as noted
earlier, evaluated price. Evaluated price includes all the costs that are subtracted from
benefits to produce value—the “cost of doing business” with a supplier. Exhibit 1-4, Direct
and Support Activities Contribute to Value shows the support and direct—or value enabling
and value creating—activities that usually occur within the firm. The left side of Exhibit 1-5,
Value Chain and Offering, represents the value chain in relation to customers who will
perceive the value offered.
The center of Exhibit 1-5, “the puzzle,” shows the created offering as a combination of
product, service, image, availability, and quantity—all part of the factors that make up the
evaluated price. Note that these factors are created by the supplier’s direct and support activities;
yet their market value is determined as a result of the perception of the target customer. This
customer perception also considers the offering in the context of the business environment. For
instance, the customer may also see the offering as consistent with standards promulgated by
international standards organizations. Or an industry commentator, in his blog, may recommend
the product. Thus the customer’s perception includes more factors than just the offering created
by the supplier. This distinction between the offering and what the customer perceives is impor-
tant. The decision to select a particular supplier will be based on the customer’s perception of the
created value, not the creator’s perception.
• Support Activities: “Value Enabling” • Direct Activities: “Value Creating”

– Infrastructure – Input logistics
– People management – Operations
– Technology development & management – Delivery logistics
– Resource acquisition – Service
Other contributions to value include adoption by channels, adoption by Original equipment manufacturers
(OEMs) or upstream suppliers, affiliation with industry trade organizations, cultural acceptance of end-
use products, etc.
EXHIBIT 1-4 Direct and Support Activities Contribute to Value

PERCEIVES
INFRASTRUCTURE
M
AR
HUMAN RESOURCES
G
IN
TH
RO
PROCUREMENT Offering:
UG
H
Product
VA
TECHNOLOGY & TECHNOLOGY DEVELOPMENT
LU
E
Value-enabling Activities
Service
Image
ADDED VALUE
Availability
Value-creating Activities
Quantity
E
LU
S
CS
C
Evaluated
VA
E
TI
S
TI
IC
LE
IS
H
IS
NS
UG
RV
G
SA
G
price
LO
RO
O
LO
SE
&
TI
TH
D
NG
RA
ER
UN
UN
IN
M
PE
TI
BO
G
BO
O
KE
AR
O
ST
IN
UT
AR
M
CU
O
CREATES
Supplier side—Direct and support
activities of the value chain create Customer side—Target customers
many elements of the offering. perceive the offering from their value
perspective.
EXHIBIT 1-5 The Value Chain and Offering
Direct versus Support Activities

This conceptualization of the specifics of a value chain, internal to an organization, includes both
direct and support activities. The direct activities contribute directly to the offering. The support
activities make it possible to perform the direct activities. For instance, marketing creates brand
image, which is valuable to customers because it provides assurances of quality, upgradability,
and the like. Marketing is then a direct activity. Human resources management defines positions
and recruits, hires, trains, and motivates the people who are necessary to do the marketing and
other activities. Therefore, human resources management is a support activity.
The implications of all of this are fairly simple and familiar, but they are also quite powerful.
The first implication is that the organization should start by really understanding its prospective
customers. The organization should fully understand what those prospective customers would
perceive as valuable. Further, the organization should understand how customers might be persuaded
to change their minds about what is valuable. This is not manipulation but customer education. It is
focused on getting the customer to better appreciate all of the value that it is possible to obtain from
the attributes of the offering. The market-driven organization, focused on providing more value, not
on giving less value and then convincing customers it is the best that they can expect, will be able to
demonstrate superior value in its offering, enabling improved margin through customer recognition of
that value. The organization must itself recognize all of the factors that provide value to its offering.
The second implication is that not all prospective customers are alike. Segments exist based
on what value the prospective customers seek and what they can afford. Once this is understood,
it becomes apparent that our traditional means of determining segments—demographically or by
industry—are perhaps misguided.
The third implication is that both direct and support activities are equally important in the
creation of value. Without critical links, the whole chain falls apart and the customer’s value is
Value Activities Value Activities Value Activities

Value Value Value
enabling Value enabling Value enabling Value
creating creating creating
From Exhibit 1-5: Value-enabling activities include

infrastructure, human resources, procurement, and
technology and technology development. Value-creating
activities include inbound and outbound logistics,
operations, marketing and sales, and customer service.
EXHIBIT 1-6 Supply Chain Orientation of Value Chain
degraded. One of the misuses of the value chain concept during the recession in the early 2000s
was to see value creation only in activities that produced or sold products. Significant cuts were
made in “non-value producing” activities, as perceived by suppliers, without realizing the impact
these cuts would have on value perceived by customers.
The fourth implication is that the creation of value extends from the customer back through
distribution channels, through manufacturers, through component suppliers, finally to raw
material providers (Exhibit 1-6). Each organization in the chain successively adds value to the
offering to accommodate the next organization. This representation is not unlike the more
logistics-oriented notion of a supply chain. Because of the nature of derived demand, business
buyers define what is valuable to them in terms of what value they are providing to their own
customers. Each purchase by a business contributes to the value it provides to its customers.
The value chain concept gives a powerful argument for following the marketing concept.
Market-driven organizations recognize marketing not as a single departmental function but as the
defining function (i.e., understanding and satisfying customer needs) in the organization. The
marketing concept says that to do well, the organization should know its customers, meet their
needs, and do so in a way that meets organization goals. The value chain concept provides
a framework for pursuing the marketing concept—that everyone contributes to the success of the
organization.24
MISUNDERSTANDING OF THE VALUE AND VALUE CHAIN CONCEPTS

The concepts of value and the value chain are so basic that marketers can lose sight of their
implications. It appears that this happens in three principal ways.
First, marketing managers can get so caught up in trying to create profits for their
companies that they lose sight of what customer value really means. They forget that
customers will not choose to buy a total offering unless it provides superior value to the cus-
tomers. To create profits, managers sometimes think that they can forgo some customer value
to reduce costs by taking shortcuts on quality, service, or availability; or they lose sight of
customer value altogether and wind up creating me-too or inferior products or offerings
whose value is easily copied and soon surpassed. Marketers need to be reminded that per-
ceived value must be better than value from competitors’ offerings. Without this fundamental
driver, profits do not happen.
Second, managers often lose sight of what creates value for the customer. As already
noted, customers get value from more than just the core product or service. Some products
provide prestige, some provide upgradability, and some have the support of a stellar service
organization while others may never need service. Too often, managers get bogged down getting
the product (or service) features right and they forget that communications, positioning, distrib-
ution, and pricing also create value.
Third, there are often so many different kinds of businesses that want a product or service
and derive value from it in so many different ways that it is difficult to pin down exactly what
combination of features in an offering is valued by the most important customers. When this
occurs, it indicates that a poor job has been done in defining segments and/or choosing target
markets. If segments have been defined well, they are practically homogeneous when it comes to
benefits sought. If there is a great deal of heterogeneity within the target segments, then the
segmentation needs to be rethought (see Chapter 7).
In all of the preceding situations, marketers lose sight of the fact that they need to be truly
customer value driven. This means that they have to maintain the discipline of focusing on
customers and finding a way to provide superior value for them. Time and again, when companies
lose sight of this, they get into trouble.
TRENDS AND CHANGES IN BUSINESS MARKETING

To this point we have suggested that it is important to study business-to-business marketing
separately from consumer marketing. We have also discussed the concepts of value and the value
chain as the bases for thinking about business marketing. The retrenchment of the economy in the
early 2000s and the subsequent recovery have borne out that these core concepts are as germane as
they were in the past: understanding customers and building relationships with them, understanding
segmentation, applying branding concepts, and careful management of the marketing channels and
business logistics, just to name a few. However, the business-to-business marketing environment is
changing rapidly, and adaptation to this change may require some new ways of thinking and acting.
Throughout this book we elaborate on trends that, at this time, appear to require attention
from business-to-business marketers. While these changes are mostly obvious, how to address
them may not be so obvious. Several of these trends are interrelated: they cause each other.
Together they produce second- and third-level effects that become trends in and of themselves.
HYPERCOMPETITION Several factors have combined, seemingly in the short term, to create
many smart, fast competitors across many industries. New companies that emerge quickly or
create new markets and industries almost overnight challenge established companies. In the face
of this new, rapidly appearing hypercompetition, existing companies are rapidly embracing new
methods and techniques. As companies learn to do more with fewer people, at least some of
these companies downsize. This leaves many skilled people who are looking for work; some
start companies, and more go to work for new companies, often with a well-established network
of relationships in place.
The rapidly changing competitive landscape means that business marketers must antici-
pate a hypercompetitive environment even though they are unable to anticipate who tomorrow’s
competitors will be. This, in turn, means that competitive analysis techniques and competitive
actions, which once focused on addressing competition from specific competitors, must be
adapted to accommodate this heightened uncertainty. Techniques that can be used in such an
environment are discussed in Chapter 6.
FORMATION OF PARTNER NETWORKS Products, projects, and systems have become so complex
and interrelated that no company can provide a “whole product” by itself. (The implications of this
for many industrialized businesses have been noted and are demonstrated in Exhibit 1-3.) For
instance, software providers need to partner with hardware vendors, other software vendors, and
systems integrators to provide enterprise-level software systems (such as enterprise resource
planning—ERP systems). What was once a sales channel—the software company to the systems
integrators—–has become a sales, service, and distribution cluster. Similar partnering occurs for new
product development and filling product lines. Larger companies are recognizing that, often, other
companies have crucial pieces of technology or complementary products. These trends are not just
occurring in the computer industry and related industries. The same kinds of partner networks are
occurring in industries as diverse as construction, energy production and distribution, consulting,
and employment services.
This seems straightforward, and the solutions for addressing this trend seem to look a lot like
extensions of channel management. However, the business marketer realizes that things are differ-
ent when the marketer is approached by an arch-rival competitor with the offer of partnering on a
new venture or in a new market. This is not collusion, because the competitor remains a competitor
in other markets; and the competitor may break the partnership—probably will break the partner-
ship—in the future and compete in this market that the two partners have pioneered together. The
implications of this trend in partnering are examined more closely in later chapters.
ADOPTION OF INFORMATION TECHNOLOGY AND THE INTERNET Another Channel facilitators are
trend changing the face of business marketing is the increased pace of adoption those service providers to
the channel that are not
of information technology. Internet technology, of which the Web is a subset,
necessarily part of
offers enhanced communication, enhanced customer service, and reduced costs. channel design but who
The concepts of total offering and evaluated price combine to demonstrate that make possible the efficient
these benefits accrue to buyers as well as sellers. Channel members and other operation of the channel.
intermediaries obtain all these benefits as well, as they act as buyers, sellers, and Channel facilitators are
financial institutions,
facilitators.
transportation and
logistics companies, third-
SUPPLY CHAIN MANAGEMENT Supply chains extend from raw material and party service providers,
component suppliers, through the manufacturer, and through the distribution etc. These organizations
channel to the final buyer. provide outsourced
services to facilitate the
The Web has and will continue to impact the dynamics of supply chain
effective operation of the
management. Theoretically, the participants do not have to have compatible channel.
equipment, just Internet access and an up-to-date browser (it is actually more com-
plicated, but the compatibility issue is much more tractable using the Internet). A single supplier or
distributor can participate in multiple channels, even though the channel leaders use different
platforms. The supplier or distributor must still reconcile different tracking and accounting systems,
and confidentiality between participants can be a problem, but such efforts can cost less than
creating and maintaining several different information technology systems.
Online ordering, inventory and delivery tracking, coordination of marketing programs,
and automated sharing of market information have always been available to the largest
companies. The potential to squeeze a great deal of the costs out of the supply chain, while
making the supply chain faster and more effective is now a capability of many smaller
organizations. Market-driven pricing methods are challenged as well. Auctioning software
allows excess inventory to be sold over the Web, allocating the inventory to the channel
outlets where it will be valued the most. Using the auctioning concept from the other
direction, manufacturers or distributors can run online bidding for supply contracts. In
a very short time frame, they can get better prices and more effective delivery contracts.
Auctioning can make existing suppliers, whose offerings do not provide good value, subject to
quick termination of their contracts for nonperformance, because the transaction costs of
switching have been minimized (other switching costs still exist, of course, and may give the
incumbent supplier some breathing room).
Many products now are digital, including, of course, software; but a product such as an
insurance policy or a consulting report can be a document, which can be transmitted in digi-
tal form. Drawings, photographs, videos, or combinations of these may constitute part or
even all of a product. These, of course, can be delivered via the Internet or Web. Many soft-
ware products that were once sold as “shrink-wrapped” products, or as major installations,
now are sold as Web-enabled services. Customers do not have to install the application on
their own systems. All they have to do is access the software on a central site and input their
own data by completing forms on a Web site, and the central site runs the application. The
output is returned to the customer through a custom-generated Web page. Selling such
services via the Web provides a great deal of value to business buyers in that installation time
is small and the overhead costs of installation and maintenance are shared with other users of
the centralized service. The implication is that many more business customers now have
access to the software, presumably making their business operations more efficient and effec-
tive. At the same time, the business model of the software company has changed from a soft-
ware product manufacturer to that of a service provider. Many software companies, such as
Oracle and IBM, are developing this model for addressing smaller company markets. All this
changes the business environment for the companies that used to provide installation, train-
ing, and maintenance services for customers installing new software and hardware. A great
deal of the business that used to be generated is now potentially going away. On the other side
of the coin, the security, installation, training, and maintenance business that is left tends to
be high value and high margin.
TIME COMPRESSION Several factors combine to create time compression—an increase in the
“speed” of doing business. How organizations react to this acceleration has both short-term and
long-term effects on their survivability and performance. With hypercompetition, competitive
pressures cause companies to attempt to get new products out faster and to replace these products
with succeeding generations of products even more rapidly.
Discussions we have had with executives and managers have yielded disquieting results.
For the question, “How are you dealing with time compression?” the responses range from well
thought out, seemingly effective methods to some version of “work harder and faster.” There
seem to be too many of the latter.
THOUGHTS TO TAKE WITH YOU INTO THE NEXT CHAPTER

With all the change occurring in the business marketer’s world, some ideas, such as the value
chain and its implications, continue to have validity and can provide guidance. The best way to
be successful and profitable is to focus on creating superior value for prospective customers. Do
this first, and prospective customers will be willing to pay, commensurate with perceived value.
The focus can then turn to managing costs in such a way that value is not diminished. With
proper management, companies will be creating enough cash flow to pay for the value that is
provided to them by their own upstream suppliers.
In the FedEx versus UPS example, the key to success is how much value can be created for
business customers. Both companies, through acquisitions, changed the competitive landscape
by creating differentiated offerings. To succeed, both companies will need to continue to learn
about customers and innovate to offer more value. Meanwhile, technology will be changing, new
competitors will enter the market, and customers’ needs and behavior will evolve.
Chapter 2 concerns other key ideas that describe how business-to-business markets operate
and how marketing implications are drawn from these concepts. Keep in mind, though, that
providing value is still at the foundation of these concepts. Customers’ perceptions of value
change over time, and the way that value is created through organizations changes as well.
Throughout this book, and indeed throughout your career as a marketer, the search for creative
ways to provide new value to current and future customers must continue.
Key Terms
bullwhip effect 8 entrepreneurial marketing 3 possession 6
business marketing 4 evaluated price 18 supply chain 8
business markets 3 form 6 supply chain management 6
channel facilitators 23 four Ps 4 switching costs 13
consumer demand 8 hypercompetition 22 time 6
derived demand 8 inelastic [demand] 11 time compression 24
discontinuous demand 11 marketing concept 7 total offering 5
economic utility 6 outsourcing 12 value 18
elasticity 11 place 6 value chain 19
Questions for Review and Discussion

1. Describe the differences between business-to- 5. We learned in economics the difference between
business and consumer marketing for the following elasticity and inelasticity. What is meant when
market elements: we say that business-to-business demand is
products buyer behavior decision making inelastic in the short term and discontinuous in
2. Describe the differences between business-to- the long term?
business and consumer marketing for the following 6. Ultimately, who is the long-term benefactor of appli-
market elements: cation of the value chain? Explain your answer.
market structure channels promotion 7. Considering all of the elements of evaluated price,
3. Describe the difference between derived demand would value to the customer’s customer be a major
and consumer demand. How does the leveraging consideration? Why, or why not?
phenomenon occur? 8. How is value created in the transaction process?
4. What is the difference between value as perceived 9. As consumers, how do our “shopping instincts”
by the customer and value as perceived by the make it difficult to understand business-to-business
supplier? marketing philosophy?
10. What factors can contribute to a customer remaining 13. Discuss the relationship between evaluated price
with a particular supplier even though lower-cost and value and the importance of that relationship to
substitutes may be available? both suppliers and buyers.
11. What factors contribute to the decision to outsource 14. How can a company gain competitive advantage
versus vertically integrate? How does proprietary through supply chain management?
technology affect this decision?
12. Discuss the bullwhip effect. How can management
of the supply chain reduce the volatility produced
by the bullwhip effect?
Endnotes
1. Based on Dave Hirschman, “FedEx, UPS 9. William D. Perreault Jr. and E. Jerome McCarthy,
Tactics Diverge: Retail Shippers a Top Priority,” Basic Marketing, 13th ed. (New York, McGraw
The Atlanta Journal—Constitution (July 13, Hill, 1999), pp. 33–35.
2004), p. D.1; James F. Peltz, “FedEx, UPS 10. For a complete treatment of the concept of
Hope to Spark Chain Reactions in Battle For marketing as the defining parameter in the orga-
Customers; The Owners of the Old Kinko’s and nization, readers are directed to Regis McKenna,
Mail Boxes Etc. Stores See Retail as a Key to “Marketing Is Everything,” Harvard Business
Sustained Growth,” Los Angeles Times (October Review (January–February 1991).
17, 2004), p. C.1. 11. David N. Burt, Donald W. Dobler, and Stephen
2. Dawn Wotapka, “Feeling Blue about Going L. Starling, World Class Supply Management,
Brown; Some Mail Boxes Owners Fighting UPS 7th ed. (Boston: McGraw-Hill Irwin, 2003).
over Control,” Chicago Tribune (July 8, 2004), p. 1. 12. Philippe-Pierre Dornier, Ricardo Ernst, Michel
3. Ted Samson, “FedEx Kinko’s Delivers Remote Fender, and Panos Kouvelis, Global Operations
Printing,” InfoWorld, 26(46) (November 15, and Logistics (New York: John Wiley & Sons,
2004), p. 52. 1998). Chapter 7 provides a complete discussion
4. Naomi Aoki, “Staples Tries to Make Copies of the bullwhip effect and its relationship to sup-
Easy for Customers,” Oakland Tribune (July 11, ply chain management.
2004), p. 1. 13. Hau L. Lee, V. Padmanabhan, and Seungjin
5. Minet Schindehutte, Michael H. Morris, and Whang, “The Bullwhip Effect in Supply
Leyland F. Pitt, Rethinking Marketing: The Chains,” Sloan Management Review (Spring
Entrepreneurial Imperative (Upper Saddle 1997), p. 96.
River, N.J.: Pearson Prentice-Hall, 2009). 14. Mitchell Pacelle, “Detroit Woes Keep Suppliers
6. A note about terminology is important here. In in a Pinch,” Wall Street Journal (April 12,
the previous paragraph, we introduced the term 2005), p. C1.
total offering to describe the augmented product. 15. Erik Ahlberg, “Alcoa Sees Pressure from Lower
This is an intentional avoidance of the word Auto Production Levels,” Wall Street Journal
product as we want to reinforce, throughout the (April 6, 2005), http://online.wsj.com/article/0.,
text, that the value provided to customers often BT_CO_20050406_008025,00.html.
goes far beyond “just the product.” 16. Some large business customers often provide sup-
7. Regis McKenna, “Marketing Is Everything,” pliers with several forecast levels. Worst, likely,
Harvard Business Review (January–February and best-case forecasts are often part of business-
1991). to-business arrangements. These forecasts are
8. Kotler has introduced a societal element to the only as good as the business-to-business
marketing concept. This is further discussed in customer’s forecast of its market and is subject to
Chapter 16. See also Philip Kotler and Kevin the same frailties of all forecasts. It is in the best
Keller, Marketing Management, 12th ed. (Upper interest of the business-to-business supplier to
Saddle River, N.J.: Prentice-Hall, 2006), p. 22. “know its customers’ customers” and develop its
own forecast of the market. (See later chapters we want the music in whatever form and format
regarding forecasts and understanding markets.) is the easiest to handle, particularly if we can
When it is not customary for a business-to- obtain it cheaply or for free.
business customer to provide best/likely/worst 21. Michael Treacy and Frederick Wiersema, The
case forecasts, it is critical for the business-to- Discipline of Market Leaders (Reading, Mass.:
business supplier to obtain, either internally or Addison-Wesley, 1995).
through outside assistance, good market 22. We prefer the expression of value as a remainder
forecasts. of benefits minus costs rather than as a ratio of
17. In the case of a fully integrated manufacturer such benefits to costs, as presented by Kotler and oth-
as General Electric, the motor brand is likely to ers. Something with relatively low benefits can
also be GE. GE is also likely to be a supplier of have a high ratio value if the costs are low. In
motors to other refrigerator manufacturers. most cases, a minimum benefit level must
18. Not very long ago, Ford Motor Company was be reached before an offering is attractive.
integrated into its own iron ore mines, steel man- Consequently, we feel it better to represent value
ufacturing, tires, fabrics and plastics, and glass. as an amount subject to a maximum budget
When the company began operations, there just constraint. For the ratio expression see Philip
were not any other sources for these materials Kotler, Marketing Management: The Millennium
and components. Edition, 10th ed. (Upper Saddle River, N.J.:
19. Michael E. Porter, Competitive Advantage: Prentice Hall, 2000), p. 11.
Creating and Sustaining Superior Performance 23. Porter, Competitive Advantage.
(New York: Free Press, 1985). 24. Another way to consider this is to recognize that
20. In fact, the recent shifts in the industry toward marketing is the only part of the organization
MP3 file transfers bear this out. As consumers, that creates margin, not costs!
Chapter 2
Environment: Customers,
Organizations, and Markets
OVERVIEW
In this chapter, several key ideas are introduced that are used throughout this book.
Categorizing business customers helps the marketer begin to understand the
business environment in which she operates, while categorizing suppliers helps the
understanding of the competitive environment. Looking inward, the marketer can
also begin to understand the constraints faced by her own company as a member
of a supplier category. Building on the value chain idea introduced in Chapter 1, the
concept of value networks aids in a marketer’s understanding of relationships that
currently exist and that need to be built to create superior value for customers. Two
models of business evolution are provided to give a framework for understanding
how business environments change: the product life cycle concept and the
technology adoption life cycle. These concepts provide frameworks for
understanding the business-to-business marketer’s environment from a large-scale
viewpoint as well as help frame the problems and opportunities that need to be
addressed.
The opening example shows how TRW operates in multiple categories, how its
customers operate in multiple categories, and how TRW’s business and marketing
strategies are affected. The example also points out how operating in multiple
modes creates management challenges.
Example: TRW Automotive Operates in Multiple Categories

Though the brands are not well known to consumers, TRW products contribute value to practically
every car and truck produced. In 2007, TRW sales to the automotive segment totaled over $14 billion.1
Does your car or truck have antilock brakes? TRW, including the Kelsey Hayes brand, has provided a
greater number of antilock brake systems to the automobile manufacturers market than any other com-
pany, beginning in 1969 with the first electronically controlled antilock brake system (ABS) launched
on the Lincoln Mark IV. Does your car or truck have an air bag? You have an even chance that TRW
manufactured the sensors that detect the severity of an accident and trigger the air bag—also provided
by TRW. It does not stop with these products. Lucas electrical components, sodium-cooled engine valves,
28
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 29
vehicle suspension systems, and engine management systems are all part of the TRW basket of offer-
ings. Of course, should you require service or replacement of any of these components, the repair
technician can pinpoint the problem with TRW diagnostic service equipment and install TRW after-
market parts. Not bad for a company that started in 1901 as a fastener manufacturer in Cleveland, Ohio
(specialty fasteners are still one of TRW’s product lines).
How does an organization continuously provide value to such diverse markets over a long period? By
understanding the market, anticipating future value, and partnering with other market participants to create
that value. TRW has recently gone through a process that has split apart TRW’s two historic business
lines—automotive and aerospace. Northrop Grumman acquired TRW in 2002. Northrop immediately spun
off the automotive business to an investment group—Blackstone—who in 2003 relaunched TRW
Automotive as an independent company, now solely focused on its automotive business.2
TRW Automotive is organized to address two major customer types, original equipment manu-
facturers and aftermarket customers. This initial segmentation might imply that customers within each
segment have similar buying habits. This is, however, not likely. For instance, Volkswagen’s purchase
habits for braking systems are quite different from an individual repair technician’s purchase habits for the
same products in the aftermarket. While providing the same core product (e.g., brakes) to both customers,
TRW recognizes that the value sought by each customer goes beyond a well-designed braking system that
will safely stop the vehicle.
The Volkswagen perception of this value includes engineering design and development colla-
boration, durable components and reliable supply, and interaction with production planning to ensure
effective supply logistics (the right quantity at the right time and place for this customer)—all at a
competitive price. In this instance, the brakes are components specified and purchased by Volkswagen
for incorporation into a Volkswagen product; Volkswagen becomes the end user of the components.
There is little if any recognition of TRW parts by the purchaser of a new Volkswagen.
In the aftermarket, TRW recognizes that the customer wants quick diagnosis of the vehicle
problem and immediate availability of replacement components. In this case, the end user is the repair
technician or the vehicle owner whose primary interest is getting the vehicle roadworthy. While the
core product is the same, the offerings are not alike. Volkswagen purchases millions of identical brake
components directly from TRW. The repair technician buys brake components individually, as needed,
and of many different designs and variations to match the different vehicles being serviced. TRW
recognizes these fundamental differences in value sought and treats these markets as completely dif-
ferent segments.
The aftermarket organization at TRW represents all TRW products in the automotive sector. TRW
Automotive Aftermarket operates as a separate business unit with a global service network covering
more than 120 countries. Original equipment manufacturer markets are managed from a headquarters
operation in Livonia, Michigan, with support centers for vehicle manufacturers in seventeen countries.
While this may appear as logistics management, it is much more than that.
TRW partners with its customers and its suppliers. As a supplier, TRW must know the methods and
culture of customers as well as the immediate supply needs. TRW must examine customers not just as
buyers of components but also as participants in their own demanding markets. TRW’s awareness of
these demands, the needs of its customers’ customers, helps TRW anticipate customer needs.
TRW manages its supply chain by requiring its suppliers to meet rigorous quality standards and share
substantial information with TRW and other suppliers. In this way, TRW maintains product quality and
assures on-time delivery. TRW continues to look to improve its supply chain systems. For instance, TRW
participates as a member of the China Auto Suppliers Group, a consortium of automotive suppliers and
manufacturers that cooperates to enhance supply chains involving Chinese auto systems and components
manufacturers. In 2004, the China Auto Suppliers Group began offering a mobile, wireless electronic
system for tracking and routing products moving through the supply system.3 Such a system reduces time
and cost of supply, value that is passed on to TRW’s customers.
30 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
Complete braking and traction control systems or complete suspension systems are designed and
developed in conjunction with major customers. The performance of the system impacts the reputation
of the customer. The customer seeks suppliers who demonstrate not just product or technology compe-
tence but an understanding of their markets and how the supplier can contribute value to the customer’s
offering. How does an organization continuously provide value to markets over a long period? It is by
knowing its customers and their organizations and the markets in which they make decisions.
LEARNING OBJECTIVES
䊏 Understand the different kinds of business customers.
䊏 Understand the different categories of business marketers.
䊏 Gain an appreciation of the different kinds of competitive market structures and their effects
on buying behavior.
䊏 Understand how the value chain concept is extended by the value network concept and by
the special case of integrated supply chains.

䊏 Reinforce and extend your understanding of the product life cycle (PLC) and its impacts on
business-to-business markets.
䊏 Gain an initial introduction to the technology adoption life cycle (TALC) and its implications
for targeting and positioning.
INTRODUCTION
Customer organizations and markets evolve over time just as products and technologies do. What
at first may seem like a natural combination of two organizations in today’s fast-changing
market, the combination of FedEx and Kinko’s described at the opening of Chapter 1, actually
redefines the competitive positioning of the companies. No single element (i.e., the Internet or
the increase in online purchasing—particularly by consumers) is the sole contributor to changes
in the market environment. A combination of factors coincides to create change in the market,
and companies often must respond with a new combined value of their offering. Similarly, the
TRW example also illustrates how a company can operate in multiple value networks and form
partnerships to enhance its positioning within those networks.
In this chapter, we examine traditional business patterns and see how organizations and
markets have evolved as the value needs of customers react to an ever-changing environment.
The concept of evolving business patterns and value as seen by the customer is not a new notion
to industry; rather, it is just one that seems to have a large number of convenient exceptions.
Firms engaged in fast-paced markets often claim that they usually do not have time to “study”
their customers. More adept competition uses this as an opportunity to move ahead with new
offerings better geared to meet customer desires.
PRACTICAL APPLICATION OF MARKET GENERALIZATIONS

The concepts discussed in this chapter are the foundation of a marketing manager’s thinking
process. In and of themselves, the concepts hold no prescriptions for specific actions that a
business-to-business marketing manager can take. The practical aspect of categorizing products,
analyzing the nature of competition in the market, tracking PLCs, and understanding the TALC is
the framework provided for perceiving the business environment. All of these concepts provide
insight into how the other actors in the marketer’s environment will generally act and react. They
also give some clues as to how the environment is likely to change in time—though not specific
changes and when they will occur.
There are several forms of product, competition, and market combinations that make up
the business environment. Common configurations often have sets of marketing activities that
tend to be associated with them. An understanding of these generalizations can assist the
marketer to better understand how customers in certain environments will behave, how they will
perceive value, and how competitors will try to create superior value.
TYPES OF ORGANIZATIONAL CUSTOMERS

Many business-to-business marketers have established their own systems for classifying
customers, suited to their own specific needs. What these systems are and how they are applied
depend on the marketer’s company’s particular situation. Understanding different customer
groups and why they are clustered together can provide insight into how and why customers in
those markets view value. This section presents a standard way of thinking about categories of
businesses. These categories represent a beginning for the marketer in trying to understand
segmentation in her market and give a first clue concerning what strategies the customers will
pursue and how they will be constrained. The categories are presented in no particular order.
Commercial Enterprises
The classification of commercial enterprises reflects a segmentation of for-profit organizations
based on how the products or services in question are going to be used. This group includes
industrial distributors and dealers, resellers, original equipment manufacturers, and users or
end users.
INDUSTRIAL DISTRIBUTORS Also known as industrial wholesalers, these organizations act as

middlemen providing the economic utilities of form, time, place, and possession to the manu-
facturers of the products they distribute and segments of customers of those manufacturers that
they serve. The creation of assortments of products from many manufacturers to closely match
the needs of customer segments is a major added value of middlemen. Business marketers often
elect to use middlemen to reach customers whose purchase volumes do not justify direct sales
efforts. Chapter 14 contains a complete discussion of marketing channels, including appropriate
products for this type of representation and the value provided by these middlemen. For now,
note that these intermediaries take ownership of goods from manufacturers and provide their
customers timely access to these goods.
VALUE ADDED RESELLERS The addition of value added resellers (VARs) to the marketplace
has broadened traditional intermediary concepts. More than distributors or wholesalers, VARs
provide an offering with unique enhancements to manufacturers’ products. Typically, a VAR
provides systems to its customers (computer software and hardware integration, communications
systems, etc.) tailored to a particular customer’s needs. The VAR draws on goods and services
from many manufacturers to create these custom systems, often developing unique expertise in
the integration of many different products. The combined offering may include portions of
products and services from different organizations that, without the VAR, would normally be
competitors. Thus, the VAR’s integration of offerings from many sources is, in effect, the
creation of a value network at the user level. Later in this chapter we look at value networks,
coalitions to satisfy specific segment needs, as a rapidly developing competitive form.
ORIGINAL EQUIPMENT MANUFACTURERS Original equipment manufacturers (OEMs)

purchase goods to incorporate them into goods they produce and sell to their customers.
Business-to-business marketers spend the major part of their resources approaching, learning
about, developing, and satisfying these customers. OEMs are usually the largest-volume users of
goods and services, particularly in oligopolistic markets, as we discuss later in this chapter.
For example, General Motors (GM) purchases tires from Goodyear; Hewlett-Packard (HP)
purchases computer processors from Intel. GM and HP use tires and computer processors,
respectively, as an original part of the products they offer to their customers. Note that Goodyear
and Intel, both OEM suppliers in this scenario, offer their products to customers in the replacement
market through distributors as well. While the total offer is significantly different (tires through
distribution are aimed at local dealers with lower volumes and greater geographic diversity than
vehicle manufacturers), the core products, tires and computer processors, remain unchanged.
USERS OR END USERS Manufacturers that purchase goods and services for consumption,
either as supplies, capital goods, or materials for incorporation into their products such that the
identity of the purchased product is lost are known as users or end users. When providing tires
to GM, Goodyear is an OEM in the preceding example. When purchasing steel for fabrication
into steel tire belts, Goodyear is an end user. Goodyear has specified the properties of and type of
steel as part of its tire design process. The steel supplier views Goodyear as its end user because
the steel, produced to the Goodyear specification, becomes an integral part of the tires and loses
its separate identity.
Business marketers find that this traditional relationship is changing as end users attempt
to differentiate their products by communicating the quality of their raw materials or components
obtained from their suppliers. Recognizing this trend, suppliers have begun to brand their prod-
ucts and communicate the value of their brands downstream to the end users’ customers.4
Successfully branding business-to-business products allows the supplier or brand owner the
opportunity to capture some of the margin that the end user obtains by charging higher prices to
its own customers. This also places responsibility for the performance of the product with the
supplier as well as the specifier.
TRW brands several of its product lines, principally because it does so much activity in the
automotive parts aftermarket. TRW brands include Kelsey-Hayes braking products, TRW steer-
ing and suspension systems, Autospecialty brake and clutch components, Power Stop Extreme
Performance rotors, and 9-1-1 Extreme Performance heavy duty brake pads.5 Using the same
branding across the OEM and aftermarket lines of business actually increases the value that
TRW provides to both OEM and aftermarket (end user) customers. OEM customers gain assur-
ance that their products will be supported and can be easily maintained by service and repair
technicians. Further, the inclusion of TRW’s premium brands in the manufacturer’s cars can be
communicated to consumers to assure them that the cars are well built, using high-quality com-
ponents. Value is provided to aftermarket customers—repair technicians and consumers—by
offering to them the same brands of parts that were originally installed on the car. This assures
end users that the replacement parts meet original equipment specifications and will work just as
well as the original parts.
Government Units
Purchases by more than 85,000 local, state, and federal government units make up about one-third
of the U.S. gross national product (GNP). Government is the largest consuming group in the
United States. Widely dispersed with large numbers of players, government markets are influ-
enced by specifying agencies, legislators, and evaluators, as well as, hopefully, the eventual users.
Government purchasing can also be the subject of significant public scrutiny. What business
marketers have come to appreciate as value in the private sector can take on a completely different
meaning in the public sector.
Complicated procurement laws and regulations often have social goals and policies as the
driving force. Preference to certain types of suppliers, socially motivated general contract provi-
sions, and the potential impact of quotas and other regulations that seemingly have nothing to do
with the product can be frustrating to business marketers. In these situations, the buyer’s view of
value will be quite different from a buyer in the private sector. For instance, the federal govern-
ment, most state governments, and many municipalities have requirements that a certain percent-
age of contracts be awarded to small businesses, minority-owned businesses, or businesses
owned by women. In many foreign countries, suppliers to government agencies are often
required to be domestic (to that country) suppliers or have a domestic company as a partner. The
social goals and policies of government purchasing can impact the entire supply chain of an
offering. In theory, this is little different from the private sector, provided the marketer is focused
on customer needs rather than the product. It is necessary to examine what value is expected by
the government customer and who or what the influencing factors will be.
The specialized role that government activities play in our society (national defense,
disaster relief, education, social and political agenda, etc.) leads to nonstandard products. This
complexity and the lack of standardization are often the result of significant negotiation by a
diverse group of stakeholders. While competitive bidding is often required to avoid demon-
strating any favoritism or undo influence, negotiated contracts are also possible, particularly
where research and development is necessary or there is no competition to the value provider in
question. When the marketer understands the value chain of the customer organization, as well
as the complexity of the government agency’s buying center influences (see Chapter 3), the
marketer can perform very effectively and profitably doing business with government.
Nonprofit and Not-for-Profit Organizations

Institutional customers such as hospitals, churches, colleges, nursing homes, and so on are part
of this customer category. At first glance, it may appear that the major part of the marketing mix
used to appeal to this customer base is price. As with any customer group, however, the best
value recognized in the exchange is important. Many of these organizations are also subject to
significant public scrutiny. As a result, their buying habits may become similar to those of
government units, particularly if there is a strong social agenda associated with the organization.
Producer Types
The goods they produce may also serve to classify business-to-business organizations. As previ-
ously stated, these classifications may provide initial bases that a marketing manager can use for
segmenting markets.
RAW MATERIALS PRODUCERS Depending on the goods or materials position in its life cycle
and the product degree of uniqueness or distinction from competition, producers of materials
may find markets more sensitive to price. Raw materials suppliers, particularly those that have
significant competition from generic types, will seek added value positions unrelated to the core
product. A supplier of sugar to a large bakery may find that the texture or granule size of its
product or how well it dissolves may be a distinctive advantage. Raw materials (such as steel,
plastics, and glass) are usually supplied by a few very large producers who sell their products
directly to large end users, relying on industrial distributors to serve smaller customers.
Often, raw materials lose their “identity” when combined into a customer’s product. As an
example, consider a metal fabricator whose customers are computer manufacturers. The fabri-
cator purchases sheets of steel from its steel supplier of choice. The fabricator forms the steel
into a computer cabinet, as defined by its customer’s specification. The customer knows the sheet
steel purchased by the fabricator as a sturdy cabinet for a computer housing, not as a branded
material supplied by a particular steel company. The commodity nature of the steel has been
replaced by the added value, created by the fabricator, of the form and function of the cabinet.
COMPONENT PARTS AND MANUFACTURED MATERIALS PRODUCERS Components and

manufactured materials (e.g., upholstery fabric for furniture, touchpads for notebook computers)
usually retain their identity even when fully incorporated into the customer’s product. These goods
have a continuous identity and are more easily differentiated from their direct competition.
Producers of these goods have added value to the materials and components they have purchased to
create value for their customers. Component parts such as the small motors used in computer
disk drives are incorporated by disk drive manufacturers in essentially the same form as provided
by the motor manufacturer. The component producer’s core product contribution is still
recognizable after its inclusion in the customer’s offering. In this instance, the small motor manu-
facturer is an OEM supplier to the disk drive manufacturer that incorporates the motors into the
disk drives it sells to its customers.
Industry standards are CAPITAL GOODS MANUFACTURERS Capital goods—those goods used to
parameters that describe produce output—are usually purchased with input from many parts of the orga-
the functionality,
nization. These are “big ticket” purchases, such as machinery specifically
interface, and design
practices in an industry. designed for an automated assembly line or real estate for a new building, with
These standards can be considerable risk involved for the customer. The process is lengthy and usually
developed by industry includes the development of a rather sophisticated specification to ensure that
committees, professional the needs of the organization are met and that the organization gets what it has
groups within an industry,
been promised. When customers invest in a capital item, they must place a
or established by
government. Often, an tremendous amount of trust in the supplier—and write a good specification.
industry standard will Customers of capital goods expect an offering that includes installation,
result from many players equipment, accessories, employee training, and often, financing. Often, trials or
in a market embracing a evaluation installations are required. As a substitute, suppliers may provide testi-
particular way of doing
monials of successful installation and application for other customers, provided
something even though
that method has not been confidentiality concerns of both the current and previous customers can be accom-
formally agreed on. These modated.
“defacto standards” are If a company is providing accessory equipment—or providing an
often one of the goals of accessory service, such as cleaning uniforms or moving trade show equipment—
market owners. Market
the key to providing value is to be compatible with the industry standards for
ownership is discussed in
greater detail in later the primary offering. For instance, keyboard manufacturers for computers must
chapters. conform to standards for data input and connection to the computer. Makers of
add-on gadgets for personal digital assistants (PDAs), such as the Palm Pilot, must conform to
the physical connection requirements of the devices and to the PalmOS software operating
system. To ensure high financial performance, the accessory equipment supplier must pick the
right standard. Once a standard has been set, the surviving accessory suppliers need to focus on
driving their costs down and, if possible, branding. Good branding strategy and execution earn
a price premium (see Chapter 13), but this, too, is limited by the relative value and price of the
primary offering.
CUSTOMER SPECIFICATIONS Suppliers should realize that, from the customer’s viewpoint, the
specification is a device used to level the playing field among all potential suppliers. By demanding
strict adherence to the terms of a specification, the customer reduces opportunities for differentia-
tion between competing suppliers. Obviously, this is exactly the opposite of what the marketer or
supplier strives for. The supplier searches for any possible way to make its offering distinctive—
better and different—from the competition. This buying behavior is discussed in Chapter 3.
Customer Needs Influenced by Classification of Markets

The proliferation of so many classification systems can lead to questioning their usefulness. By
now, you may be asking yourself why these classifications are important. As the classifications
stand alone, they are of little value other than for creating data. No single classification method
serves all marketing needs. In fact, rigid organizational classification systems can get in the way
of effective benefit-based segmentation; but they can also be a significant factor in development of
strategies.
Each of these different types of products and organizations, however, has different levels of
involvement by the many individuals involved in the customer’s purchase decision. Purchases of
capital items used to produce output are often the endgame of a major investment decision by the
customer, involving many people within the customer organization who play varying roles in the
purchase (see the discussion concerning the buying center in Chapter 3). A routine purchase of
materials and parts has a smaller group of interested parties; the supplier who recognizes and
assists these participants to maximize the value of the offering for the particular situation can have
a substantial advantage.
CLASSIFYING THE BUSINESS-TO-BUSINESS MARKET ENVIRONMENT

The discussion so far has dealt with classifying individual companies based on the kind of offer-
ing they provide. The marketer can use these classifications to get a sense of what kinds of needs
the customer organization has, what sorts of motives and constraints drive the competitors in the
classified market, and what constraints the marketer faces in designing marketing strategy.
We now shift our viewpoint to classifying the market environments in which business-to-
business marketers must operate. As part of this, we briefly examine the effects of different
economic market structures and how these structures impact the relationships between market
participants.
Publics
Recall from your marketing principles course the factors that make up the market environment.
These generally apply as well to business markets as to consumer markets. They include the
various publics, or communities of interested parties who are not customers, channel members,
suppliers, or competitors—not direct participants in a market. These publics have interests
because of economic or societal effects of activity in the market or because they provide fin-
ancing to the direct participants.
FINANCIAL PUBLICS Financial publics include banks and other lending institutions, investors,
investment banks, venture capital firms and investors, stock exchanges, brokerage houses and
financial analysts, and investment institutions such as retirement funds and mutual funds invest-
ment houses. The members of this community seek to maximize their own financial performance
by investing in companies and investment instruments they think will perform best. They develop
and share a great deal of information about companies and industries. Very often, they attempt to
impact corporate action with their ability to influence how the company is perceived by the
financial community. Financial publics can be large employee retirement plans responsible for
investing their funds for specific growth goals. (For example, the California Public Employees’
Retirement System (CalPERS), has significant funds to invest and can influence the companies
in which they choose to invest.) Or, financial publics can be the fund managers at major invest-
ment banks and firms (e.g., Fidelity Investments). Many independent (as well as institutional)
investors are sensitive to the views and directions taken by the financial publics.
Business-to-business marketers need to understand the role played by these entities in
making resources available. Much marketing effort is spent in communicating with the members
of the financial public and working to meet their particular needs. Most medium- to large-sized
companies now have specialists in investor relations devoted to maintaining relationships with
the financial community. These specialists usually are part of corporate marketing or corporate
finance within the organization. While these specialists handle most of the communication with
the financial community, higher-level marketing managers are sometimes called upon to make
presentations to venture capitalists, bankers, or brokerage house analysts to explain the company’s
marketing vision and strategy.
As is shown in Chapter 15, one of the most difficult tasks for corporate marketing com-
munications specialists is to ensure that all outgoing communications have compatible and cross-
reinforcing messages. The financial public must be considered another audience that perceives
communications. They are not isolated from communications intended for customer groups, and
vice versa. Accordingly, marketers must be careful to consider the financial public in efforts to
keep consistency in all marketing messages.
INDEPENDENT PRESS The media can publish news that can enhance or destroy a market
position. On the positive side, it is important for companies to maintain good relationships with
the news media that serves their particular industry so that good news about a company can
receive the most notice. When negative things concerning the company arise, media attention
can be devastating. We have sometimes referred to this as “the 60 minutes syndrome,” named
after the CBS long-running news magazine program. As is discussed later in Chapters 15 and 16,
the best defense for a company in this type of situation is a proactive public relations effort that
“inoculates” against a single incident causing serious damage.
PUBLIC INTEREST GROUPS Many public interest groups, though comprising a minority in the
population, are often able to get the attention of the media or opinion leaders and thus focus
“popular” attention on their issues. In some instances, this effort can succeed in attracting the
attention of the financial publics, leading to an impact on investors. Again, a good public
relations effort combined with an effective inoculation strategy can minimize the negative impact
of these groups. A market-driven organization, however, should recognize its societal role and
that public interest groups may be an early indication of shifts in the mainstream market.
As an example of a firm’s societal role and the attention interest groups can bring to bear,
consider how the soaring gasoline prices during the first six months of 2000, and again during
2006, invigorated environmentalists efforts regarding fuel consumption. These efforts were
focused particularly on large SUVs, also a target of vehicle safety groups. The largest and most
profitable producer of these vehicles, Ford Motor Company, reacted by adding safety features to
its larger SUVs and making a commitment to improve the fuel economy of its entire line of
SUVs by 25 percent.6 Were these actions recognition of societal responsibility, good marketing,
or a clever public relations position? Whatever the answer, the result is the same.
INTERNAL PUBLICS Every employee is a representative of the organization to the general

public, and every employee is a representative of her part of the organization to the other com-
ponents of the organization. The reputation and the image of a firm or its parts are greatly
impacted by the attitude of its employees. Firms are known as “good to work for” primarily
based on the word of mouth from current and past employees, just as different parts of a firm are
impacted by conversation among employees. A major aim of internal marketing programs is to
promote belonging and ownership among employees that will be reflected in their attitudes when
away from as well as on the job.
The Macroenvironment
Also included in the market environment are existing trends and other macroenvironment factors.
The seven macroenvironment factors generally addressed in marketing texts are the demographic,
economic, sociocultural, natural, technological, competitive, and legal and political environments.
In this chapter, we focus on the first six factors in this list, with emphasis on how they influence
value creation. The legal and political environment is fully discussed in Chapter 4.
THE DEMOGRAPHIC ENVIRONMENT Demographics are the vital statistics that describe a
population. The demographic environment includes the characteristics of the population in the
geographic regions in which the company does business. Demographic variables include the dis-
tribution of ages, incomes, wealth, mobility, education, family composition, religion, ethnic
background, and living conditions. All of these variables have an influence on consumer con-
sumption, which translates into business consumption in the effort to meet consumer needs.
Businesses themselves have demographic characteristics, including the type and size of
industries that exist, the size and location of companies, the ages of the businesses, and the size of
the functional areas within the companies. Many of these characteristics will be the basis of, as dis-
cussed earlier, a determination of how the business is classified. Demographic characteristics may
be associated with particular needs and buying behaviors. Part of developing a relationship with
customers is knowing the characteristics of the customer’s organization. The demographic charac-
teristics of a firm and its products can impact this. Older firms or products will behave differently
than new firms with new products. Multiproduct firms will have several products at various points
in the PLC. The multiproduct firm may design its marketing and sales operations around the point
in the life cycle of the product and associated customer behavior. Marketers should thus be aware
of the relevant demographics of the populations and businesses that comprise their environments.
THE ECONOMIC ENVIRONMENT The macroeconomies of regions in which the company

does business also influence how business-to-business customers buy and consume. The
macroeconomy of a region or jurisdiction is the sum total of all economic activity in the area
and certain economic characteristics of note. These characteristics include how fast the economy
is growing (or declining) in size, the level of employment, the rate of unemployment, interest
rates, and exchange rates of currency between different economies.
The state of the economy affects customers’ willingness and ability to buy, principally by
affecting personal income (which influences derived demand in business-to-business markets),
interest rates, and company profits. The economy similarly influences channel members.
Competitors may have lowered ability to respond to perceived threats and/or undertake new
initiatives in an unfavorable economy, leading to an opportunity for other players in the same
market, assuming the other player recognizes the environmental factors at play and takes advan-
tage of the opportunity. On the other side of the coin, competitors may be more desperate and
willing to attack when the economy has hurt them. Public policy may also be influenced by the
state of the economy. Finally, the internal environment of a company will probably be affected
by the economy: Individual employees may be more cautious when the economy is not favor-
able, and it is likely that fewer resources will be available for new initiatives. A grasp of the
trends in the economy will help a marketer to anticipate how all of these participants within the
marketer’s environment will tend to behave.
THE SOCIOCULTURAL ENVIRONMENT Just as in consumer marketing, the culture of the soci-
ety in which the business operates has an impact on what people buy, why they buy it and use it,
how they buy, and how they react to marketing stimuli. A culture is all the symbols and themes
that reflect a society’s norms and values. In any large society, multiple cultures and subcultures
may be relevant. Social trends within a culture define the topics of interest to people in a society
and further define what is acceptable and unacceptable in the way of products, services, com-
munications, and even prices. Similarities in behavior—the cultural norms—of a market or
group of businesses in that market can often be inferred by how they are classified. The business
marketer must be aware of the cultural norms and social trends affecting customers, competitors,
partners, and employees.
THE NATURAL ENVIRONMENT The natural environment includes natural resources, raw mate-
rials, the ecology, the weather, and, on occasion, geologic activity. Much of the effect of the nat-
ural environment comes from raw materials, water, and energy resources, which of course are
needed in some degree by almost every company. Marketers perceive the impacts of the natural
environment principally as constraints on the products that they can offer. The constraints are
imposed by the availability and quality of raw materials for products and water and energy for
operations. For most marketers, the impacts of availability and quality are an interaction between
the natural resources themselves and the companies involved in the supply chain. Suppliers of
capital goods that require energy, cooling water, or even real estate can develop differentiation
from their competition by maximizing the efficiency of the capital goods they market.
In the last several decades, the environment has taken on another set of influences as soci-
etal preferences and public interest groups have taken to the cause of environmental protection
and conservation of natural resources. The effects of this movement are influenced as much by
consumer perceptions as by reality in the natural environment. The leveraging of public attitudes,
as expressed through the actions taken by business-to-business customers, can have a dramatic
impact on a business.
A good example is the McDonald’s switch from plastic foam packaging to wax-coated
paper packaging for most of its menu items.7 Consumers perceived foam packaging as unfriendly
to the environment and paper as biodegradable and a good environmental choice. (In fact, foam
packaging techniques no longer used chlorofluorocarbons—CFCs—in the manufacturing
process and polystyrene foam is generally recyclable.) The wax-coated paper would not biode-
grade. McDonald’s made the change because of consumer perceptions, not reality. Consider the
loss to their foam packaging supplier.
The lesson for business-to-business marketers is to pay attention to trends in the perceptions
of consumers and try to anticipate how this will affect the behavior of businesses attempting to
provide value to consumers.
THE TECHNOLOGICAL ENVIRONMENT Advanced technology is developed and housed in

companies; universities; research institutes; government agencies and laboratories; and sometimes
in industry consortiums, such as the semiconductor industry’s Sematech and the U.S. automotive
industry’s Advanced Battery Consortium. Technological developments can dramatically change
business-to-business markets. This may include changes in a competitor’s product or process tech-
nology, competition arising from outside the industry because a new technology meets customers’
needs, changes in channel members’ technology that alter their competitive position, or changes in
customers’ technology that change their needs or buying behavior. News of technology develop-
ments can surface in several forums.
The technological environment has been both a blessing and a curse for business-to-
business marketers: a blessing as technology can open new markets and create new ways to
satisfy customer needs; a curse if a firm has not kept pace with technology and finds itself with
an obsolete product line. Through technology, customer service can be improved and more infor-
mation is readily available to marketers. Technology, however, is changing at an ever-increasing
pace. Still, this is no excuse for not being prepared. Technology was ultimately a major contrib-
utor to the demise of vacuum tube electronics powerhouses such as Sylvania, TungSol, GE, and
RCA; and the railroads were victims of changing technology in business logistics and passenger
travel. More recently, unwillingness and inability to adapt to technology trends—the dominance
of networked workstations and personal computers over mini-computers—spelled the fall of
Digital Equipment Corporation (DEC), and digital imaging has all but eliminated consumer
demand for Polaroid instant imaging products. Today’s technology has changed much more
rapidly than the changes faced by RCA or DEC. This emphasizes the need for marketers to be
even more vigilant in today’s environment.
The warning that rapid technological change brings to business-to-business marketers is
really very simple: Product technology should not play a major role in your customer’s decision
to buy your product. Technological advantage is fleeting. If you do not replace your technology
with the next generation, your competitor will—and it’s likely to be a competitor that you did
not even know you had! Not anticipating a technological change that affects customer buying
behavior offers another way for competitors to gain an advantage.
THE COMPETITIVE ENVIRONMENT From Levitt’s “Marketing Myopia”8 to McKenna’s

9
“Marketing Is Everything,” significant effort has been made to improve business marketers’
recognition of the full dimensions of possible competitors. The IBM Selectric typewriter was
not replaced in the market by another typewriter (not even the next-generation IBM typewriter
that was the intended IBM replacement), but it was replaced by a new technology. Similarly,
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 exist, 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 nonuniform. Typical examples include autos, airlines, and 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.
EXHIBIT 2-1 Competitive Forms in Business-to-Business Markets
dedicated word processor manufacturers (e.g., Lanier, NBI) should have seen that electronics
technology and third-party software would lead to full-function desktop computers.
Exhibit 2-1 describes four common types of competitive markets (you may recognize
these from your economics principles course). Although all of these forms can be found in busi-
ness-to-business markets, as indicated in the examples for each of the four types, oligopolies
have traditionally dominated the industrial competitive arena. For example, the small number of
major automobile producers in the United States (GM, Ford, Chrysler, Toyota, Honda, etc.)
purchase the large majority of all synthetic rubber, lead, and glass produced in the United
States. A similar situation exists in the grain markets, with companies like Kellogg’s, General
Mills, and a few others purchasing most of the grains produced. Even when there are smaller
players in the market, evolutionary trends are often established by the competitive positioning
of the major players. Three major players and a host of smaller niche players seem a natural
state of competition in an oligopoly. Fewer than three major players tend to drive market players
to collusion.10
If a marketer competes in an oligopolistic market, strategy depends on the marketer’s
current position within the oligopoly. If the company is one of the leaders in the market, strategies
should be pursued to differentiate from the other leaders while building volume. If the company is
a smaller player, then its marketers should be looking for smaller, defensible niches in which the
company can dominate. As you would expect, oligopolies are natural examples of the 80/20
rule—80 percent of a supplier’s sales volume is likely to come from 20 percent of its customers. It
is imperative to build strong, collaborative relationships with those large-volume customers.
In many other business-to-business markets, monopolistic competition or pure competition

exists. The key in either market is to look for ways to differentiate the offering, creating superior
value compared to competitors’ offerings. Even after differentiation has been established, the
offering must be constantly updated to create more value.
Commodity markets might seem resistant to differentiation, but it can be done with some
creativity. Consider a sugar processor who differentiated its offering to a cereal manufacturer.
The company worked with the manufacturer to alter the texture for the sugar so that the sugar
would adhere to the cereal better when doused in milk. The change in the composition of the
sugar was only part of the differentiation, however. The value to the cereal company also resided
to a great deal in the supplier’s willingness to collaborate in the relationship built between the
two companies.
Usefulness of Classification
The act of classifying the market and its actors will not provide all the information necessary for
choosing target segments and designing strategy. However, classification helps marketers to
frame the issues, threats, and opportunities they face. These characterizations provide a good
starting place for understanding the business environment. This should be an ongoing effort,
adding to the information base as new pieces of information surface, as new trends emerge, and
as new interpretations are developed.
VALUE NETWORKS AND SUPPLY CHAINS

The next two sections of this chapter concern ideas that further frame an understanding of the business
environment. The classifications that have been described so far help the marketer see patterns in the
business environment. However, the classifications are static and do not reflect the complexity or
dynamics of the market. The concepts in this section and the next present a more dynamic view.
The first idea extends the concept of the value chain introduced in the previous chapter.
The idea of the extended value chain (Exhibit 2-2) has more than a coincidental similarity to the
concept of a supply chain. We see a supply chain as a network of relationships that produces and
facilitates a physical flow of materials and goods from raw materials producers through to final
customers. A value chain includes these relationships, plus the relationships that create or
enhance added value from raw materials to final customers. Thus a value network would
include, for instance, a patent holder licensing her technology to a component manufacturer.
The component manufacturer would be considered to be within both the supply chain and the
value chain; the patent holder would only be part of the value chain. Some other examples of
Value Activities Combine elements

to create value
Value
enabling
as perceived by the
Value
creating
target market.
EXHIBIT 2-2 The Value Chain

value chain partners that would not be supply chain partners might include market research
firms, research and development (R&D) laboratories, product design firms, security consul-
tants, and so on.
The ebb and flow of market relationships that exist in today’s complex markets, however,
are not as straightforward as the flows of a supply chain or a value chain. From a marketing
perspective, the implications of partnerships and alliances can create a multidimensional net-
work of relationships that change frequently. In fast-paced markets, organizations are finding
that the most productive way to create an offering with maximum value in the shortest time for
a particular market or customer contains elements of offerings from several parties. These
parties, or collaborators, can either be companies that the organization has previously allied
with or may be a competitor in another market. Thus the chain expands into a multidimensional
network. This network of collaborators includes nontraditional partners in a way that all partners
in the network “win” as part of the team that provides the offering of greatest value.
For another customer or in another market, the network of partners may be completely
different. When a marketer looks to enter a new market, a new network may be formed. This new
network may include some or all of the members of the previous network. A firm’s value net-
work, depending on the variety of added value through collaboration, may be different for every
major customer. Exhibit 2-3 represents the complexity of the network when multiple value
chains are combined. Imagine how this network would look if more partners are added.
Companies that elect to operate through value networks must be well aware of the markets
of their customers and their network partners. The network alliance will create opportunities to
disclose, willingly or inadvertently, many facets of each partner’s operations, creating challenges
to many traditional organizational schemes and confidentiality (ethical) procedures. Proper
barriers are needed to prevent undesired information exchange and can be developed to encourage
the alliance while protecting other business interests.
Value Activities Total

Value
enabling Value Offering
creating
Efforts of collaborators at
different levels in the value
network combine to create
the total offering for the
customer. See Chapter 1,
Exhibit 1-4 for greater detail.
EXHIBIT 2-3 The Multidimensional Value Network

Supply Chain Management as a Form of Value Network Management

A supply chain can be seen as an integrated network of suppliers that provide inputs into the
creation of an offering marketed to some segment of targeted customers. A lead collaborator
usually integrates the supply chain and manages the relationships between suppliers within the
chain. Often the lead collaborator will outsource the role of integration to an organization that
specializes in supply chain management, such as United Parcel Service (UPS). In supply chains
that are highly integrated—in which the lead collaborator sets strict terms for inclusion, enforces
strict adherence to quality and timeliness requirements, and enforces the extensive sharing of
information among supply chain members—we observe that lead collaborators are most often a
very large customer for the supply chain.
The object of managing an integrated supply chain is to create value for the targeted cus-
tomer(s) through a combination of availability, assured supply, customization, quality control, and
cost control. Supply chain management thus results in higher sales quantities and more profitable
pricing, consequently higher profits for the supply chain members. Exhibit 2-4 shows a depiction
of an integrated supply chain. Company A is the lead collaborator. It specifies and manages the
supply activities of Companies B through I, who provide inputs to Company A’s internal value
chain. Company A then offers the recombined inputs to its customers in target Segment X.
Using the Value Network and Supply Chain Concepts

What does this mean for the business marketer? Four sets of implications will be examined more
closely in later chapters, because they concern specific analyses that must be done and specific
actions to be taken.
1. When a business markets its products or services to a customer within an integrated supply
chain, the marketer needs to understand the motives and behavior of the supply chain and
the dominant company within the supply chain (see Chapters 3 and 14).
2. In analyzing competition, the marketer needs to look at competitive clusters of partnered
companies rather than stand-alone single-company competitors (see Chapter 6).
B G
A
Lead Collaborator
H
C
E Value Activities
Value
Segment
F enabling Value X
creating
A is the lead collaborator.
I B through I are members

of the supply chain.
EXHIBIT 2-4 Supply Chain as a Value Network

3. In designing offerings, the marketer must decide on what pieces to outsource to partners,
which to provide from the company’s internal resources, and which to develop jointly with
customer or supplier partners (see Chapters 8 and 9).
4. In building relationships, partners have to be sought, screened, contracted with, managed,
and—in many cases—dropped (see Chapter 14).
The value network perspective is introduced here as an element of the market environment.
While it is difficult enough to try to anticipate the effects of the business environment on several
layers of customers and competitors, the marketer facing real-world situations must deal with an
added layer of complexity in trying to understand the effects on a network of partners. In the
context of this chapter, though, the question becomes, “How is a marketer’s analysis of the
marketer’s own industry affected by consideration of partnership relationships?”
VALUE NETWORKS AND COMPETITION One principal concern arises when a marketer
considers the nature of competition in the market or industry. Monopolies, monopsonies
(a monopsony is a market with one dominant buyer, much as a monopoly has a dominant sup-
plier), and oligopolies tend to have some staying power, since the actors in such markets and the
market forces themselves (such as high-entry barriers) can prevent substantial competition from
arising. This is why we have antimonopoly laws (see Chapter 4). However, when a market is
dominated by a partnership, instead of a single-company powerhouse, the partnership’s
dominance would seem to be more precarious. Partnerships can break apart or run into internal
decision-making problems more easily than can a self-contained company. Thus, the competitive
forms in which some players clearly dominate are in danger of transitioning rapidly into mono-
polistic competition due to shifting competitive forces. Also, partnerships can quickly produce
sizable new competition that quickly changes the competitive landscape. For example,
Microsoft, in its infamous U.S. antitrust case, made the argument that the partnerships between
Netscape, Sun Microsystems, America Online, and others rapidly changed the nature of com-
petition in many of the markets that were under scrutiny in the case.
Another concern arises in the technological environment. One of the key kinds of partner-
ships that has evolved over the last fifteen to twenty years is the joint development partnership.
Very few companies have the resources to pursue basic research or comprehensive technical
development of new products in complex technical areas. Joint ventures for such research and
development can overcome many of the resource limitations problems. When examining the
technical environment, then, a business marketer should look closely at the partnerships that
exist to address new technology. The strengths and weaknesses of these alliances need to be
examined to fully understand what technical progress is likely to occur—or not occur—in the
foreseeable future.
The impact on the assessment of the macroenvironment, of the trend toward value networks,
then, is a need to examine the partnership relationships that exist and can exist within the elements
of the business environment. These networks may be synergistic, producing more value than the
partners could produce independently; or, they may actually produce less value than is possible.
Business marketers need to look at value networks as presenting opportunities as well as threats.
CHANGES IN MARKETS OVER TIME

It is not enough to understand the nature of competition in a market and what benefits will be
perceived as having value just at a given point in time. Markets evolve as competitors, channels,
customers, and technologies change. In this section, two ideas are introduced that help the
marketer think about how her situation will change and how these changes might be successfully
addressed.
It is important to have a sense of how a market has developed and how it is likely to change
in the future. For instance, oligopolistic markets are generally not oligopolies from the very
beginning. Usually they start out as a temporary monopoly when a company introduces a prod-
uct with a radically new technology or business idea. As the product or business is improved and
as prospective customers learn more about the value of the products and services, the market
becomes more competitive as it draws more entrants. If the product easily becomes a
commodity and there are minimal barriers to entry, the market often moves quickly toward pure
competition with many players and slim margins. More complex offerings and markets will
evolve more slowly. In either case, over time, a few competitors emerge that create brand identity
and operating efficiency. As competitors who cannot match costs or differentiation drop out, the
market evolves to an oligopoly
An oligopoly may also emerge after the market has gone through a period of monopolis-
tic competition. After the introductory period, new entrants enter the market and are able to
differentiate their offerings along several dimensions. They continue to develop the product
technology but also make improvements on costs, business configurations, and the other three
Ps of marketing. The market undergoes rapid or hypergrowth until the rate of new adoptions
falls off. With the reduction in the growth rate, the inefficient competitors drop out and a slower-
growing oligopolistic market emerges. A few companies dominate the mainstream market and
smaller companies serve relatively small market niches.
Over the years, marketers, strategists, and academics have noticed patterns in how
markets change over time. The following two ideas, namely the PLC and the TALC provide
some generalizations about these patterns and what they mean. Of these two, the PLC is
more generally usable. The TALC has particular applicability in the case of breakthrough
innovations.
The Product Life Cycle

Marketing students will recognize characteristics of the PLC from prior discussion. The concept
of the product life cycle is that product categories go through several “life” stages, as shown
below in Exhibit 2-5.
Note that not all products follow the PLC as it is shown in the exhibit. Divergence from the
classic bell-shaped PLC is partly dependent on the level of abstraction. The PLC for a single
incarnation of a given technology (e.g., “Version 2” or “Release 3a”) may deviate substantially
Maturity
Sales Revenue/
Period
Growth
Decline
Introduction
Time
EXHIBIT 2-5 The Product Life Cycle
from the shape of the PLC and is really only a contributing element to the total sales curve for the
product category as a whole.
The level at which the PLC has the most relevance is at the “category” level. Product category
is still a nebulous concept and can create some ambiguity. For instance, one might ask whether
Pentium-type microprocessors are a relevant category. The question arises when the marketer is trying
to understand competitive dynamics for, say, laptop microprocessors from Intel and competitive offer-
ings from Advanced Micro Devices (AMD). Should the marketer consider the “Duo Core” processor
to be part of the overall Pentium life cycle, or does it deserve to have its own life cycle analyzed?
The answer lies in the purpose for which PLC analysis is chosen. The principal reasons
why a marketer wants to understand the PLC for her offering or market is to anticipate the
general behavior of customers and the general nature of competition that will be faced in the
near future. Accordingly, the most useful level of abstraction for the Pentium or Duo Core exam-
ple is probably at the level of the Pentium, overall. The nature of competition in the processor
industry reflects a mature industry more so than it does an introductory market. Customers, such
as Dell Computers, HP, and Gateway, know their needs and what they must do to meet them.
Competition exists and is well entrenched. The market is oligopolistic, with Intel a dominant
player and AMD a smaller but competitive second company. The next round of microprocessor
innovations may upset this stable—though not static—environment. The new technology may be
so advanced that the product-market behaves in a way that is consistent with the introductory
stage of the PLC, in which the innovator has a temporary monopoly. Under these circumstances,
members of the oligopoly must recognize that the business they are in is the value they create for
customers—not the products they supply.11
As the use of any tool requires an understanding of its capabilities, the assumptions behind
the PLC concept should be understood. First, the PLC, without the inclusion of significant addi-
tional information (such as those tools discussed later in Chapter 5), gives only general guidance
on what to expect. It does not specifically provide a means for predicting changes from one stage
to the next. Similarly, it does not provide prescriptions for strategies or actions that a firm should
take during the current PLC stage or some future stage.
Concerning the first assumption (the inability to predict when the shape of the sales curve
will change), realize that markets change as the various factors driving their nature change.
Predicting when changes will occur is like predicting when the weather will change. Oftentimes a
forecaster will get close, particularly when the prediction is for the very near future and historic
patterns are well known. However, inflection points in the PLC curve occur because several factors
interact concurrently that lead to these changes in trends in total sales. For instance, in the latter half
of the 1980s, pundits predicted at the beginning of each year that year would be the “Year of the
LAN,” i.e., local area network. Finally, at the end of the decade, when Novell had a stable operat-
ing system available and when customers were ready to buy new equipment and software, LAN
system sales rocketed. Several pundits were correct in predicting this growth period. However, they
had been inaccurate in the prior two or three years for having predicted the same thing.
Concerning the second assumption (the inability to derive specific strategies from the
PLC), the same difficulties arise. Any individual company faces a unique combination of multi-
faceted factors. The PLC provides a framework for organizing these in the marketer’s mind. The
marketer must assess the opportunities and threats that are posed at any given time and construct
strategy based on matching the firm’s strengths and weaknesses to these opportunities and
threats. The PLC, then, can suggest some general directions in which the market may go, but the
marketer’s job is to find a unique strategy that provides superior value to targeted customers.
The PLC can be an aid in market situational analysis. Understanding the general theory
that several factors interact concurrently, leading to changes in trends in total sales, marketers
should be aware of and examine these factors (competitive actions, major price changes in the
market, withdrawal of a major competitor, a major competitor adds new capacity, a major player
introduces a new technology, and so on). An important ingredient in a strategic view of the
market can result if there is recognition that a combination of events has taken place.
Understanding of the tenets of the PLC can be a major learning tool for students. Many
strategic management tools (discussed in Chapter 5) relate to the stages of the PLC and have
overlapping “rules.” An understanding of this relationship can simplify the understanding of
various tools and aid in the understanding of the interrelationship of the concurrent factors
impacting a market situation.
The Technology Adoption Life Cycle

While the PLC has uses and limitations, it still provides a reminder to the marketer that things
will change and the marketer must adapt. In the case of breakthrough innovation, additional
insight may be gained by examining another life cycle that can be superimposed on the PLC, the
technology adoption life cycle. The TALC focuses more on the kinds of customers and how
they come to adopt the new technology.
BRIDGING A CHASM The TALC describes how a breakthrough innovation becomes adopted
in a market. Geoffrey Moore12 has taken the innovation diffusion model described by Everett
Rogers13 and extended it. Rogers divided adopters of a new innovation into groupings he called
innovators, early adopters, early majority, late majority, and laggards. Moore updated these
groupings based on his own research on high-tech, business-to-business products. He called the
groupings technophiles, visionaries, pragmatists, conservatives, and skeptics.
Moore did not just change the names of the groups, though. He uses the TALC as a frame-
work for explaining two principal observations about how technology markets evolve. The first
observation is the existence of a chasm, a break in the sales growth curve for a new technology.
The second observation is the chaos that occurs in a period of rapid growth that Moore calls the
tornado. The tornado eventually produces the emergence of a dominant supplier. These two
observations and the implications of the TALC have potential for providing useful guidance to
the business marketer in technology markets.
Moore suggested that there were natural breaks in the TALC that occurred between each
group or segment. Note on Exhibit 2-6 that a relatively large break—the chasm—occurs in the
TALC between visionaries and pragmatists.14 Moore claims this occurs because pragmatists will
not treat visionaries as credible references when it comes to adoption. Pragmatists want proven
solutions, with little trauma in their adoption. Pragmatists will not buy until other pragmatists buy
and provide references. It is difficult, though, to find the pragmatists who buy first and then pro-
vide references for other pragmatists. Visionaries, on the other hand, try to make quantum jumps
in the way they compete. Hence, they adopt an innovation before all the pieces are in place to
make the product work well, that is, before a “whole product” exists. The visionary users then
create or buy customized pieces of the system to make the whole thing work. The trial-and-error
process of sculpting such a customized solution can create a state of chaos within the adopting
organization. Thus, visionaries tend to obtain a reputation for wreaking havoc and pragmatists
will not trust them.
Pragmatists Conservatives
Sales from New
Adopters/Period
Visionaries
Laggards
Technophiles Time
EXHIBIT 2-6 The Technology Adoption Life Cycle
To cross this chasm, Moore claims that the supplier of an innovation must pass through the
first two segments—the technophiles and the visionaries. These are necessary because the whole
product cannot be defined and then developed until enough experience has been gained. Then the
supplier must find a “beachhead,” or foothold, niche among pragmatists on the other side of
the chasm. This niche must have a need for the product that is so compelling that pragmatist buyers
will take the risk of buying without the assurance of references from other pragmatists who have
already adopted. The supplier must find such a niche, create a whole product to meet the compelling
need of these buyers, and offer the whole product to these buyers through proper positioning, trans-
lating a “specialty” product to a more mainstream and higher-volume offering. The proper positioning
means that the one or two most compelling benefits of the whole product are clearly communicated
and delivered.
The chasm, or market development gap,15 marks a major change in the way an organi-
zation does business. Externally, the customer segment changes from visionaries to pragmatists.
Accordingly, the main benefits sought by customers will change and the marketer’s offering will
have to change to meet this need. Internally, the company’s production capability, size, and
culture will change. None of this change is automatic.
ACROSS THE CHASM AND INTO THE TORNADO Once this first beachhead is addressed,
pragmatist buyers talk to other pragmatists and a chain reaction spreads across many niches with-
in the market. Naturally, if an organization successfully capitalizes on a new technology, either its
own or that of a supplier, competitors for that market segment with similar value offerings will
gravitate to the new technology. Instead of customer acceptance of the technology, the market
begins to accept the technology. Eventually, this acceptance can lead to standardization within a
segment or an industry.
If the market is large enough, a groundswell of demand can develop. The market goes
into a period of rapid sales growth, the tornado.16 This portion of the TALC superimposes
directly onto the growth period of the PLC. Moore claims that in a tornado, the market wants
to support the market leader. This occurs because the buyers, pragmatists that they are, face the
least internal chaos if the systems they are buying are a recognized standard.17 There will be
plenty of peripherals and software that will work easily with the leader’s product. There will
be plenty of consultant expertise available to help them through problem periods. As upgrades
become available, adoption of these upgrades causes the least internal upheaval if they are
backward compatible with the leader’s product that was purchased earlier in the tornado.
The market-chosen leader, then, has the opportunity to become the “gorilla,” as Moore
dubs it. The gorilla can do what it wants as long as it does not deviate too far too often from what
the pragmatist buyers desire. In return, the gorilla receives the “gorilla’s share” of the sales and
obtains a healthy margin on these sales. This, of course, allows the gorilla to invest in new
technology to reinforce its leadership position in the market.
Moore suggests that the way to become the gorilla in a tornado involves a certain amount
of luck combined with smart coordination of several factors. The gorilla must have assembled
the “whole product” and this product must be standardized so that the members of the main-
stream market can all obtain roughly the same product (with minor customized features).
Readers should compare Moore’s viewpoint, at least through this portion of the TALC, with
the concept of market ownership expressed by Regis McKenna.18 A major difference is that
Moore’s concept of the gorilla concerns market dominance starting in the tornado and lasting
through the remainder of the TALC for a given technology platform. McKenna’s concept of and
path to market ownership implies that an organization needs to continue to “push the envelope”
within its market niche to maintain a growth market. This implies that the market owner will
continue to innovate to dominate from one TALC to the next, and so on. The ownership focus is on
continuously innovating the value presented to the market rather than focusing only on innovating
the technology itself.
Another logical comparison is the TALC and the PLC. To make this comparison, note
that the vertical axis on Exhibit 2-5 for the PLC is “Sales Revenue per Period” while on the
Exhibit 2-6 for the TALC, the vertical axis is “Sales from New Adopters per Period.” Also,
realize that the TALC represents sales from all products based on a particular technology. To be
comparable, the PLC and TALC have to both represent sales from a product category based on
a particular technology. Consider as an example the technology or product category of
“Wireless Local Area Networks.” Exhibit 2-7 shows the TALC superimposed onto the PLC for
this product category.
Notice that the TALC reaches its apex well before the apex of the PLC. The difference is
that the PLC tracks total sales—repeat sales to customers who have already adopted—not just
sales to new users. A clear implication of this diagram is that the marketers must enlarge their
targeting efforts to include repeat and long-term users sometime during the growth period (during
hypergrowth in the tornado). In Chapter 11, the character of different adopter groups and the
acceptance of offerings along the PLC is further discussed.
PLC–Total
Sales
TALC–Sales from
New Adopters/Period
Time
EXHIBIT 2-7 A Hypothetical TALC and PLC for Wireless LANs


The concepts described in this chapter—classifying products, defining different types of compe-
tition, emerging value networks and supply chains, the PLC, and the TALC—help marketers to
begin to frame their business environments. Differences in products help marketers understand
how differing kinds of value may be desired by differing kinds of customers. The PLC and the
TALC help marketers characterize how value desired by customers and competition will change
over time. The nature of competition helps marketers think about how to develop and maintain
competitive advantage.
Good marketing strategy cannot be based solely on these “mental models.” Now marketers
must delve deeper into the specifics of their markets. In Chapter 3, you will get more of a sense of
how individual business customers attempt to obtain value from their suppliers. If you keep in mind
the concepts we have discussed in this chapter, you can then begin to understand how value is
pursued differently under differing market conditions, by different types of organizations, and even
by different types of individuals within those organizations. Beyond Chapter 3, subsequent
chapters help build an understanding of legal constraints (Chapter 4) and the context of company
strategy (Chapter 5). Chapters 6 and 7 provide guidance on obtaining and utilizing information
about the market. Together, these chapters provide the detail necessary to create strategy and tactics
that provide superior value to target customers, thus making it possible to beat the competition.
Key Terms
capital goods 34 market development gap 48 publics 35
chasm 47 monopoly 44 technology adoption life
culture 38 monopsony 44 cycle (TALC) 47
demographics 37 oligopoly 40 tornado 47
end user 32 original equipment user 32
industry standard 34 manufacturer (OEM) 32 value added resellers (VARs) 31
macroeconomy 38 product life cycle (PLC) 45 value networks 32

1. What are some of the differences between market- e. A maker of automated assembly equipment
ing to typical commercial enterprises and marketing f. A supplier of small motors to disk drive
to government agencies? manufacturers
2. Classify the following businesses as VARs, 3. How can the agenda and focus of financial publics
users, component producers, or raw material and public interest groups create seemingly opposite
producers. goals for business-to-business marketing managers?
a. A supplier of copper to a wire manufacturer 4. Defend the validity and importance of internal
b. A supplier of rear axle assemblies to a heavy publics.
truck manufacturer 5. How can market-sensitive internal publics improve
c. A distributor of private telephone exchange a firm’s competitiveness?
equipment (PBX) and installation services 6. Should technology play a major role in your
d. A supplier of pigments to a paint manufacturer approach to your customers? Why or why not?
7. How do oligopolies support the 80/20 rule? 10. Relate the PLC and the chasm with particular
8. Describe the areas of validity and fallacy associated emphasis on the market factors that undergo
with the study of the PLC. change from introduction to rapid growth of an
9. What market characteristics make it unlikely that offering.
pragmatists will easily follow the role model of
visionaries?
Endnotes
1. TRW Automotive Corporate Web page, “Who 9. Regis McKenna, “Marketing Is Everything,”
We Are.” Harvard Business Review (January–February 1991).
2. Anonymous, “Product Innovation for Today’s 10. Jagdish N. Sheth and Rajendra Sisodia, “Only
Aftermarket,” Aftermarket Business, Vol. 113 the Big Three Will Thrive,” The Wall Street
(January 2003), p. 60. Journal (May 11, 1998).
3. “GlobalAutoIndustry.com’s China Auto Suppliers 11. Levitt, “Marketing Myopia,” is the classic dis-
Group Expands Product Line by Offering Low cussion of this situation.
Cost, High-Tech Telematics Solution from China,” 12. Geoffrey Moore, Crossing The Chasm, Marketing
Business Wire (September 15, 2004), p. 1. and Selling Technology Products to Mainstream
4. Gerry Kobe, “The Demise of Brand X,” Auto- Customers (New York: Harper Business, 1991).
motive Industries (May 1999), p. 53. 13. Everett M. Rogers, Diffusion of Innovations,
5. Matthew Beecham, “TRW Automotive: 4th ed. (New York: The Free Press, 1995).
Company Profile—2004 edition,” Just—Auto 14. A similar approach to customer adoption and
(June 2004), p. 4. market development can be found in Roger J.
6. The timeframe of the commitment, made in 2000, Best, Market-Based Management, 2nd ed. (Upper
was later modified by the dramatic change in the Saddle River, N.J.: Prentice Hall, 2000), Ch. 3.
market environment—including the Firestone tire 15. Ibid., p. 64.
crisis and shifts in vehicle preferences by the 16. Geoffrey Moore, Inside the Tornado (New York:
market. Harper Business, 1995).
7. Robert Grace, “McD’s & Politics of Perception,” 17. This standard may be an industry standard or a
Plastics News (November 12, 1990), p. 6. defacto standard arrived at by the momentum of
8. Theodore Levitt, “Marketing Myopia,” Harvard the market.
Business Review (July–August 1960). 18. McKenna, “Marketing Is Everything.”
Chapter 3
Organizational Buying
and Buyer Behavior
OVERVIEW
Chapter 1 introduced business-to-business marketing and Chapter 2 established
the nature of the many types of participants in business-to-business markets.
Successful business-to-business marketing involves understanding how
organizations buy and how individuals are likely to behave in the roles of decision
makers within the organization. This chapter examines the nature of buying and
individual behaviors associated with the buyer’s decision process.
Organizations “buy” to satisfy rational needs that result from their desire to be
successful in their markets; however, it is individuals within organizations who make
the buying decisions. In this chapter, we demonstrate that the need of the organization
may be quantifiable but that behavior in organizations has many qualitative elements
that influence the buying decision. It is in the qualitative elements of decision making
that the importance of the customer–supplier relationship becomes a critical factor in
the success of the marketing effort.
The complexity of the business buying process varies. Routine purchases are
automatic, repeated with an almost mechanical approach. More complex needs
require greater involvement by a larger number of stakeholders in the organization.
We examine the levels of buying complexity and how a marketer’s relationship and
approach are impacted by this complexity.
Covisint: Illustrating the Importance of Adapting to Customers’ Buying Behavior

Late 1999 could arguably be the beginning of the end of the dotcom explosion. General Motors
Corporation and Ford Motor Company had each started their own Internet marketplace exchange and
the two long-time rivals were battling to get the upper hand with suppliers. The Internet exchanges
were supposed to streamline communications, inventory, and logistics management for all major
suppliers to the companies.
Of course, each exchange was tailored to the specific methods and technologies of its specific
creator—General Motors (GM) or Ford. Ford had chosen Oracle to develop and supply the software
that would run its exchange, while GM had chosen the latecomer Commerce One as its supplier.
Within weeks, suppliers that served both companies were complaining that the new exchanges were
52
Chapter 3 • Organizational Buying and Buyer Behavior 53
incompatible with each other and usually incompatible with their own in-house systems Suppliers were
threatening to band together and form their own exchange to develop a common platform of operation.
Early in 2000, Morgan Stanley Dean Witter (MSDW), financial advisors and consultants,
proposed a unique solution. By combining the two rival exchanges, the resulting exchange would have
tremendous purchasing power. The forecast purchases through the exchanges by Ford and GM, com-
bined, hovered around $600 billion, making it the largest business-to-business operation. MSDW argued
that the combined exchange could strip out millions in costs for both customers and suppliers. An inde-
pendent exchange could invite additional automotive companies to join. Profits would be generated by
the transaction fees the exchange would charge users.1 There were immediate comparisons to Sabre, the
reservation system of American Airlines that, as an independent operation, became worth more than
the airline. MSDW argued that such an operation could be worth $10 billion in five years as a separate
company on the stock market.
By February 25, 2000, GM, Ford, Oracle, Commerce One, and the newest member of the team,
DaimlerChrysler (DC) announced the plan: build the biggest-yet industrial Web exchange. Industry
analysts estimated that a successful common exchange could shave as much as 6 percent off of the cost
of building a car.2 The mood was euphoric—the United States’ biggest “rust belt” companies were
entering the e-commerce business.
Soon, other automotive businesses joined. Toyota would become an exchange participant, but not
an investor. Nissan, Peugeot, and Renault joined. Johnson Controls, Delphi Automotive, Visteon,
Magna International, Lear, and about twenty-five other supplier companies soon joined the exchange.
Membership was forecast to rocket to more than 30,000 companies.
Covisint had its own board of directors comprised of the Who’s Who of automotive executives.
Since each automotive manufacturer had previously required its suppliers to conform to its own standard,
many suppliers maintained a connection to an Internet portal for each company. Covisint set its sights on
simplifying this to one common portal/exchange for all. It would be simple, really. The auto companies
would all use a common system; suppliers would adopt that system; efficiency would lead to significant
cost savings. Could this really happen between companies known for their intense rivalries? Nope.
Decisions had to be made fast, but the corporate egos involved didn’t always make that easy.
Selecting a corporate name took three months. Oracle, Commerce One, and DC’s supplier SAP all
wanted to be the lead supplier for the exchange technology Whichever technology was selected, two out
of three of the U.S. auto companies would have systems throughout their operations become obsolete.
Though the technologies were supposed to be able to work together, the final execution, requiring
cooperation of all three of the technology companies, never quite seemed to be complete.3
While the executives of Covisint might have been euphoric, many of their potential customers
were not. Four issues would prove to be practically insurmountable. First, industry leaders estimated
that over 80 percent of all purchases by the auto companies involved “intellectual capital collaboration
and sharing of proprietary content.”4 These were not routine repurchases of nuts and bolts or copy
machine paper. Second, Covisint required all tier one suppliers to add their own exchange systems to
Covisint. This would provide transparency to the supplier supply chain. Suppliers balked—they feared
that the auto companies would use this information to justify lower prices. The tier one suppliers
coveted the relationship that they had built with their own suppliers. Third, the potential cost savings
appeared as a very large inducement to proceed with the project, so time was of the essence. Suppliers
were not willing to wait as those savings were slipping away. Fourth, and possibly the biggest problem,
Covisint required all participants to give up their own systems (“the way they buy”) and adopt the
system that Covisint was developing.
By mid-2000, Dana Corporation, who had already set up its own internal e-commerce system
with Ariba, Incorporated (competitor to Oracle and Commerce One), brought five suppliers together to
set up their own exchange. Indeed, suppliers were sold on the attractiveness of the efficiencies and cost
savings. Also, Volkswagen announced it would not join Covisint but would instead develop its own
exchange. The critical mass that would make Covisint work wasn’t coming together.
54 Chapter 3 • Organizational Buying and Buyer Behavior
By the year 2002, GM, Ford, and DC had invested $200 million in Covisint, the automotive
e-commerce marketplace. Covisint had become a battleground for control of supply chain information.
Ford and DC, while theoretically participants in Covisint, had continued development of their own
exchanges, requiring suppliers to join. By the end of 2003, Covisint had been through four CEOs, the
third of which had served for just one month. Suppliers had continued to hesitate to join, instead
developing their own systems or adopting to the systems of their various individual customers. Covisint
had sold its auction services business to FreeMarkets (which would eventually be purchased by Ariba)
and would now focus on its supplier management portals and data messaging services.5 In 2004, the
remaining businesses of Covisint were sold to Compuware for $7 million.6 At its peak, Covisint had posted
$50 billion of auction activity annually—a far cry from the MSDW five-year forecast of $600 billion. For
fiscal 2004, Covisint is on track to meet its expectation of $25 million in revenue.7
As a postscript to this story, Commerce One announced in the fall of 2004 that it would wind
down its operations and probably file for bankruptcy.8
LEARNING OBJECTIVES
䊏 Develop an understanding of the difference between quantifiable organizational needs
and the often qualitative process used to fulfill those needs.

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

䊏 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.
䊏 See how the supplier–customer relationship is the principal defining factor in the success of
business-to-business marketing efforts.

䊏 Gain an initial sense of the concepts of trust and commitment in effective relationship
development.
䊏 Gain an appreciation for the different levels of complexity of decisions made in the buying
process and how a business-to-business marketer can influence the process.
INTRODUCTION
The scenario described in the opening example took place over a period of approximately four
years. At the start of that period, it was thought that technology, as demonstrated by online
exchanges, could significantly reduce transaction costs in business-to-business sales. In the
development of Covisint, there was also the goal of standardizing the specifications of routinely
purchased components and materials, thus reducing costs. At the end of the four-year period,
however, the market witnessed the demise of Covisint as well as several of the technology com-
panies that had been considered the business models of the future.
The Internet is a great communications tool in the information transfer and transaction
process, but what happens to the relationships between supplier and customer that have in the
past been considered so important? This chapter examines the often-taught classical buying process
and its value as well the interpersonal dynamics and relationship aspects of how organizations and
individuals make buying decisions—whether at the pace of the Internet or more conventional means.
THE NATURE OF BUYING

Many consumer purchases (i.e., buying decisions) are spur-of-the-moment decisions, often asso-
ciated with the availability of funds to make the purchase. While consumers seldom conduct a
conscious value evaluation, the act of making the purchase indicates that they have decided that
the value they are about to receive is greater than the value they are giving up (i.e., their costs). If
this were not the case, the exchange would not take place. The value assigned by the customer is
influenced by many factors beyond the serviceability of the core product or service. The nature
of the buyer decision process in a business-to-business environment is not unlike the consumer
process, though the steps are often thought to be more visible and theoretically more quan-
tifiable. Let us further compare the processes.
The Consumer Buying Decision Process

Our purchases as consumers are influenced by the roles we play in our daily lives. As parents,
teachers, students, children, managers, and individuals, we are influenced to “do what’s right”
within the framework of the role we are playing. Sometimes that is a responsible decision with a
broad range of beneficiaries; at other times, what is right is an impulsive, self-satisfying choice
(e.g., “I bought it because I liked the color”). In any event, though we are influenced by many
factors, we make the buying decision as individuals and are usually accountable to only our-
selves for the outcome. What we have just described is part of the need-recognition stage in the
classical five-stage consumer buyer decision process:
1. Need recognition
2. Information search
3. Evaluation of alternatives
4. Purchase decision
5. Post-purchase behavior
This process, or a similar representation, is familiar to every student who has completed a
marketing principles course. As presented, these five stages imply that the process consists of
five discrete, sequential events. Depending on whether the purchase is a repeat of an earlier pur-
chase or an entirely new task (or is low involvement or high involvement), some parts of the
process may be de-emphasized or extended. As consumers, our experience tells us that this
process is more of a simultaneous process rather than a sequential process. Consumer beliefs
about legitimacy of information sources, brand reputations, and the influences of others combine
into a final purchase decision by the individual consumer or family group. Afterward, the con-
sumer evaluates the purchase relative to either individual or family expectations.
Organizational Buying
How do organizations “buy” compared to how we, as consumers, “buy” in the retail market?
The initial response from an inexperienced observer might be that organizations purchase
whatever is cheapest, that is, that organizations must make the most rational, lowest-cost,
most-profitable decision. While the ultimate profitability of the buying organization (or mini-
mized cost for the nonprofit organization) plays a major role, price is only a part of the deliv-
ered value.
Organizational purchases involve inputs from many of the professional specialties in the
organization. The organization relies on decision makers and influencers at many levels and from
Stakeholders are the different disciplines to contribute their expertise to satisfy a diverse set of needs.
individuals and The inputs from these stakeholders aim to ensure that the best possible buying
organizations that have
decisions are made for the organization. Individual stakeholders may contribute
an interest—a “stake”—
in the company, its their expertise to influence the decision process without full knowledge or
operation, and its appreciation for the requirements of other stakeholders. Seldom is any one
performance. The individual entirely responsible for an organizational purchase decision.
interest may or may not This decision process requires communication among stakeholders within
be financial.
the buying organization. It is necessary for the supplying organization to
simultaneously approach all influencers in the decision process with a message tailored to the
needs of each individual influencer. When effective and trusted, it is not unusual for the sup-
plying firm’s communications with different stakeholders to substitute for, or instigate, greater
communication among stakeholders.
The Buying Center

The buying center is a collection of individuals with a stake in the buying decision, individuals
who contribute to the final purchase decision. Members of the buying center determine, within
their own professional responsibilities, the organization’s needs and the methods the organi-
zation uses to satisfy them. Buying center complexity changes depending on the complexity of
the need. Contrary to what the term implies, a buying center is not one central location
where buying decisions are made. The term simply refers to the representatives of the various
independently operating portions of an organization (finance, production, purchasing, engineering,
etc.) that influence the selection of the overall best solution for the organization’s needs.
Depending on the size and complexity of the organization, influencers (stakeholders) in the
decision may be physically located a great distance (across the hall, locally, nationally, inter-
nationally, etc.) from each other. One of the major tasks of the business marketer is to simulta-
neously but individually influence all stakeholders by satisfying their individual professional
and personal needs.
The needs of the organization are determined by the organization’s customer needs, the
organization’s internal goals and objectives, and by external environmental factors. Stakeholders are
accountable for the development of buying requirements that satisfy all of these influences.
Depending on the intended market and customers of the organization, influences may include
government agencies and independent standards-setting organizations and publics, as well as
the quantifiable and relationship needs of the supplier and the customer. Exhibit 3-1 shows the vari-
ous professional disciplines and organizations that may contribute to or influence the buying center.
The professional needs of engineering or technical specialists in the buying center are
related to the physical performance of the product that is being supplied. Their concerns center
on how well the component will meet design requirements and reliably perform in their appli-
cation. Production or manufacturing specialists in the buying center are concerned with how well
the component will integrate into their manufacturing process. Personnel responsible for the
service and support of the product when it is in use by their customers will be concerned about
how and what service the component will require when the product is in the field. If the purchase
is a significantly large investment, the customer’s finance organization is concerned with alter-
natives to fund the purchase. Each member of the buying center has a concern unique to his
responsibilities and presents an opportunity for the business marketer to demonstrate a unique
value of the offering his company seeks to provide.
Internal Factors Typical Concerns

• Technology/engineering • Physical performance of product
• Management • Monitor organizational needs being met
• Finance • Ability to pay for large capital investments
• Accounting • Verify/track associated cash flows
• Legal • Clarity of long-term agreements
• Production/manufacturing • Integration into existing facilities; throughput to meet
• Purchasing/supply management production volumes-Inventory costs; quality and
• Marketing assurance of supply
• Service • Input to customer trends/desire for flexibility
• Reliability and ease of replacement
External Factors
• Customer needs and buying behavior • Stakeholders in each discipline within the organization
• Government agencies contribute their expertise to the decision such that both
• Independent standards-setting internal and external factors are accommodated
organizations
• Various publics
EXHIBIT 3-1 Many Disciplines Can Contribute to the Buying Center
For instance, consider a buying organization that is building a new fabrication or man-
ufacturing facility. Included in this facility will be new fabrication tools used to manufacture
the organization’s product. Such assembly equipment is costly, should have a long life, meet
the production volume forecasts of marketing, be reliable, and be easily and quickly repaired
when problems do occur. Since this is a capital investment, the organization’s finance depart-
ment will be interested in the best purchase terms. Manufacturing and production personnel
will want assurances that the equipment is reliable and easy to operate, and will likely want
some kind of guarantee of access to rapid repair if problems do occur. Operations personnel
will be concerned with the utility consumption (water, electricity, etc.) of the new equipment.
Facilities planning will have requirements related to the physical space the new equipment
will occupy. Human resources may be concerned with employee training. Because of
the complexity of the purchase, the number of stakeholders—the size of the buying center—
is large.
At this point, it should be noted that in many organizations the buying center has undergone
a makeover in the last decade or so. As companies have moved toward more integration of supply
chains, buying centers have evolved into more formalized cross-functional teams that take a more
strategic approach to supply issues.9 This has resulted in tighter and more predictable buying
processes. The good news for suppliers is that customers are more willing to entertain long-term
collaborative relationships with suppliers. The outcome of the selection process is a long-term
commitment to buy products or service from the supplier. The challenge (bad news?) for suppliers
is that the requirements are more difficult to meet than before and suppliers may be forced to spend
more effort sharing information and adapting their logistics systems to customer requirements than
they had in the past. On the whole, though, well-run supply chains foster an attitude aimed toward
win–win relationships rather than the traditional battles to see which side—buyer or seller—can
keep most of the profitability.
Summarizing the differences between consumer and business-to-business buying dis-

cussed so far,
• Organizational buying involves more buyers—more decision makers or contributors to
portions of the decisions.
• Committees (the buying center) are involved, with professionals in each discipline (stake-
holders) making decisions that are driven by their particular needs.
• Different types of decisions are often occurring simultaneously in the process, spread
throughout the buying organization.
ORGANIZATIONAL BUYERS’ DECISION PROCESS:

A STEPWISE MODEL
Exhibit 3-2 shows the business buyers’ decision process as it is usually presented. We believe
this model can be misleading. Let us discuss what is important to understand about the buying
decision process before examining some of the potentially misleading elements.
Intricacies of the Buying Decision Process

Successful business marketers understand the buying processes of their customers and work with
these processes to provide value to customers and win their business. Several key concepts lead
to successful interaction with customers’ decision processes.
INDIVIDUAL ROLES AND PERSONAL NEEDS Several people in the buying center are involved
in any stage or step of the process. Each of them has individual needs related to his role in the
buying center. Each of them has personal needs as well. Included in these personal needs will be
needs related to the political interactions within the buying center. As occurs in most group inter-
actions, the group will have power relationships among the members of the group. Individuals
will want to maintain or alter these relationships and the buying decision may become the focal
point of political relationships or tensions. If individuals try to maintain the power relationships
within the group, the process might play out with very little contention. On the other hand, the
process may become very contentious if individuals are trying to change relationships or
improve their power position within the organization.
THE BUYING PROCESS IS SIMULTANEOUS, NOT SEQUENTIAL The buying decision process
progresses only loosely as a stepwise process. In the previous example of an organization
1. Problem recognition
2. General need description
3. Product specification
4. Supplier/source search
5. Proposal solicitation
6. Selection
7. Make the transaction routine
8. Evaluate performance
EXHIBIT 3-2 Steps in the Buying Decision Process

purchasing new fabrication equipment, many members of the buying center are simultaneously
involved in the decision process. Particularly in new task situations (which is explained later in
the chapter), a grouping of the steps into stages better represents the process. The steps within
each stage may overlap, occur simultaneously, recycle, and/or change their character in midstream.
RELATIONSHIPS AND LOYALTY The quality of the relationships between organizations and
individuals of the organizations is a key influence. If the buying center members have confidence
in a supplier and the supplier’s representatives—and if the supplier has an ongoing consultative
relationship with the buying center’s members—the buying center tends to use the supplier’s
information, take advice from the supplier, and buy its products. A key factor affecting the
degree of influence exerted by the relationship is the track record of previous successes and the
loyalty those successes have created between the participants.
THREE KINDS OF NEEDS The members of the buying center try to meet three kinds of needs as
they participate in the buying decision process. The first type of need is the organization’s needs
for benefits from the product or service once it is finally purchased and used. The second type of
need is the buying center individual’s need stemming from his role in the buying center. The
third type of need is the buying center member’s personal need. These three kinds of needs are
explained as follows:
• Organization’s needs for benefits from the product or service once it is finally purchased
and used: This “need” usually includes the technical specifications, performance require-
ments, and other elements, quantitative and qualitative, of the total offering that ensure
both an immediate success and sustain long-term objectives.
• Individual’s need stemming from his role in the buying center: Each professional is expected
to perform the functions of his job in a way that supports the organization’s needs. This
may be obtaining the best designed component part, the most favorable contract terms, the
highest quality materials, and so on.
• The buying center member’s personal needs: Often overlooked, an individual’s personal
needs for career success, recognition, and quality of life factors will influence his decision.
CLUSTER OF STAKEHOLDERS’ VALUES All of this adds up to the fact that a supplier’s success-
ful offering is really a cluster of values, each aimed at individuals in the buying center at given
points in the process. The core product or service is only part of this cluster and really does not
directly meet the organization’s needs until after the product has been purchased and put into use.
Needless to say, this makes business-to-business offerings very complex.
ORGANIZATIONAL BUYERS DECISION PROCESS:

A PROCESS FLOW MODEL
Based on the previous discussion, the stepwise model can present some problems. Recognizing
the value of relationships in the decision process and that the value offering is a cluster of
values, we prefer a model that moves through a series of clustered stages. The “formal,” step-
by-step process implies a beginning and an end to each step, as well as the notion that each step
must be completed before starting the next. For simple, familiar, or low-involvement decisions,
this may be the case. Our experience of how buying decisions are really made, particularly for
new task purchases, strongly suggests a process flow with significant overlap and feedback
Process Flow Stages Buying Decision Process—Steps

Definition Stage
• Problem definition • Problem recognition
• Solution definition • General need description
• Product specification • Product specification
Selection Stage
• Solution provider search • Supplier/source search
• Acquire solution provider(s) • Proposal solicitation
• Contract for supplier(s)
Deliver Solution Stage
• Customize as needed • Make the transaction routine
• Install/test/train
Endgame Stage
• Operate solution • Evaluate performance
• Reach end result • Resell the job
• Evaluate outcomes
• Determine next set of needs
EXHIBIT 3-3 Stages in the Process Flow Model of the Buying Decision Process
loops and without borders between steps. We have presented the flow as a series of stages
because, even in the most free-form decision process situations, there generally are milestones
or transitions that occur between the stages. Within the stages, actions generally include the
previously discussed steps, but they flow in a loose progression from start to transition point and
then on to the next stage. Exhibit 3-3 shows the buying decision process as a process flow
model rather than as a step model, as was shown in Exhibit 3-2. It also shows the correlation
between the two models.
Notice that in Exhibit 3-3 we show almost all the classical decision steps in the definition
and selection stages. We then expand the steps “Make the transaction routine” and “Resell the
job.” We do this because there is so much activity—especially marketing activity—that occurs in
these last steps, particularly when the purchase is complex. These two stages become an integral
part of the relationship that forms between buyer and supplier organizations and become the pre-
cursor activities for the next buying decision process undertaken by the buying organization.
To better understand how business marketers can address buying center needs, let us exam-
ine each stage in greater detail.
Stage 1: Definition
In this first stage of the process, the buying center attempts to learn more about what their
organization needs and about what options are available to address those needs. In Exhibit 3-3,
this stage is shown as having the following kinds of activities: recognizing and defining the
organization’s problem, defining the broad outlines of a solution, and specifying the product or
service features sought. The stage ends with a first quantification of what is specifically sought
by the organization. This specification may be revised later, but it sets the organization’s buying
center on a path with a specific direction.
A key thing to understand about the definition stage is that it includes “problem recogni-
tion,” which determines how the buying center carries out the rest of the decision process.
Problem recognition is analogous to consumer need awareness, albeit at an organizational level.
The way that the buying center defines the problem and the general nature of the solution
determines whether they approach the buying decision as a familiar or an unfamiliar task. At one
extreme, the problem and its likely solution may be defined as a completely
new task. The rest of the buying decision process then tends to be more rigor- A new task is a need that
ous, and time consuming as a result. At the other extreme is determination that hasn’t been faced by the
the organization simply needs the same thing it obtained last time it had this organization previously.
An entirely new offering,
particular problem. This results in a straight rebuy situation. A straight rebuy the incorporation of a
involves abbreviated steps in the process, fewer people in the buying center, and new technology,
less time to completion. In the middle lie modified rebuy situations in which development of new
the buying center determines that the problem or solution is somewhat similar to facilities, or a
past problems or solutions. Such a determination results in a buying decision combination of factors
can create this level of
process that examines alternatives but within a limited scope. As one would task. The organization
expect, it involves fewer people than the new task situation and more than the has a significantly steep
straight rebuy. It takes less time than a new task and more time than a straight learning curve in a new
rebuy. task buying situation and
An astute supplier benefits greatly from involvement with its customer in will initially seek many
sources of information
this early process stage. An understanding of the buying center’s needs, both and assistance, utilizing
organizational and individual, during this stage allows the supplier to create the complete buying
value for the buying center by helping the buying center through the process. process to investigate
The supplier also has the opportunity to adapt its product or service through the alternatives.
process of helping the buying center define its problems and solution set. A straight rebuy is a
As the decision moves through the stages, a general need and solution is buying situation that is
defined. The buying organization’s technical team fully details the need and routine and has
solution through the development of a product specification. It is at this point established solutions.
that the technical team members of the buying center determine the extent of Straight rebuys are “more
of the same” and often
the product’s intricacy. Prototypes are built and reviewed for how well the orig- involve simply the reorder
inal need is satisfied. Component technology and appropriate alternatives from of a previous product. A
a cost and performance viewpoint are examined. The technical value assess- marketer should strive to
ment is made, and the product specification is created. The development of the derive straight or
specification should be the result of extensive collaboration between supplier modified rebuy situations
from new task situations
and customer. It is in this process that technology alternatives are narrowed and to limit established
designs begin to rely on the specific nature of the remaining alternatives. business to exposure from
This description can lead one to believe that this is the end of the defining competitive forces.
process and that after this point the product design is frozen. In reality, this is
too narrow a view. As was noted in the value chain discussion, concluding that all possible
customer value can be quantitatively specified is a major misstep in the application of the value
chain concept.
THE MEANING OF A SPECIFICATION What purpose does a product specification serve? The
obvious answer is that a specification is what a customer gives to a potential supplier that com-
pletely describes what the product must be and how it performs. Following this logic, it is then
the responsibility of the supplier, if it wants the business, to quote the lowest possible per unit
price on the product. Perhaps this is an accurate analysis in a straight rebuy situation and is true
for most Web-based transactions. Not only does the specification give the customer a method to
say what the product must be should there be any future disagreement, but also it provides the
supplier with a very clear indication of what the product does not need to be—also useful in
future disagreements.
The functions performed by the specification, however, are not limited to resolving con-
flicts between the buyer and the seller. Specifications are an attempt by the buyer to generalize
the need description, regardless of its complexity. The specification seeks to reduce differences
between different potential suppliers of the product, making it easier to choose from among com-
peting proposals. Internally to the buying center, the specification serves as an assurance that
when a supplied component meets the specification all of the requirements of the organization
have been met. In this regard, the specification serves as an internal brand much the same way
a national consumer brand reassures buyers about quality, function, and value in the consumer
market. Thus, the buyer views a well-written specification as an enabling factor that virtually
eliminates differences between competing suppliers.
The development of a product specification is a step where a business marketer can have
significant input, particularly if the value provided by the marketer goes beyond easily quantifi-
able needs. Successful suppliers will have worked with the buying organization such that the
specification utilizes attributes of the supplier’s own total offering while minimizing the impact
of the differentiating attributes of competitors’ offerings. The development of early prototypes as
noted earlier, the selection of component technology, and appropriate alternatives from a cost
and performance viewpoint are all areas where suppliers can meet the buying organization’s
needs that exist during this phase of the process. Concurrently, such assistance provides assur-
ance to the buying center that the supplier can provide superior value when the final solution is
delivered at the end of the decision process.
Beyond this point in the process, it is much more difficult for a potential supplier who has
not yet been involved in the definition stage to be truly competitive. The new supplier finds the
buying center already predisposed to a particular form of solution.
THE SPECIAL CASE OF AN INTEGRATED SUPPLY CHAIN Today most large companies and
many medium-sized companies attempt to integrate their supply chains back to the point of raw
materials extraction from the earth. As has been discussed in Chapters 1 and 2, integrating
supply management through the supply chain can provide competitive advantages in terms of
cost, quality, and flexibility. Entering into a relationship with an integrated supply chain can give
the supplier advantages and benefits as well, once it becomes certified and integrated into the
chain. The supply chain poses a special case of customer requirements that, notwithstanding a
complete and competitive core offering, may exclude a supplier from further consideration.
The case of the integrated supply chain will occur mostly in industries where technologies
and products are maturing or have matured. Some companies in markets or industries that are
emerging will attempt to integrate their supply chains, but supply dynamics are so fluid at these
early stages that little advantage can be gained from integrating supply management.
Many larger companies form a supply management committee or team to make supply
policy decisions and manage the supply network’s activities.10 The supply management team
will pursue inbound purchasing and logistics as strategic design decisions and tend to manage
these activities as business processes. The team will emphasize strict quality tolerances for the
purchase of materials, parts, and services. These requirements are specific for all links in the chain
back to raw materials producers. In a further broadening of the supply chain management con-
cept, the team will develop, or incorporate from an independent source, specifications for the
processes that suppliers must adhere to. Many of these processes, including but not limited to
quality manufacturing, inventory management, purchasing, and quality control, are defined
under standards set by the International Organization for Standardization (ISO) and the Institute
of Supply Management (ISM). The prospective supplier must show that they have incorporated
these standards. The suppliers will also be required to share information about demand and sup-
ply levels both upstream and downstream. The supplier may be required to follow policies and
procedures in ordering and inventory tracking. In return, the supplier can often expect special
assistance in meeting these requirements, such as training, equipment, and financing.
Obtaining standard certification from ISO can qualify a supplier to participate in supply
chains for many large customers. The initial qualifying effort will be of value at many customers.
Because an independent standards organization is used, the requirements are readily determined
and consistent. In this way the supplier gains legitimacy in an efficient manner. On the other
hand, the strict requirements to enter the supply chain take away many sources of differentiation.
This suggests that a prospective supplier can differentiate itself by learning to manage and
improve its own internal operations so that it can exceed the stringent requirements of the supply
chain. By creating a core competency of process improvement and maintaining an ongoing rela-
tionship with the standard-setting organizations, the supplier can rise to the level of a preferred
supplier for one or more supply chains.
Some suppliers that have achieved this level of sophistication in process management and
continuous process improvement have gone on to build new distinctive competencies in managing
processes for creating innovations.11
Stage 2: Selection
Once the buying center knows what it wants to acquire, it seeks, during the selection stage, a
supplier to provide it. The choice of supplier may be a foregone conclusion, particularly if, as
noted earlier, the supplier has collaborated with the buyer throughout the specification process.
The buying center may go through the steps of the selection stage, though, just
the same. As shown in Exhibit 3-3, the activities performed in this stage include RFQ and RFP are
acronyms for the common
development and issuance of a request for proposal (RFP) or request for business practices of
quotation (RFQ), evaluation of offers, initial selection of a supplier, negotia- asking a supplier to quote
tion of terms, and specification of an order or contract. While the steps can a piece of business. RFQ
occur simultaneously and in varying order, the stage ends and transitions to the is a Request for
next stage with the contract or order. Quotation, usually
associated with an
As already discussed, if the supplier organization can help the buying offering that can be
center through the process, the supplier stands a greater chance of becoming the thoroughly and
supplier chosen. If a supplier has a good relationship with the people in the quantitatively defined. An
buying center, then the RFP often can be influenced to ask for proposals to do RFP is a Request for
exactly what the supplier intends to do. Obviously, the proposal then will match Proposal, usually defined
by a set of needs,
very well with the buyer’s requirements and will at least stand a good chance of specification, or
being picked for a final round of proposal presentations. outcomes that have
After the RFP or the RFQ is issued, proposals or quotes are received and greater leeway with
evaluated by members of the buying center. Depending on the complexity of the regard to the final form
need, the competing suppliers’ marketers are called on to marshal their writing or technology of the
offering.
and presentation skills as well as their knowledge of their own and their cus-
tomers’ markets. Straight rebuys of somewhat generic items, such as those that could be success-
fully purchased as described in the Covisint opening vignette, may require only a brief (perhaps
only online, if suppliers are adequately prequalified) response to an RFQ that stresses price as
the dominant part of the marketing mix. For new tasks and, to a certain degree, modified rebuy
situations, however, successful and profitable responses to RFQs require a combination of
elements well beyond price (and are not likely to be successfully purchased through online
exchanges).
DISTINCTION FROM PUBLIC SECTOR PURCHASING This process of issuing an RFP or an

RFQ often runs a little differently in the case of government purchasing. Fairness or equal oppor-
tunity is often a legislatively mandated goal in structuring the proposal or quote and selection
process. The RFP or quote often has to be published in specified newspapers or other outlets.
Prospective suppliers have to meet a set of rigid criteria that are often much less flexible than
criteria in private sector purchasing. This does not mean that suppliers’ marketers are ignored in
the design process for the RFP or the RFQ. In these situations it is critical to fully understand
what degree of assistance is acceptable to the government agency and its oversight authorities.
Government purchases are often subject to far more scrutiny than private sector purchases. What
is considered normal design or development assistance in the private sector may be interpreted as
undue influence when addressing public sector markets.
Marketers addressing governmental markets can still establish relationships with govern-
ment buying centers and assist in designing and specifying the solution. They may face more
competition, though, in the selection process. Indeed, they may also face fewer straight rebuy
situations due to legislatively mandated rebidding on purchase contracts over time.
BUYERS SEEK SELLERS WITH BEST TOTAL OFFERING AND CAPABILITIES In evaluating pro-
posals, buying organizations seek to protect themselves from single-source and inflexible price
situations by seeking additional or alternate suppliers. The search for qualified, acceptable suppliers
leads to a list of those suppliers who, in the view of the buying organization, can meet the needs
of the buying center. Depending on the stature of the buying organization, their reputation as a
customer, and the nature of the supply opportunity, they may attract proposals from all or a few of
the available qualified suppliers. If the buying organization is hindered by previous difficulties with
suppliers or is experiencing other environmental situations (e.g., severe financial difficulties, etc.)
the RFQ or proposal solicitation may require a marketing effort to appear attractive to potential
suppliers.
As was discussed in Chapter 2, business markets are often oligopolies, with only a few com-
panies having capabilities in any particular area. Many organizations may be capable of making
exceptional one-of-a-kind items (that special cake that resulted from customization of the general
recipe), but this capability does not automatically transfer to an ability to supply several thousand
items each month (how big is that kitchen?). Organizations, because they have many concerns
they are trying to address in acquiring a product or service, seldom have the luxury of many
choices. Yet the supplier is an integral part of the success or failure of the efforts of the buying
organization. So, business buyers must screen supplier organizations with regard to their capabil-
ities beyond the creation of one component. Years in business, size and reputation, manufacturing
capacity, ISO certification, and customer service commitment are among the screening factors, in
addition to the supplier’s product quality and ability to meet the technical specification.
These screening factors can be the most difficult for a supplier to satisfy, especially for the small,
technology-oriented young company without a track record of large volume production—such as
a firm “before the chasm.”
The classical process of supplier selection implies that the buying center weighs all factors
as defined by the specification and selects the supplier that best meets those specified needs.
If there is an outstanding provider, the selection among potential suppliers can be obvious.
However, all facets of the offer come into play, those quantifiable as well as those value chain
features that are not as easily measured.
Assuming that all potential suppliers are qualified and that all have met the minimum
performance requirements specified, the buying center selects from a group of providers who
have worked very hard to meet the specification. The problem with this, from the suppliers’
viewpoint, is that in all their hard work to create an offering as described by the specification
they have probably accomplished exactly the worst outcome—to be just like each other, with no
differentiation. Under such circumstances, the customer selects the supplier with the lowest
price. From this result comes the entrenched myth that the successful supplier is the one that
offers the lowest price. This does not follow good marketing logic.
Why would suppliers want to work to be just like each other? Smart suppliers work very hard
to distinguish their offerings from each other. Market-driven suppliers do not use price as a marketing
tool but will look to the buying center’s broad and diverse needs to assemble an added-value approach
that demonstrates qualitatively the advantages of their offer. This does not mean to imply that price is
not important; it is, but competitive offerings need to be distinguished in other ways as well.
The buying center eventually arrives at a decision on which supplier it chooses. The final
selection may be contingent on negotiations on some of the solution’s features, on terms of the con-
tract, or even on the final price. The selection stage reaches completion when the contract is signed.
Stage 3: Solution Delivery

Once chosen, the supplier begins the process of delivering on its promises. This portion of the
overall process may take a longer period of time than the first two stages combined. When the
product is complex and involves a high degree of customization and even technical development,
this stage is an extended set of activities. The solution delivery stage ends when the “delivery” is
complete and approved by the buying organization. An astute supplier already involved in the
definition and selection stages already has, in many cases, had its offering approved or is pro-
ceeding through the approval process.
Activities that can be included in this stage include all solution development that remains
to be done, customization of the product or service based on a diagnosis process, testing of early
versions of the solution, delivery of prototypes and incorporation into manufacturing trials,
installation and testing of the full-scale solution, training of the buyer’s employees who will
operate the solution or interact with the service provider, resolution of any supply chain or
logistics management issues, and perhaps other readiness activities.
The process of merging the supplying logistics of the supplier with the consumption
logistics of the customer occurs during this stage. It is incumbent on the supplier to match the
operational buying needs of the customer. Suppliers must recognize “how their customers buy”
and meet that pattern. The transaction process should be routinized in a way that it is invisible to
the buying organization. The customer will want such things as materials planning, shipping
quantities, inventory location, delivery times, and invoice routines (i.e., the utilities of business
logistics—form, time, place, and possession) to match their existing methods.
How the supplier delivers on its promises up to this point is watched closely by the buying
organization. All through this delivery stage, the buying organization evaluates how good the
supplier is and what the likelihood is of a good working relationship in the future. If the supplier
can provide this value during the delivery stage, it stands a good chance of making a successful
transition into future buying decisions.
SUPPLY CHAIN IMPLICATIONS Return briefly to the Covisint opening example and recall the
fourth of the four major issues that proved insurmountable—Covisint required all participants to give
up their own systems (the way they buy) and adopt the system that Covisint developed. Customers of
Covisint included both downstream clients (the major automobile companies) and upstream clients
(suppliers to the major automobile companies) in the supply chain. Covisint was not a customer of
any member of the supply chain. As a result, Covisint had very little if any leverage to persuade its
clients to follow the rules it established, particularly those that required clients to accept Covisint tech-
nology and systems as their system. Covisint made no effort to match the “way their customers buy.”
Stage 4: Endgame
All of the prior activity has a purpose—to provide the buying organization with the products, mate-
rials, or capabilities necessary for the buying organization to reach its goals. Often, buying organi-
zations formally evaluate purchase outcomes and these are the criteria by which the outcomes are
judged. Many firms will have standardized supplier audits or “scorecards” that compare all suppliers
on the same criteria. Individual members of the buying center also evaluate the purchase, the
process, and the supplier after the purchase is in use. The needs at this point are the benefits that were
anticipated to begin with. Along with this is a need for reasonable (and usually predictable) costs.
The supplier should use every opportunity to reinforce the validity of the buying center
decision. Suppliers that continue to show an interest in the changing needs of a buying center
after the supplier has been selected are preparing for the next RFQ from the customer as well as
making it far more difficult for a competitor to encroach on the business. The quality with which
the supplier meets the logistics needs described in the discussion of the delivery stage should be
a positive influence in the business relationship, and suppliers should solicit feedback regarding
these processes. The manner in which the supplier “resells the job” can be tangible evidence of
otherwise unquantifiable factors that can make price less of an issue.
The endgame of a specific supply situation should also be the definition stage of the next—
a natural flow in the involvement of the customer and supplier organizations. The degree to
which this happens automatically is an indicator of the degree of success of the relationship
viewed from either organization.
TWO EXAMPLES OF BUYING DECISION PROCESSES

Let us look at two hypothetical situations (based on real situations) to illustrate what happens in the
buying process. The two examples represent the two ends of the spectrum: a straight rebuy on the one
hand, shown in Exhibits 3-4 and 3-5, and a new task on the other, shown in Exhibits 3-6 and 3-7.
For the straight rebuy, let us examine the purchase of office supplies by a small advertising agency. The
need for the supplies is triggered when the office manager notices that some inventory levels are low.
Maybe, though, they are a little more organized and the office manager places a monthly order. In either
case, a problem is recognized (office supplies need to be replenished) and the process starts (see
Exhibit 3-3). The next step involves checking the inventory to see if some items have sufficient inventory
or need an extra large order. The office manager may also ask someone in each department (e.g., from
the creative, media, traffic, account management, and administration departments) whether they have
any special supply needs coming up soon. The order comes together and is typical of previous orders,
except that one item is needed in larger than usual quantities. The office manager then makes out his list
EXHIBIT 3-4 Straight Rebuy Example—Buying Office Supplies

of things to order. This represents the definition of need and definition of solution steps, and this stage is
complete (refer to Exhibit 3-3). The definition stage took all of maybe an hour to complete.
The next step is for the office manager’s assistant to place the order. The assistant prepares a
purchase order that is faxed to the agency’s regular office supply dealer. The assistant follows up with an
email message to the dealer’s customer service rep that handles the ad agency account. The message
verifies the unusual quantity of the particular item, as the supplier is likely to notice something out of the
ordinary routine. That’s the extent of the selection stage.
Let us say that the dealer makes its own deliveries. Three days after the order was placed, the deli-
very van shows up and drops off the supplies. The driver, along with the office manager’s assistant, checks
the packing list against the purchase order. The assistant signs off and the delivery stage is complete.
In the endgame, the invoice from the dealer is received and the agency’s accountant pays the bill.
Perhaps the dealer’s customer service rep e-mails the office manager’s assistant and checks to
see whether the order was received with no problems. Perhaps the service rep also checks quickly to
verify that no changes in procedure are expected for the next month’s order.
The office manager may make a cursory evaluation of the process to verify that the value received
was satisfactory. If a problem has occurred during this process, the office manager will pay more atten-
tion to the evaluation. Some problems that might occur include an increase in prices, a slow delivery, the
delivery of the wrong items, the back ordering of some crucial items on the order, or a churlish attitude
from the service people. Any one of these may cause the office manager to try to rectify the situation or
to reopen the search for a new supplier.
Discussion of Examples
A few key points need to be highlighted in the straight rebuy example. Notice that the ad agency
did not actually need the supplies at the time when the office manager determined an order needed
to be placed. Their need was for information on what supplies they were going to need in the
coming month.
Notice, too, that a selection of supplier was made very quickly: The office manager deter-
mined, almost unconsciously, that the agency would use its regular dealer. Again, at that point,
the agency does not actually need the supplies; it needed only to have a reliable supplier chosen
and an order easily placed by the end of this stage. In a straight rebuy, this part of the process is
almost trivial, unless something has happened to cause the office manager to re-evaluate whether
the choice of supplier should be reopened.
At the point in the process where the order was delivered, the agency still had not reached a
point where it actually needed the supplies; rather its needs at this stage were on-time delivery, the
right products received, and the convenience of the transaction. After the order has been received,
Stage Result
Definition Recognized problem—supply inventory was low; departments specified what
supplies they would need in the next month
Selection Order placed with usual supplier
Deliver solution Order delivered by supplies dealer; order checked by driver and office manager
Endgame Supplies used; next month’s order set up.
EXHIBIT 3-5 Summary of the Straight Rebuy Example

Consider a value-added reseller (VAR) of computer systems. It comes to the realization that it wants to
improve its own sales and presale service operations. It finds that it is losing some customers to competi-
tors because the competitors provide better presale service. To complicate this problem, the competitors
seem to have controlled their costs to the point that they can offer superior service while charging lower
prices. Competitors are finding customers, qualifying them, and “getting in the door” before the VAR even
knows that an opportunity exists. At this point, the VAR has not determined what sort of solution to seek.
The next step for the VAR involves undertaking an analysis of its current sales and customer
service processes. With the help of a consultant, the VAR and the consultant arrive at the conclusion
that several processes would be improved with the installation of an automated sales and customer
management system. As part of his solution development services, the consultant has brought in a
business development person from a reputable supplier of software for automated sales and customer
management. A discussion with the business development person from the software supplier launches
the VAR into a new-task buying process to acquire such a system.
They begin this process by writing general specifications of the kind of system they are looking
for. The consultant and a missionary salesperson from the software supplier help them write this
specification. The consultant suggests several other companies that would also be good alternatives as
suppliers. These companies are contacted and asked to make proposals based on the specifications that
have been written. All potential suppliers ask the questions they feel are necessary for them to fully
assess the VAR’s situation. Three of the potential suppliers prepare detailed proposals and make presen-
tations to the VAR’s executives and several other managers within the organization.
The executives and the VAR’s information technology (IT) manager confer to select a supplier. In
their discussions, they discover that new selection criteria have arisen from some of the supplier
presentations. They revise their criteria and determine that they need more information from a couple of
the suppliers. After additional discussions with the suppliers, they finally select one supplier. It happens
to be the first supplier, who helped them write the specifications and request for proposal. After negoti-
ating the work and the terms, a deal is signed by executives for both the supplier and the VAR. The
technical team for the supplier begins talking at length with the future users of the system and begins
designing the system. Early versions of the system are tested with users and demonstrated for the
VAR’s executives. Modifications are made; some renegotiation of features and price results. First
modules of the new system are installed, and the first batch of users is trained. They begin using the
system, with mixed results. The supplier fixes some bugs and provides some additional training.
Meanwhile, the users are becoming more proficient—some of the problems take care of themselves.
Over the next six months, the VAR’s IT manager and the sales vice president begin to discuss how
well the system is working. A sales assistant collects some evaluative information on system perfor-
mance. The vice president and the IT manager generally conclude that they like the system, that they
would have done a few things differently, and that they need more modules. Meanwhile the system sup-
plier’s sales team has been helping the VAR evaluate the system. They suggest some improvements and
introduce the vice president and the IT manager to new modules that have been developed in the time
during which the system was installed. It is some of these new modules that the vice president and the IT
manager suggest to the VAR’s CEO for improving the automated system.
EXHIBIT 3-6 New Task Example: Acquiring Automated Sales and Customer Management System
all the actions in the endgame reinforced the routinization of the transaction and even progressed
to reselling the job. The needs of the organization during this stage were the availability and
usefulness of the office supplies, as well as reassurance that the same thing will happen in the
future. Note that it was during this stage that the actual need for the products was realized. It was
at this stage, too, that the price of the order was actually realized.
A summary of the process for the straight rebuy is shown in Exhibit 3-5.
Let us contrast the preceding process with the second example, shown in Exhibit 3-6. The
example is of a VAR acquiring a new computer system, representative of how the process might
flow in a new task buying situation. The buying center took more time and effort throughout the
whole process than was taken for the straight rebuy. In fact, the buying center itself was larger and
involved people higher in the organization than were involved in the straight rebuy. The individual
stages and steps did not occur in a stepwise fashion. While there was a general flow, the steps tended
to recycle and repeat to a certain extent. For instance, the analysis of sales and service processes
that occurred in the solution definition step probably further refined the definition of the organiza-
tion’s problem. When the selection team entered its initial deliberations on the selection of the
supplier, they discovered new criteria to consider, which sent them back to the solution definition
step and took them through more information search on the suppliers.
One feature of this process that stands out is the amount of time and effort that transpire
between the time a contract is signed and the delivery of the “final” product (Exhibit 3-3). It
might be argued that there is no final delivery as such; the endgame stage overlaps and flows into
the early process stage of the next buying process. Another feature that stands out is the amount
of uncertainty at each step. The recycling that occurs does so in part because so much uncertainty
remains when the organization progresses from step to step. The organization uses much more
information in the whole process to try to combat the uncertainty. The organization also makes
use of a consultant in an attempt to help handle the complexity, newness, and uncertainty.
As occurred in the straight rebuy process, the VAR’s needs differ from step to step. The
organization does not need an actual product until it is well into the solution delivery activities.
In the problem definition step, the VAR needs a good definition of the problem it is trying to
solve. In the next step, it needs a good description of the parameters of a solution to its problem.
It needs assistance in defining those parameters. It needs further help in designating prospective
vendors. In the selection process itself, it needs good information, not only of the vendors’
capabilities but also other characteristics such as their flexibility, their reliability, and the ease of
working with them. The underlying need is the need for assurance that the vendor chosen will be
able to deliver the value desired.
In the step in which the solution is defined, the needs include a need for increasing detail
on how the new system will work and how it will help the VAR provide new value. This helps the
VAR start to redesign its processes to take advantage of the system and to begin to plan to adapt
and adopt. The VAR also needs further reassurance that it will get the desired value boost. As the
system gets closer to implementation, the VAR needs the system to perform to specifications.
Stage Result
Definition Recognized problem; analyzed with help of consultant; supplier helps write
specifications and RFP; suppliers submit proposals
Selection Discussions and negotiations with suppliers; supplier selected (the one who
helped initially); contract negotiated and signed
Deliver Solution System delivered in modules; tested; users trained; system modified,
redefined as needed
Endgame System operated; results observed and analyzed; discussions begin with
supplier for acquisition of new modules and upgrades
EXHIBIT 3-7 Summary of the New Task Example

Steps in Flow Organizational Needs Individual Needs

Define problem Clear, concise, tractable Information and time
Define solution Appropriate, affordable Design assistance
Acquire provider Choice, speed Information, assurance
Develop solution Speed, easy use Execution help
Install, test, train Ease of integration, speed Knowledge, comfort
Operate solution User-friendly Easy to maintain
End result Effective, low cost Recognition
Evaluate outcomes Information Communication, reward
EXHIBIT 3-8 Examples of Organizational and Individual Needs in the Buying

Decision Process
Further, the VAR needs ease of use, ease of adoption, training of its employees, and merging
with processes in place.
Exhibit 3-8 shows how needs progress through the stages of the buying decision process.
Notice that we have distinguished between the buying organization’s needs and the individual
needs of the members of the buying center. Notice, as well, that individual needs can be classi-
fied as personal needs or needs related to the individual’s role within the organization. In general,
the needs of the organization tend to be addressed by the product and service portions of the
supplier’s offering. The individual needs, both personal and role related, of the buying center
members are addressed mostly by the supplier’s efforts to build a relationship with the customer.
Transition of Buying Decision Process—New Task Becomes Rebuy

If the supplier’s marketing efforts are done well and have the desired effect, the new-task
buying situation for a particular customer will transition into some form of rebuy situation in
the next round, as illustrated in Exhibit 3-9. If the marketing effort fails for some reason—a
New Task
Definition Yes. Then

No. Then next purchase. . .
next purchase. . .
Rebuy
Selection
Definition
Is buyer
satisfied? Selection
Solution
Solution
delivery
delivery
Endgame
Endgame
EXHIBIT 3-9 Buying Decision Evolution

Modified Rebuy
Straight Rebuy
Definition
Definition Define changes

to process Selection
Selection
Satisfied,
Solution No differences Solution
delivery Small delivery
Dissatisfied
difference
Endgame yes
no Endgame
Is the buyer How different is

satisfied? the next situation?
Large
Evaluation in Endgame difference To New Task
EXHIBIT 3-10 More Buying Decision Evolution
mistake is made, a competitor performs better, or the customer’s situation changes drasti-
cally, for instance—the decision process may revert to an earlier stage or the customer may
decide to choose an alternative supplier. Exhibit 3-10 shows such contingencies as having a
recycling effect in the process. The supplier then has to change its approach, determining
what stage the decision process is now in, and looking for ways to provide value to the
customer at that stage.
Influences that Shape the Buying Decision Process

The preceding discussion described the effect of familiarity on the nature of the process. Also
emphasized was the effect of the supplier’s marketing efforts, particularly in the early stages of
the buying process. Other factors that similarly affect the nature and flow of the decision
process are the complexity of the problem and solution, the risk aversion of the decision
makers and influencers, the importance of the decision (related to the importance of the
problem), and the speed with which the solution needs to be in place. Complexity tends to
lengthen the process. Importance and risk aversion tend to make the process proceed with
more rigor or care and tend to involve people higher in the organizational hierarchy. A require-
ment for speed, of course, tends to work against rigor and care and tends to reduce the scope
of investigation.
As has been noted, a business marketer must fully recognize the impact of joint decision
making in the buying center. The ability of the supplier to influence each of these decision
makers requires recognition not only of the rational facets of the process but also of the com-
plexity of center members’ simultaneous but individual influence in the process. Just as different
ingredients in a recipe interact with each other throughout the baking process, the interaction
among members of the buying center is a continuous process.
As individual members of the buying center influence the decision, they are guided not by
the classical decision process but by conventions related to the organization. These may include
• the characteristics/corporate culture of the firm,
• the degree of risk aversion present in the culture,
• the reward system in place at the time of the decision, and
• the amount of vertical and horizontal management involvement.
In addition to these organizational conventions, the social dynamics of the situation will
play a large role in the decision process. Missionary sellers can find themselves in the center of a
conflict internal to the customer. This can be a disaster or an opportunity for the seller. The
missionary seller can play roles as a communicator, a boundary person, diplomat, and a liaison
between different customer interests. Treating these roles with respect can gain the trust and con-
fidence of the various customer stakeholders. All require a marketer who understands the inter-
personal dynamics of the situation and what each participant defines as a win. Individuals in
these roles are influenced by several factors. Individuals within the buying center may be poli-
ticking as they plan for their own advancement and/or operating in a framework neither entirely
rational nor beneficial to the organization as a whole.
OTHER ORGANIZATIONAL INFLUENCES

The mission, goals, and objectives of an organization determine its attitude toward many pro-
jects. Policies and procedures are created to reinforce those goals and objectives and impact
the organizational structure. The degree to which an organization is innovative or bureaucratic,
dynamic or static, risk accepting or risk averse impacts business decisions. If the marketer’s goal
is to enlist a customer as partner in a new development, the customer organization should be one
that rewards innovation and leadership. Certainly this should be one of the considerations, and a
possible segmentation variable (Chapter 7), in selecting which customer in an oligopolistic
market would be the best candidate to approach with new ways of doing things.
OTHER INTERPERSONAL AND INDIVIDUAL INFLUENCES

Individuals in organizations react to situations with the same belief systems as in their private
lives. Though in different roles, personality types and individual preferences will influence
decision making. Customer reactions to authority and status, though not “rational,” may be per-
fectly human. Understanding aspects of social styles and human relationships can significantly
contribute to the persuasiveness of a marketer’s position.
An individual’s age, income, education, and job position all contribute to attitude. Personal
assessments regarding risk and beliefs about how things are supposed to be done can overshadow
the most logical and rational decision process. The personal assessment by the participants in the
decision process, both the buyers and the sellers, have a greater influence on the decision than
product and price.
IMPLICATIONS FOR BUSINESS MARKETING

Recognizing the concurrent nature of the decision process, the business marketer can influence each
step to enhance the supplier’s position relative to the competition. The continuous relationship
between the supplier and the customer should contribute to the supplier’s knowledge of where the
customer’s market is going and, within that market, where the customer sees its role. This provides
insight into possible new product development efforts by the customer. This “need recognition” by
the customer is an opportunity for the supplier to place information about its new products and
technologies into the decision mix. As buying center individuals develop the initial general need
description, they usually are not aligned with one type of solution or technology. The business
marketer should participate with the buying center to influence the process. The added-value
features and attributes of the marketer’s offering and its suitability for the buyer’s needs should be
presented to individuals in the buying center in a way tailored to their individual focus. If customers
are considering a major investment in a new facility, they may have concerns about financing the
project and, as with any major facilities investment, be concerned about obsolescence. The finance
professionals in the buying center should be approached with offering attributes that appeal to their
needs, while manufacturing management should be counseled about the long-term flexibility of the
facilities.
The business marketer must simultaneously appeal to all levels and disciplines in the
buying center. It is not unusual for suppliers to jointly develop product specifications with
customers. This is advantageous to both the customer and the supplier. The customer gets a com-
ponent or service that is specifically tailored to its needs, often unique in the market and quite
possibly a competitive advantage. The supplier gains from the development of the tailored
product, both technically and through the enhanced relationship with the customer. The
enhanced relationship can demonstrate not only a financial investment by the supplier in the
business of the customer but also an emotional one. Competition is locked out, at least initially,
from the business opportunity. If the supplier has a distinctive competence that is prominent in
the offering, the competition may decide to not even pursue the business.
THE VARIABILITY OF RATIONAL BUYING DECISIONS

Many texts and training sources have proposed that business selling is primarily technical
selling. A business presents logical benefits of its product relative to the competition’s; and, pro-
vided its product is better, its product is selected. This is simplistic—nice in theory. In reality, as
can be seen from this discussion so far, the business buying decision process has many elements
of consumer decision making in it. Humans still make the decisions, so the decisions are still
subject to many of the factors that are involved in consumer buying decisions.
Human Factors in Business Decisions

When human factors are involved, an entirely objective decision may not be possible. With this
in mind, what can be said about the traditional stepwise process?
• Objective means are used to narrow choices. In many instances, several suppliers will be
completely capable of providing the basic need of the organization. There will be a select
group of suppliers, however, that match the cultural, interpersonal, value, and relationship
needs of the organization.
• Suppliers that recognize the cultural, interpersonal, value, and relationship needs of the
organization are more likely to be the “in” suppliers, favored by more members of the
buying center, than those who rely merely on the capabilities and features of their core
product. Members of the buying center will be more comfortable and receptive to a supplying
organization they believe has their best interests (their organization’s and their own) in
mind, as well as selling a product.
• A review of the facts is often done because the cultural process says it is supposed to be
done. There is safety in having made a decision in a conventional way. Members of the
buying center can always say, “But I did it the way I was supposed to.”
• Facts are arranged to justify the decision that individuals in the buying center want to
make. As decision makers, they are influenced by many intangible factors. Why do we
think they can make a decision without regard to those influences? Why should they?
• People seek reinforcement for their beliefs in every factor that is presented to them. It is
human nature to want to be right. Individuals want what they already believe to be true. In
consumer buying, this is acceptable. In business buying, there is a need for rational justifi-
cation to narrow choices and serve as a backup to decisions.
Mutual Dependence and Customer Loyalty

While not completely irrational—the needs of the organization must be satisfied—business buy-
ing decisions also must satisfy the members of the buying center. Marketers can work hand in
hand with a customer. Ideally, the goal is to create a mutually rewarding relationship in which the
customer becomes dependent on the solution or system rather than on just the core product.
The focus is to create customer loyalty. This can make it expensive for the customer to change to
another supplier. This investment is mutual and visible in a number of ways:
• Long-term contracts. As in any relationship, long-term commitments increase both the risk
and the reward for the parties involved. The reduced uncertainty of long-term commit-
ments makes it possible to better utilize resources for both organizations.
• Financial and emotional investment by both the selling organization and the buying
organization in the success of the effort. When the supplier and the customer have mutual
financial interests that favor the success of their cooperation (not to be confused with any
arrangements that may be termed illegal—see Chapter 4), there is more motivation to
continue the relationship through the difficult times. In addition, the relationships among
individuals in each organization develop an emotional investment in the success of
“members of the team.”
• Organizational relationships are built on commitment; personal relationships are built on
trust.12 Involvement with the customer in research and development effort contributes to
the organizational display of commitment. Trust in the process is built by the individual
interpersonal relationships. The relationship aspects of selling are further examined in
Chapter 12.
A Brief Psychology of this Process

Like any managerial decision, decisions made in the supplier selection process are made with
a degree of uncertainty. They must be. For a decision to be made with absolute certainty, all
rational details and rational outcomes must be known. If these factors are known, the decision
can be made by a series of binomial choices—a computer program—thus not requiring atten-
tion of management judgment or intuition.13 Simon made the observation that decisions are
made by “bounded rationality.”14 This model states that decision makers do not know all
possible outcomes or payoffs and have limited motivation to search for additional alternatives,
opting for the first alternative that meets the minimum standard of performance. This can
lead to satisfactory, but not necessarily optimum decisions. Simon called this “satisficing”
behavior.
In the buying center, behavior that reflects this thinking would lead the marketer to
believe that being the first supplier with a plausible offering may be sufficient to win the
business. Satisficing can be seen as the first step beyond core product offerings, but experi-
enced marketers know this often is not enough to capture business, let alone create a lasting
relationship. While being first to market is often cited as a good positioning strategy,
marketers interested in maximizing the value offering should look for optimal rather than
sufficient positioning.
Sherlock states that customers form a value image associated with Value image is the total
supplier alternatives.15 This image is the sum total of all impressions and of all impressions that a
experiences that the buyer has of the supplier, whether or not pertinent to customer has of the firm.
It is a very powerful
the current buying situation. These impressions act at the individual, motivator—perhaps
organizational, and personal levels. This value imaging is not unlike because so much of an
conscious product or market positioning in that it is entirely in the individual’s beliefs about
customer’s mind. The value image is formed by the customer and may a firm, situation, or
have little to do with the actual product or service. Marketers should occurrence are based on
forgotten experiences.
actively seek to maximize (not satisfice!) positive value image in the While the concept of
“mind” of the customer. value image is more
obvious in consumer
markets, it has
APPLICATION IN BUSINESS RELATIONSHIPS So how do we apply application in
this in business marketing? Individuals have attitudes and beliefs about business-to-business
a number of things. Images and symbols are associated in memories markets as well.
with values and experiences: a pink bunny beating a drum—batteries;16
a red circle with white script writing—a soft drink; a gecko in a heated conversation—auto
insurance. These symbols represent whatever value, positive or negative, customers associate
with those images and the type of outcomes they expect from those values. People relate to the
roles that others play in the same way. Customers, the members of the buying center, have asso-
ciations with the company, products, and marketing and sales professionals—all aspects
the supplier brings to the table in the process of marketing. These associations create powerful
expectations of behavior. In some instances, these are positive associations that aid the marketing
effort; while in others, they may unknowingly work against the marketer. Unfortunately, they
are difficult to generalize. We cannot make a table of five things to do, in typical business book
style, to be successful. This cake has no recipe.17
As an example of rationalized decision making that seeks to satisfy more than core needs,
say that you are a junior in college about to purchase your first new car. You have saved a long
time, working two part-time jobs to get through school and still be able to afford this new car.
You can purchase a small, economical (boring) car that, financially, is the logical choice for a
student with at least one year of college remaining; or you can purchase that GT Convertible
(exciting) that you would, “logically,” keep beyond your graduation, eliminating the need to sell
the economical car and buy another as a step up when you graduate. Which choice will you
make? Either can be made to sound logical and rational.
This same type of rationalized decision making occurs in business buying decisions. In a
business context, suppose you are the information systems manager for a start-up company.
You must decide between Lenovo desktop computers for your employees or lower-cost clones
assembled by a local reseller. Depending on your attitude toward risk and your need for quality
assurance, after-purchase support, and ability to upgrade, you could, logically, select either
supplier.
Lenovo rationale: Lenovo has been in business for a long time and will continue to be able
to support us. Their product may not be the latest, hottest computer for the best price, but
their quality and reliability make them the right choice. They better fit the image of the
type of company we want to do business with, and we cannot get hurt choosing Lenovo.
Besides, upgrading is not important since technology changes so fast we will not want to
bother to upgrade old computers but will purchase new ones when necessary.
Local reseller rationale: Fast Freddie Computers (FFC) is a local business on the
cutting edge of new systems integration. FFC can pick the best components from many
suppliers to assemble a system tailored to our individual needs. They are local, in our
community, and more able to understand the needs of a small start-up company.
Reliability and service will not be an issue because they are nearby and will be on-site
immediately if there are any problems. We will be a big customer to FFC, while Lenovo
will not know we exist. Besides, they will be able to upgrade our computers with the
latest technology at a lower cost than purchasing new units.
How do marketers reconcile this view of decision making with what is supposed to be a
logical business approach? First, recognize that a good marketing plan and a good business
marketer assist the buying center through the decision process. The marketer should recognize
the steps previously discussed as components of the decision that can be influenced. The
marketer that fully understands the nature of the customer’s business, his own organization’s
supply capabilities, and the role he can play will seek opportunities to enhance his image with
respect to the needs of the customer at every possible opportunity. All of these factors combine
to create “the way the customer buys.” It is impossible to standardize these factors into an eight-
step routine decision process.

The process by which organizations select suppliers is difficult to generalize. As a result,
learning the way a particular customer buys is critical to the business marketer. The differ-
ences in consumer and business buying models have been discussed, with emphasis on the
broad array of different types of decisions occurring simultaneously in the buying center. The
marketer should address the different aspects of value sought by the different members of the
buying center. Only in this way can the marketer provide superior value to the customer’s
entire organization.
Perhaps the most important observation to come out of this chapter is the importance for
the business marketer’s organization to be involved in the early portion of the customer’s buying
decision process. As the customer develops the general statement of need, the business marketer
should be of assistance in offering alternatives and pointing out the supplier’s unique values. The
development of a specification should be a joint effort of the supplier and the buying center.
When complete, the supplier’s offering should be a natural fit with the specification and the
organization’s needs.
The development of a specification by the customer is often a method used by the cus-
tomer to reduce differences between potential suppliers. The ability of the supplier to influence
the specification is attributable in many ways to the expected value that the customer believes
will be provided by the supplying firm. These expectations are the result of images and beliefs
formed about potential suppliers long before this actual business episode.
Customers rely on suppliers for assistance throughout their design, development, and spec-
ification process. Particularly with new technologies, customers need coaching as to how to get
maximum value from the supplier’s products. A strong alliance with major suppliers to ensure
that their best interests are protected is of value to customers. Suppliers do not become significant
to the customer without forging these alliances. As we hope to demonstrate throughout this book,
mutual trust, respect, and professionalism are essential to the business-to-business relationship.
This chapter has shown that understanding the buying center and the buying decision
process is key to building customer relationships. In the chapters that follow, we discuss how
to learn about customers and the business environment and how to turn this knowledge into
executable strategy. A key component of this strategy focuses on meeting customer needs
through the development of relationships with customers.
Key Terms
buying center 56 process flow model 60 stakeholders 56
internal brand 62 request for proposal (RFP) 63 straight rebuy 61
modified rebuy 61 request for quotation value image 75
new task 61 (RFQ) 63

1. Contrast the consumer buying decision process 11. What types of purchases are likely to experience
with the organizational buying process. extensive activity occurring in the following
2. What is a buying center? portions of the buying decision process model?
3. What organizations or departments are usually a. definition stage
considered to be in a buying center? b. selection stage
4. How does the buying center change for different c. solution delivery stage
types of purchases (straight rebuy, modified rebuy, d. endgame stage
new task)? 12. What types of purchases and purchase decisions
5. Relate the value chain discussed in Chapter 2 with lend themselves to the Internet or other Web-based
the buying center. How can they be intertwined to decision strategies?
provide value for the customer? 13. An influential member of the buying center has
6. Discuss how an internal culture within a buying confided to a supplier’s representative that she is
center could work against rational, quantifiable anxious to “show her stuff” and move up in her
decision making but results in satisfying decision organization. Into what part of the individual needs
outcomes. description does the statement seem to fit? When is
7. Compare two or three internal cultures that you have such a request likely to occur?
read about (or experienced) and their impact in con- 14. Your company has been a reliable and trusted
sumer decision making and business decision making. supplier of somewhat generic, frequently pur-
8. Why is it difficult to generalize the process of busi- chased hardware items. One of your largest regular
ness buying behavior? customers has announced that all purchases of
9. Relate the buying process model to organizational hardware and supplies will be subject to an online
and individual needs. How do they change through bidding service. Your company has a choice of
the process? either submitting to the bidding system or lowering
10. Under what type of purchase decision is an your current prices by 5 percent (thus avoiding
existing supplier at the greatest risk—new task; exposure to the online process). How would you
modified rebuy; or routine purchase? respond?
Endnotes
1. David Welch, “E-Marketplace: Covisint,” 15. Paul Sherlock, Rethinking Business to Business
Business Week Online (June 5, 2000). Marketing (New York, The Free Press, 1991),
2. Christopher Koch, “Motor City Shakeup—The p. 24.
Future of E-Commerce,” Darwin Magazine 16. The “Eveready Energizer Bunny” advertising
(January 2002), http://www.darwinmag.com/ campaign was named as one of the top ten
read/010102/shakeup.html. commercials in 1990 by Video Storyboard
3. Welch, “E-Marketplace.” Tests Inc. Ironically, a full 40 percent of those
4. John Waranuiak, Johnson Controls, as quoted in who selected the ad as an outstanding commer-
Motor City Shakeup – The Future of E-Commerce, cial thought it was for Duracell—Eveready’s
http://www.darwinmag.com/read/010102/shakeup. strongest competitor. Duracell’s previous posi-
html. tioning (value image?) was able to negate the
5. Dawn Kawamoto, “Covisint to Sell Auction commercial’s popularity! [As cited by Regis
Business (sic),” CNET News.Com (December McKenna, “Marketing Is Everything,”
2003, 31), http://news.com.com/2102-1017_ Harvard Business Review (January–February
3-5134296.html. 1991)]
6. Jim Ericson, “Compuware Buys Last of Covisint,” 17. In Rethinking Business-to-Business Marketing,
Line56 E-Business Executive Daily (February 6, Sherlock applies the principles of Carl Jung to
2004), http://www.line56.com ArticleID=5357. the decision process. Sherlock observes that the
7. Jewel Gopwani, “Compuware renews (sic) conscious mind (the area where we think we
Covisint,” Detroit Free Press (September 3, 2004). function); combined with the personal uncon-
8. Anonymous, “Commerce One Inc.: Software scious (forgotten personal experience); and of
Concern Tells SEC It Expects Its Business to the collective unconscious (where our inherent
Close,” Wall Street Journal (Eastern Edition) nature combines with archetypical roles—
(September 24, 2004), p. B.7. mother, child, hero, seller, etc.) with its power
9. David N. Burt, Donald W. Dobler, and Stephen L. and drive are the three regions of the mind
Startling, World Class Supply Management: The responsible for decision making. Sherlock
Key to Supply Chain Management, 7th ed. (New emphasizes that this unconscious-driven deci-
York: McGraw-Hill/Irwin, 2003), pp. 29–30. sion process is justified by an after-the-fact
10. Ibid., Chapter 6. rationalization through the use of the classical
11. Pete Engardio and Bruce Einhorn, “Outsourcing decision model.
Innovation,” Business Week (March 21, 2005), For example, our conscious mind is where we
pp. 84–94. think we make willful decisions, where we have
12. Das Narayandas and V. Kasturi Rangan, willpower in decisions such as dieting, studying
“Building and Sustaining Buyer-Seller rather than partying, saving rather than spending.
Relationships in Mature Industrial Markets,” With willpower, we are not utilizing all of our
Journal of Marketing, 68(3) (2004 July), p. 63. capabilities and resources, which is why we are
13. Richard R. Ritte and Ray G. Funkhouser, The often unsuccessful in these pursuits. Our belief
Ropes to Skip and the Ropes to Know, 3rd ed. systems, created by our experiences and stored in
(New York: John Wiley & Sons, 1987), p. 66. less-than-conscious parts of our minds, exert
14. Herbert A. Simon, “Rational Decision Making tremendous influence on our decision process.
in Business Organizations,” American Economic To deny this would be to deny many of the moti-
Review (September 1979), pp. 493–512. vational aspects of buyer behavior.
Chapter 4
The Legal and Regulatory

Environment
OVERVIEW
The impact of law and politics on business is usually greater than imagined by
students and consumers. Regulations impact many business decisions and can
define the nature and positioning of competition. Patents and intellectual property
laws are major considerations in many business models and a factor to consider in
the formation of partnerships and value networks. Beyond short-term price
decisions that impact the supplier–customer relationship, business regulation
defines the extent of many activities between supply chain members.
In this chapter, we examine the logic of legal restraints applied to business-to-
business activities in a market-driven economic system and introduce the primary
legislative controls on business-to-business markets. Many of these regulations
overlap, support, or clarify prior regulations. To assist you in understanding the
regulatory environment, we discuss the combined focus of these regulations with a
review of the activities they regulate.
One of the most complicated and easily misunderstood issues in marketing
is the legal environment. Contributing to this confusion is that, like many pieces
of legislation, the laws and acts are subject to interpretation. The discussion that
follows does not attempt to legally interpret legislation beyond that which has
already been done in marketing and legal literature. The focus of this chapter is
to define the parameters of the legal environment that business-to-business
marketers face each day. We believe that it is more important to understand
when a business practice can be considered illegal rather than to be able to state
specifically which act(s) the practice is governed by. Within this context, we
demonstrate the legal issues and offer some insight into antitrust and price
discrimination law enforcement. While most of this chapter references U.S. law,
the principles of business legislation are quite common in most post-
industrialized nations.
79
80 Chapter 4 • The Legal and Regulatory Environment
Example: Your Plight as Owner of Pacific Drives

Suppose that you are the owner of Pacific Drives, a small computer hard drive company in a
Northwestern state. Your potential customers are major producers of laptop computers. Your two largest
competitors, DynaDrive Peripherals and Spin Technologies, are large companies with extensive product
lines, established customers, and well-developed and efficient market access. When you attempt to
contract the shipping of your products to your customers, you find that the major logistics provider with
the best service in your area will not ship your products because its nationwide contract with DynaDrive
Peripherals awards it 100 percent of the DynaDrive shipping business but only if it does not ship any
products of DynaDrive competitors. As a result, you are forced to use a piece-meal collection of regional
shippers with neither the reputation nor the market reach to completely satisfy your needs. Your
business faces slow and costly delivery service, putting you at a competitive disadvantage in the market-
place. As e-commerce grows, however, you find an alternative to your present way of doing business.
You begin to offer your products directly to customers over the Internet. In cooperation with several
other small technology firms whose products complement yours, you start an Internet-based trading site.
Your customers and the customers of your cooperating partners can access the site once a business
relationship is established with one of the primary partners.1 You make arrangements with a worldwide
parcel service to handle all of your deliveries and other logistics needs. It looks like your problems are
solved, until your Internet service provider (ISP) refuses to provide secure transmission capabilities
for your ordering system. It seems that your ISP is a division of a conglomerate that is also the parent
company of Spin Technologies. The parent company thinks the Internet operations are a good idea and
wants to use it, so they are going to use their leverage to keep you out of the market.
LEARNING OBJECTIVES
䊏 Understand the primary goals and objectives of business legislation and its implications in a
market economy.
䊏 Understand the basic U.S. antitrust and business regulatory legislative acts.
䊏 Gain a sense of the interaction of legislation and the activities it restricts or prohibits.
䊏 Recognize the business-to-business marketing implications and nuances of those restrictions.
䊏 Recognize the defining role that legislation can have with regards to intricate and multiple
supply chain roles.

䊏 Understand the methods and variability in enforcement of the acts.
䊏 Understand the substantiality test in enforcement decisions.
䊏 Understand specific market issues related to price discrimination.
䊏 Be introduced to intellectual property protection, licensing, and the relationship to antitrust laws.
INTRODUCTION
Does the treatment of Pacific Drives in this opening case sound like a fair scenario? No? Why
not? The logistics provider, by giving a quantity discount to DynaDrive, is legally providing a
quantity discount to one of its larger customers, and the ISP cannot be expected to provide
service features to a customer that competes with its parent company. In fact, this fictitious
example contains two restraints of trade that are violations of antitrust law. First, while the logistics
provider can give quantity discounts to large customers, the discounts must be justified by the
Chapter 4 • The Legal and Regulatory Environment 81
cost savings associated with the economies of scale and the contract cannot shut out the
customer’s competitors from using the same logistics provider. The second violation is exclusive
dealing, committed by the ISP. Companies cannot selectively restrict access to products and
services in a way that lessens competition in the market.
In most situations, it is not likely that management with intentional harm or malice as a
goal violates business legislation. Good marketers want to make the best deals for their employers
and customers. Marketing managers, who daily make decisions regarding price and other
components of total offerings to customers, must have a working knowledge of the potential
pitfalls, traps, and nuances of antitrust and price discrimination laws. Application of this working
knowledge not only avoids embarrassing situations with customers but, through the use of a
proactive approach to avoid legal entanglements, can enhance the customer relationship.
BUSINESS REGULATION IN A FREE MARKET

Though the United States has what is called a “free market” economy, there are some necessary
restrictions that must be placed on business to assure equal access to the market by all competi-
tors and protect consumers in the market. As a result, business-related legislation has been
focused in three areas:
1. Protect companies from each other. While competition is one of the fundamental strengths
of a free market system, some organizations are much more able to compete than others. Smaller
companies are often at risk of being overpowered by large companies attempting to dominate mar-
kets. By using its size and market presence, a large organization, acting as a predator, can leverage
its impact in the market to make it very difficult for a smaller company to compete. Laws that pre-
vent unfair pricing or restricted access to markets are often aimed at just such predatory situations.
2. Protect consumers. Without business legislation, some firms would misrepresent their
products, lie or bait in their advertising, deceive in their packaging, or provide unsafe products.
Unfair consumer practices, often highly visible to consumers and thus enforcers that answer to
them, have been a major area of enforcement. Generally, business laws attempt to maximize
choice to the consumer while providing all businesses with maximum access to markets.
3. Protect the Interests of Society. A market-driven economy works most effectively for its
citizens when all businesses are on a level playing field. Equal opportunity for businesses,
regardless of their size, enhances consumer choice in the market. Additionally, most new legis-
lation has focused on holding businesses responsible for the social and environmental cost asso-
ciated with their processes or products. Thus, environmental legislation has significant impact on
the conduct of business.
ENFORCEMENT RESPONSIBILITIES
At the federal level, enforcement of business law is usually the responsibility of a federal admin-
istrative agency or of the Justice Department in the executive branch of the U.S. government.
Though many state-level agencies exist, their diversity puts them beyond the scope of this book.
Administrative agencies are neither legislative nor judicial bodies.2 While some agencies reside
in the executive office of the president of the United States (e.g., the Department of Health and
Human Services and the Department of Agriculture), most are independent agencies like the
Consumer Product Safety Commission (CPSC) and the Federal Trade Commission (FTC). The
president can exercise a degree of control through his authority to appoint agency administrators,
though a major difference between executive agencies and independent agencies is the term over
which administrators serve. Independent agency administrators serve for a fixed term whose
period is staggered with the president’s term, reducing the influence of any one presidential term
and thus reducing executive branch influence.3
It is very difficult to generalize about enforcement of business legislation because enforce-
ment is often the choice of an agency or the Justice Department. Though traditional patterns have
blurred in recent years, enforcement priorities can change with the change of a presidential
administration or political party in power in Congress. As different candidates are elected to
office and use the appointment powers of the office, current officials are replaced. The agenda
and priorities of the new officials may place emphasis on different political and social issues.
Thus, the successful and astute marketer has an up-to-date working knowledge of the legal
aspects of marketing and the current attitude of enforcement agencies.
Injunctions are THE LEGISLATIVE ACTS THAT AFFECT MARKETING

agreements—“equitable
remedies”—that can be This section summarizes major legislation in the United States related to
imposed by the courts to business-to-business marketing situations. The acts themselves and their primary
prevent, delay, or enjoin a
focus are summarized in Exhibit 4-1. Because of the interrelationship of these
particular activity.
laws, this summary is followed by a discussion of legal issues that do not always
Treble damages are three fall clearly within any one act.
times the actual loss
incurred by the injured
Sherman Antitrust Act (1890)
party as a result of a
violation of antitrust law. The Sherman Antitrust Act was the first to prohibit “monopolies or attempts to
Damages are awarded as
monopolize” and “contracts, combinations, or conspiracies in restraint of trade”
compensation to the
injured party. The injured in interstate or foreign commerce. The Sherman Act provides for injunctions to
party must prevail in a restrain activities found to be in violation and allows anyone injured to recover, in
civil court. a civil action, treble damages. Sherman Act jurisdiction is not strictly limited to
Statute Focus
Sherman Antitrust Act (1890) Monopolies, attempts to monopolize. Provided for both civil
and criminal penalties. Broad coverage was base for later
legislation.
Clayton Act (1914) Tying agreements, interlocking directorates, intercorporate
stockholding. Provides for civil penalties only.
Federal Trade Commission Act (1914) Broadly defined unfair competition or competitive situations.
Robinson-Patman Act (1936) 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.
Celler-Kefauver Act (1950) The “Antimerger Act.” Broadened power to prevent
acquisitions where they may substantially impact
competition.
Consumer Goods Pricing Act (1975) Repealed Miller-Tydings Act (1937) which had allowed
“fair trade,” a form of price maintenance.
EXHIBIT 4-1 Summary of Antitrust Acts and Their Focus

interstate commerce but includes intrastate activities that have a substantial Tying contracts are
impact on interstate commerce. contracts that require the
purchase of unnecessary or
The Sherman Act provides for criminal felony penalties for both individ- ancillary goods or services
uals and corporations. Corporations are subject to substantial fines and potential “in a bundle” to get the
prohibitions on certain market activities and individuals may be fined as well as offering really desired.
imprisoned for up to three years.4 Example: A manufacturer
of office copiers leases the
copier for a below market-
Clayton Act (1914) value rate, but the
The Clayton Act, passed in 1914, supplemented the Sherman Act by prohibiting customer must purchase all
paper and supplies from
certain specific practices before they advance to the definition of a restraint of the manufacturer at
trade as held by the Sherman Act. Clayton includes limitations on tying inflated prices.
contracts, exclusive dealing, intercorporate stockholding, interlocking
directorates, and mergers in which competition may be substantially reduced. Exclusive dealing occurs
when a seller sells to only
The Clayton Act also provides that corporate officers and officials may be held one buyer in a region or
individually responsible for violations. The Clayton Act, however, can be territory such that
applied only to transactions and persons engaged in interstate commerce, rather competition is lessened.
than the more broadly defined jurisdiction of affecting interstate commerce as Example: A manufacturer
under the Sherman Act. restricts access to its
products via only one
While the Clayton Act added teeth to Sherman, it specifically exempted distributor and prevents
labor and agricultural organizations from antitrust legislation.5 Though the the distributor from
Clayton Act has no criminal penalties specified, intentional price discrimination carrying competitive
carries criminal penalties under other acts. offerings. Both exclusive
dealing and tying
contracts are attempts to
Federal Trade Commission Act (1914) restrict buyers’ access to
The Federal Trade Commission was initially established by this Act to prevent competitive products. In
specific circumstances,
unfair methods of competition and deceptive practices. The FTC has powers to judgments about the
investigate and enforce the federal legislation already mentioned. Its powers legality of these situations
were broadened by the Wheeler-Lea Act (1938), which granted the FTC the often depends on the size
power to regulate unfair or deceptive practices whenever the public is being and market power of the
deceived, regardless of the competitive environment. Thus, the commission is firm attempting to limit
choice in the market.
charged with the duty of preventing “unfair methods of competition in com- Chapter 14 includes
merce and unfair or deceptive acts or practices in commerce.” In 1953, the U.S. further discussion of
Supreme Court further broadened and strengthened the power of the FTC exclusive distribution.
(FTC v. Motion Picture Advertising Service Co.) as follows:
Intercorporate
stockholding occurs
The unfair methods of competition which are condemned by. . . . the Act when one company
are not confined to those that were illegal at common law or that were controls the stock of
condemned by the Sherman Act. . . . It is also clear that the FTC Act was another company and
designed to supplement and bolster the Sherman Act and the Clayton Act through that ownership
exercises control such
to stop in their incipiency acts and practices which, when full blown, that trade is restrained.
would violate those Acts. (Italics added for emphasis).6
The real impact of this upon business marketers is to let the FTC address any kind of
restraint of trade, not just those that fall under the Sherman Act or Clayton Act. This allows
the FTC to keep up with the innovativeness of companies seeking new ways to restrain
trade.
Interlocking directorates A common pattern of enforcement by the FTC is to enter into consent
is the term applied to firms orders with potential violators to minimize the possibility of future violations.
that are in competition
with each other but have
Exhibit 4-2 provides an example of how consent orders are used to limit the
common members on their anticompetitive nature of mergers and acquisitions.
board of directors.
Companies faced with legal challenges from the FTC have an alternative to a court battle not unlike a plea
bargain between a prosecuting attorney and a defendant. This alternative, called a consent decree, is a
written agreement between the agency and the company. When this type of negotiated settlement is possible,
significant time and expense can be saved. These agreements are often used to alleviate FTC concerns that
arise when mergers and acquisitions might limit access to markets. By reaching an agreement, the company
involved can proceed with the intended acquisition in a timely manner. Consider the following examples.
Silicon Graphics and the FTC

Silicon Graphics, Inc. (SGI), provides 90 percent of the software used to produce three-dimensional high-
resolution graphics. This software has made possible the images for movies such as Jurassic Park,
Terminator 2, and similar high image-oriented movies. SGI acquired two of the three leading entertainment
graphics software firms. The FTC became concerned that, as a result of the acquisitions, SGI would no longer
support independent graphics software producers and might deny competitors access to the software of the
firms it was acquiring. Such actions by SGI could limit choices in the graphics software market as well as
make it more difficult for hardware suppliers to provide compatible equipment for the software market.
Without resolution of these concerns, the FTC would likely have challenged the acquisition. Under the con-
sent order, SGI agreed to maintain an open architecture for independent software developers and publish an
application interface to give other graphics software producers the capability to write software for SGI
workstations. SGI also agreed to assure that the acquired software could be run on hardware other than that
provided by SGI.
Boston Scientific and the FTC

Boston Scientific Corporation (BSC), a principal player in the market for intravascular ultrasound imaging
catheters (IVUS), intended to acquire its main competitor. The combination would give BSC 90 percent of the
IVUS catheter market. In addition to this acquisition, BSC was acquiring another firm that was considered to
be the only new competition in that market. To assuage FTC concerns, BSC proposed the licensing of a pack-
age of its patents and technologies and those of the acquired firms to Hewlett-Packard (now known as Agilent
Technologies) or another FTC-designated firm to help launch a strong competitor. The FTC added two require-
ments: (1) BSC must provide the licensee, for three years, with IVUS catheters and technical assistance to
obtain Food and Drug Administration approval of their own catheters, and (2) BSC cannot enter into any
exclusive contracts with manufacturers of IVUS imaging consoles (consoles necessary to use the catheters).
In other words, BSC was prevented from excluding any competitors from the market for other necessary
equipment and was required to help their licensee successfully enter the market.
As you can see, the FTC has the authority to act before a violation of law or restraint of trade
actually occurs. This power acts as an incentive to bring firms desiring mergers or acquisitions to
communicate with the FTC prior to actual acquisition or merger. The agency and the firm(s) agree to
create a mutually acceptable set of circumstances that will maintain a competitive marketplace.
EXHIBIT 4-2 Alternatives to Court-Imposed Remedies Source: “Antitrust Policy, an On-line

Resource Linking Economic Research, Policy and Cases,” Owen Graduate School of Management,
Vanderbilt University, http://www.antitrust.org
Robinson-Patman Act (1936)

The Robinson-Patman Act amended and strengthened portions of the Clayton Equality/proportionately
Act and also made it unlawful for a buyer to knowingly “induce or receive” equal terms means that a
a discriminatory price.7 Buyers as well as sellers could now be held liable for seller must provide
substantially equal offers
actions that violate antitrust laws. Particularly for large firms engaged in inter- to buyers in horizontal
state commerce, Robinson-Patman has been known as “the” price discrimi- competition with each
nation act. It specifically defines price discrimination as unlawful, subject to other. The offers may
certain clearly defined exceptions. Robinson-Patman also provides enforcing differ in specific
agencies with the right to limit quantity discounts, prohibit brokerage attributes, but must be
relatively equal in value.
allowances except to independent brokers, and prohibit promotional allowances The volume of business
or furnished services or facilities except when made available equally to all received from each buyer
participants. This equality can be defined as proportionately equal terms and may proportion the offers.
can be based on several factors.
Through the concept of proportionately equal terms as held by the Robinson-Patman Act,
price alone does not determine equality. The total offering, which may include financing,
inventory and delivery services, marketing assistance, and other factors, is considered in deter-
mining the total value in question.
Celler-Kefauver Act (1950)

Often referred to as the Antimerger Act, the Celler-Kefauver Act amended the Clayton Act and
broadened the power to prevent the acquisition of one company by another where the combination
may substantially impact competition.8 Even with this legislation, many business combinations
have occurred in recent years, such as BP-Amoco, Exxon-Mobil, and the Boeing acquisition of
McDonald Douglas. In each of these mergers, enforcement agencies ordered that certain portions
of one or both parties’ activities and holdings in specific markets be ceased or divested to avoid
any opportunity to monopolize the market.
Consumer Goods Pricing Act (1975)

The Consumer Goods Pricing Act (CGPA) repealed the Miller-Tydings Act, which had allowed
fair trade pricing of consumer goods. Fair trade was intended to protect small retailers (what we
might know today as small specialty boutiques) from the discounting by other retailers in the
same area as well as from the buying power of large chains. Independent retailers could feel con-
fident that they would not face price competition for the fair traded items. Many manufacturers
were content with this arrangement as it made it easier to control retail prices. This control was
considered necessary in positioning products as well as managing marketing channel margins.
Fair trade evolved into a form of resale price maintenance, which is further described later. While
the CGPA prohibits manufacturers from setting prices through their channels, a recent decision
by the U.S. Supreme Court allows manufacturers, in some circumstances, to set a minimum
price for their products.9 Not unlike the “free rider” provisions discussed later in this chapter,
manufacturers are expected to welcome this change. The ruling allows an opportunity to more
quickly recover costs of the development and training related to sophisticated products. This is
desirable to manufacturers that participate in markets with short life cycles. The ruling does not,
however, allow for retail price maintenance where pricing policies have the effect of reducing
competition.
Securities Laws
Complicated federal and state securities laws, beyond the scope of this book, are designed to pro-
tect the investing public, not business competitors and customers. Nevertheless, the effect of
securities laws on the way we conduct business is enormous. In brief, business people in com-
panies that have issued stock to outsiders cannot defraud the investing public and must
“disclose” important information about the company and its business.
From a marketer’s perspective, probably one of the most important provi-
The Silent period is a
period of several weeks sions of securities laws is what is known as the silent period. When a company
before a company IPO that is engaged in an initial public offering (IPO) there is a period of several weeks
blacks out any extraneous prior to the offering when the company and its executives cannot comment
or private information about the financial status of the organization nor its prospects for the future
about the company that
beyond that which is stated in the investors’ prospectus. The goal of the silent
may impact the initial
value of the stock. The period is to ensure that all potential investors have access to the same infor-
company assembles its mation, via the prospectus, about the company. “Inside” information about the
pertinent and relevant data company and its prospects is prohibited. Marketers must use caution in dis-
into a prospectus that is cussions with customers that they do not inadvertently violate this provision.
made available to
If you are involved with your company in an IPO or any issue of stock to
interested investors. The
silent period is another “the public,” you absolutely need the guidance of securities law professionals.
example of regulatory
efforts to maintain a level Sarbanes-Oxley Act and Its Offspring
playing field; this time
among investors in newly In 2002, The Sarbanes-Oxley Act introduced major changes in financial regu-
listed stocks. lation, mostly as a reaction to a number of major corporate accounting scandals,
An initial public offering including but not limited to Enron, Tyco International, and Worldcom (now part
is a company’s first issue of Verizon). Also known as the Public Company Accounting Reform and
of stock to the general Investor Protection Act of 2002,10 and commonly called “SOX,” the Act estab-
public. Prior to this point, lished the Public Company Accounting Oversight Board to oversee wide-
the company has usually
ranging new standards for all public company’s boards, management, and public
relied on private investors
and operational funding. accounting firms.
An IPO is usually a sign The advent of SOX inspired regulatory activity in several other industrialized
of success for a small nations. In Canada, “Bill 198,” known as the “Canadian Sarbanes-Oxley Act”
company. Prospects for (C-SOX), was passed in 2003; Australia has implemented “Corporate Law
the firm are usually
Economic Reform Program”11 (CLERP) in 2004; and the “Financial Instruments
described in a prospectus
that is available to the and Exchange Law” (J-SOX) was implemented in Japan in 2006. All of these bills
general public—the seek to re-establish public confidence in the financial activities of public corpo-
segment of investors the rations. Though not immediately apparent, the marketing impact of a lack of
firm wants to attract. public trust can be a serious positioning problem (Chapter 16 discusses Business
Ethics and Crisis Management).
Common law really is a
method of interpreting The Uniform Commercial Code
law. Judges interpret any
law based upon all case Some form of written document defines most business transactions. These
decisions already made documents may be as simple as the terms of sale of an individual purchase or
about the same issue.
may comprise many pages of conditions of the sale and rights and remedies of
This accumulation of
decisions, called the parties involved. The law that governs these contracts is either common law
precedence, was or the Uniform Commercial Code (UCC). The UCC is a standard set of laws
developed in England. that govern the contracts and associated case law. For clarity and uniformity,
most portions of the UCC have been adopted by all states except Louisiana. Business contracts,
particularly those concerning the sale of goods (UCC Article 2) across state lines, are assisted by
the consistent provisions of the UCC.
It has been our experience that most students will have only limited need for extensive
knowledge of contract law and, when necessary, will consult with legal professionals. Further
coverage of the UCC and contract law, beyond topical discussions in other portions of this text
(e.g., pricing and sales, Chapters 10 and 12), is left to business law courses.
BUSINESS LEGISLATION ISSUES

Marketers need a working knowledge of the combined nature and effect of business regulations.
Since the regulatory powers of the acts overlap and amend each other, the best way for business
marketers to approach this is with a discussion of the issues rather than the individual acts.
Intercorporate Stockholding
As already noted, intercorporate stockholding occurs when a company owns another company in
the same market or own shares of another company in the same market in an attempt to control
that company such that competition in the marketplace is reduced. It is important to emphasize
that ownership of more than one company that participates in a marketplace by a parent firm is
not, in and of itself, illegal. However, manipulating that ownership in a manner that reduces
choice and competition in the marketplace is considered a violation. Consider a manufacturer of
chemicals and plastics that has significantly large stock holdings in an automotive manufacturer
such that the purchases of chemicals and plastics by the automotive manufacturer can be influ-
enced. Applying this influence so that it is very difficult for any other chemical and plastics
company to be considered as a supplier would be a restraint of trade.
Interlocking Directorates
A company may attempt control of another firm by having members of its board of directors
serve as directors of the other company, a practice referred to as interlocking directorates.
Companies that participate (ostensibly, compete) in the same market cannot have common
directors such that actions could be influenced that would lessen competition between the
companies or in the markets in which they participate, either as buyer or seller. Important to
the particular situation is how enforcers define “the market.” “Market” may be region, market
segment, product line, or any factor in the competitive arena. Exhibit 4-3 provides an enforce-
ment example.
Price Maintenance
A manufacturer’s attempt to dictate the resale price of an item is called price maintenance and it
is specifically illegal. The problem usually arises in marketing channels, either at the wholesale
or at the retail level. Once an intermediary (wholesaler, retailer, etc.) purchases a product, it can
sell it at any price it wishes. Obviously, price is a part of the marketing mix and manufacturers
would like to control it. Oddly enough, this practice was legal at the retail level under the Miller-
Tydings Act (1937) until 1975 and was actually called fair trade! The CGPA discussed previously
eliminated this practice. In today’s market, suppliers may suggest or recommend pricing, but
this must not be interpreted as having coerced the reseller into maintaining that price. While
In the view of the Justice Department, whether mergers and acquisitions create a restraint of trade often
depends on the definition of the impacted market. Here are two examples in which the market definition
has significant impact on the proposed acquisitions.
Kraft General Foods, Incorporated, versus the State of New York

Kraft General Foods, Inc. (KGF), acquired the breakfast cereal business of Nabisco (Shredded Wheat,
etc.). At the time of the acquisition, KGF’s breakfast cereal line included Post-brand cereals. The state con-
tended that the acquisition would have adverse effects in the ready-to-eat (RTE) adult breakfast cereal
market. By defining the market as adult RTE, the state hoped to show that the two popular cereals, Post
Grape-Nuts and Nabisco Shredded Wheat, would dominate the “market.”
The court found evidence of both supply-side and demand-side substitutability. The “kid” and
“adult” RTE cereal markets overlapped, with the dominant selection characteristic being variety. Thus,
the “market” was expanded to include more than 200 RTE cereals. From a supply-side perspective, the
court determined that the RTE cereal industry manufacturing processes were flexible enough that if, as
a result of the Post-Nabisco combination, adult cereals experienced a significant increase in market
price, additional competitive substitutes would become available.
Community Publishers, Incorporated, versus Donrey Corporation

In this example, we can see the potential restraint of trade implied by interlocking directorates as well as
the impact of market definitions. Community Publishers, Inc. (CPI), publisher of the Daily Record, a
newspaper in Northwest Arkansas, challenged the acquisition of the Times, a competing local newspaper,
by an organization indirectly controlled by the same family that owned another Arkansas newspaper, the
Morning News. In defense of the acquisition, the defendant argued that the market for news was served
by a broad array of providers, including radio, television, and national- and state-level newspapers.
Additionally, the defendant claimed that the market of each newspaper was different because the papers
did not compete directly for advertisers nor was there significant switching of subscriptions between the
papers. The court, however, defined the market narrowly as local daily newspapers in the northwest
Arkansas geographic area. Under this definition, the combined newspapers had an 84 percent market
share; the geographic area was integrated “socially, politically, and economically,” and everyone involved
with each of the newspapers considered the other to be a competitor. The need of advertisers to promote
in a “dominant newspaper” could, through an increase in advertising rates, “soak up” advertising revenue
from other newspapers. The court found that the combined newspapers could, through regional expansion,
create an entity that would have little competition for subscribers or advertisers.
As corrective action, the court rejected the idea of divestiture by the defendant, as this would
allow the defendant to still have significant say as to the fate of the divested newspaper. The court
therefore ordered rescission of the acquisition, restoring the market to its condition prior to the
acquisition.
EXHIBIT 4-3 Legally Defined Markets Source: Antitrust Policy, an Online Resource Linking
Economic Research, Policy and Cases, Owen Graduate School of Management, Vanderbilt University,
www.antitrust.org.
manufacturers’ suggested retail prices (MSRPs) are often used as tools to position the offering in
the market and a retailer may often elect to follow the suggested price as part of an overall pro-
motional plan, the retailer cannot be coerced to sell at that price. If a retailer elects to discount the
items below the MSRP, the manufacturer cannot use other means (e.g., refusal to deal, which
follows) to force the seller to maintain a specified price.
There are circumstances in which a manufacturer is allowed to exert Free riders are those
some control over the resale price of an offering. When suppliers are contribut- retailers who, either
through mail order,
ing to the value of the offering (e.g., providing financing for inventory, selling e-commerce, or other
through a consignment agreement, providing support services, etc.), they are means, provide a reduced
allowed more influence on the final price. This, ostensibly, is allowed to reduce service package to
the impact of free riders—retailers who provide a reduced-service package to customers, enabling a
customers, enabling profitability at a lower sales price than full-service retail- lower sales price. This
reduced package usually
ers. Full-service retailers who provide a full package that may include such lacks purchase assistance,
items as product demonstrations, installation advice, and local parts availability product information,
incur costs associated with these services. Manufacturers can protect full- and customer
service retailers by limiting the discounts that limited-service retailers can education—many of the
provide. Without such an accommodation, customers would seek information services provided by
full-service “brick &
and education from the full-service retailer and make purchases at the lower- mortar” retailers.
cost alternative.
Refusal to Deal
When used as a method to enforce or encourage one of the preceding issues, such as price
maintenance, refusal to deal is illegal. This may take the form of not restocking or not providing
associated services to dealers that have not followed suggested pricing. The courts have, how-
ever, recognized the right of a seller to sell (or not sell) to whomever it wants, provided the
motivation is not to restrain trade or fix prices.
Resale Restrictions
The courts have not come down firmly on either side of the issue of resale restrictions, which
usually refers to suppliers maintaining house accounts (customers that, while they are located
within a reseller’s market area, remain a direct customer of the manufacturer) or limiting
resellers to certain territories.
Price Discrimination
Price discrimination is one of the most difficult areas about which to generalize because
court interpretations have been somewhat inconsistent. Essentially, price discrimination
occurs when a supplier sells the same product to the “same class” of buyers at different prices
such that the price differentials lessen competition in the marketplace served by the buyers.
Prices for products that would be considered discriminatory but are sold to customers who
are not in competition with each other are not illegal. Confused? Let us consider a sample
scenario.
A sample scenario Your company, Pacific Drives (Pacific), manufactures hard drives for
personal computers. Among Pacific customers are two large computer manufacturers, NBM
and PaloAlto Computers (PaloAlto). NBM and PaloAlto are rivals, each competing for the
desktop computer market. Both companies purchase Pacific Model 1000 hard drives in
large quantities, 5,000 units per month, for their products. Since Pacific is selling the same
product, in similar quantities, within the same time frame (so that obsolescence or seasonal
PACIFIC DRIVES
Pacific Model 1000 Pacific Model 1000

5,000 units/month 5,000 units/month
$38/unit $38/unit
NBM PaloAlto
Computers Computers
Desktop Computer Market
EXHIBIT 4-4 Pacific Drives Supplies the Same Product to Two

Customers Who Compete in the Same Market
pricing is not a factor) to customers who compete with each other, Pacific is required to sell
at the same price, $38, to both. In this scenario, illustrated in Exhibit 4-4, Pacific provides
quantity discounts based on the size of the purchases.
This is a simple example that assumes comparable logistical considerations (e.g., shipping
costs). Basically, neither PaloAlto nor NBM has an advantage in the marketplace as a result of
any pricing irregularities on the part of Pacific Drives; but, wouldn’t each customer strive for an
advantage? Wouldn’t Pacific be seeking opportunities to adjust pricing, up or down, as part of its
value offering to its customers? The answer to both questions is yes. Let us add another factor to
this scenario.
A competitive offer One of Pacific’s competitors, United Memories (UniMem), has

become very aggressive. It is attempting to increase its market share by targeted price
reductions at major customers in Pacific’s market. UniMem approaches NBM with a
special price on its Model UniMem300 drive, which is comparable to Pacific Model
1000. The Pacific selling price to NBM has been $38 per unit in quantities of 5,000
drives per month. UniMem offers the UniMem300, at the same quantities and service
logistics as Pacific, for $32 per unit. This is a significant enough savings for NBM that
it decides to take advantage of the offer and informs Pacific of its decision to change
suppliers.12 Of course you (Pacific) are interested in retaining the business and offer to
meet the UniMem price of $32 per unit. (see Exhibit 4-5)
Wait a minute. Is this fair (or legal)? What about the Pacific price of $38 to
PaloAlto? Doesn’t this lower price to NBM give it an advantage over PaloAlto in their
competitive battles?
PACIFIC DRIVES
UNITED MEMORIES
UniMem Model 300 Pacific Model 1000 Pacific Model 1000

5,000 units/month 5,000 units/month 5,000 units/month
$32/unit $38/unit $38/unit
NBM PaloAlto
Computers Computers
EXHIBIT 4-5 United Memories Aggressive Price at NBM Computers
In fact, pricing regulations allow a defending supplier (the one with the Predatory pricing occurs
business––in this case, Pacific) to match the price of a competitor attempting to when a firm with a
dominant position in a
take away the business. Pacific Drives is not required to lower its price to any market, threatened by a
other customers. In fact, an across-the-board price reduction on the part of new or smaller firm,
Pacific could be interpreted as a predatory pricing. changes its pricing
The most serious marketing considerations here are not related to price. structure such that the
While pricing to different customers is considered confidential and customers new firm cannot operate
profitably.
theoretically do not tell each other what they are paying for components,
Pacific Drives should be concerned about PaloAlto finding out that NBM is
now getting a better deal. It is likely that UniMem will approach PaloAlto with its Model
UniMem300, using the new pricing at NBM as supporting evidence of why PaloAlto should
consider UniMem as a supplier, replacing the Pacific Drives product. The business relation-
ship between Pacific Drives and PaloAlto may be tested as it could look like Pacific has been
overcharging PaloAlto.
Marketing professionals at Pacific should be asking themselves how UniMem could
surprise them in the marketplace like this. Pacific’s knowledge of its competitors and the dynamics
of the market seem to be wanting. As we discuss in Chapter 10, price is a very dynamic part of
the marketing mix. Pacific needs to be aware of product life cycles and the leading edge of tech-
nologies that could impact demand and price for their product.
So far, our discussion has been relatively easy to follow within the guidelines of the
Robinson-Patman Act. We now consider a situation in which price discrimination can occur
notwithstanding adherence to the guidelines.
A new customer enters the market The desktop computer market is attractive to the
entrepreneurial spirit and is a relatively easy market to enter. A small start-up company,
Spartan Computers, contacts Pacific about supplying its hard drive needs. Spartan will
manufacture desktop computers locally. Among its competitors will be PaloAlto and
UNITED MEMORIES PACIFIC DRIVES

Pacific Model 1000
Pacific1000 500 units/month
UniMem 300 Pacific1000
5,000 units/month $55/unit
5,000 units/month 5,000 units/month
$32/unit $38/unit $38/unit
NBM PaloAlto Spartan

Computers Computers Computers
EXHIBIT 4-6 Spartan Computers Enters the Market
NBM. Spartan anticipates its volume will be approximately 500 units per month, but it will
experience “significant growth” and would like Pacific to consider this in its offer. Of
course, Spartan has also asked UniMem to quote the business. The Pacific response to the
Spartan request for quote (RFQ) is $55 per unit, the standard “list” price for the anticipated
volume of 500 units per month. Competitive information and the historic reaction patterns
of UniMem convince Pacific marketers that this is what UniMem is likely to quote. Since
discounts for large-quantity purchases are legal, Pacific does not anticipate any conflicts
with its lower unit prices for higher volumes at NBM and PaloAlto. The addition of
Spartan as a potential customer is shown in Exhibit 4-6.
It is not unusual for start-up companies to attract the employees of their larger competitors,
and this has happened at Spartan. It does not take long for Spartan to realize that the Pacific
offer of $55 per unit is significantly higher than the Pacific price to its larger competitors.
Spartan’s concern, beyond its cost of the hard drive, is that higher component prices in general
will make it difficult, if not impossible, to compete in the market with NBM and PaloAlto.
Spartan asks Pacific to reconsider the offer, notwithstanding the established list prices.
Pacific’s initial reaction to Spartan is to stand by the standard prices. However,
Spartan has pointed out that these prices will make it difficult for its products to compete in
the market and that could be interpreted as a restraint of trade. It may be time for Pacific
to re-examine discount policies for quantity purchases.
Quantity Discounts
Quantity discounts for volume purchases are normal business practice and entirely legal
provided the discounts are cost justified. In other words, lower costs to serve high-volume
customers may be passed on to the customer.13 However, artificially low volume discounts can
be (they are not always but can be) interpreted as discriminatory if they substantially impact
the ability of the customer to compete in its marketplace. Thus, Spartan is justified in asking
for a lower price if Pacific’s quantity-scaled discounts cannot be justified by Pacific’s cost to
serve at those volumes.
In the foregoing examples, what happens if a purchasing agent from NBM told Pacific that
NBM had an offer of a lower price than Pacific’s current price and asked Pacific to match the
competitive offer, but the competitive offer does not really exist? Well, the Robinson-Patman Act
also makes it illegal for the purchasing organization to knowingly create a discriminatory pricing
situation. Generally, any action that will create an imbalance in the marketplace or restrict com-
petitors from equal access to the market can invite regulatory oversight.
Let’s summarize the major tenets of price discrimination regulation.

Offerings sold
for different uses,
to separate markets,
at different times,
that are not identical,
to government agencies, or
at prices to meet a competitive threat
are generally not a violation of price regulations.
While this scenario is simplified and exaggerated, it nonetheless depicts real possibilities.
Good marketing programs avoid possible regulatory problems. This summary provides some
insight into how this is done. Most notably, offerings that are the result of a collaboration between
customer and supplier, created through the process of partnering, or the result of customization for
a particular customer’s needs are not identical to any other offering but are unique to that specific
customer. The degree of this difference is determined by the extent of new technology, speciali-
zation, and customization that was created in the process of satisfying the customer’s needs.
Standardized products sold by industrial distributors that specialize in particular market segments
usually satisfy the market needs of small-volume customers that have not engaged in a custom
development with suppliers. (This is further developed in Chapter 14.) Exhibit 4-7 provides a real-
world example of a price-fixing conspiracy and Department of Justice enforcement.
On January 19, 2000, Mitsubishi Corporation, a distributor of graphite electrodes, and a former executive of
UCAR International (a 50 percent owned joint venture of Mitsubishi during the period 1991–1995 and the
world’s largest manufacturer of graphite electrodes) were indicted in an international graphite electrode price-
fixing conspiracy. Shortly thereafter, on March 13, 2000, the president and chief executive officer of Carbone
of America Industries Corporation and the corporation pleaded guilty and agreed to pay more than $7 million
in fines for participating in an international cartel to fix the price of isostatic graphite.
Graphite electrodes, made of fine grain carbon with great strength and chemical resistance are
largely known as isostatic graphite and are used in, among other things, electric arc furnaces in steel-
making mini mills, the fastest growing method of making steel in the United States. The electrodes
generate the heat necessary to melt and refine steel. The total sales of graphite electrodes during a four-
year period in the early 1990s were more than $1.7 billion. Steel makers, as a result of the conspiracy,
paid higher noncompetitive prices for the electrodes used in steel manufacturing.
As of March 2000, several corporations and individuals had been charged and criminal fines
assessed as a result of the Justice Department’s investigation. In the two years leading up to these
actions, the following companies and individuals pled guilty to participating in the conspiracy:
EXHIBIT 4-7 The International Graphite Electrode Price-Fixing Conspiracy

UCAR sentenced to pay a $110 million fine;

• UCAR’s former CEO sentenced to serve seventeen months in jail and assessed a $1.25 million fine;
• UCAR’s former COO, through a plea agreement, agreed to serve nine months in jail and pay a $1
million fine;
• SGL Carbon AG (a German corporation) sentenced to pay a $135 million fine;
• SGL’s CEO sentenced to pay a $10 million fine (to this date, the largest ever antitrust fine imposed
on an individual);
• Showa Denko Carbon Inc. (U.S. subsidiary of a Japanese firm) sentenced to pay a $32.5 million fine;
• Tokai Carbon Co. Ltd. (a Japanese corporation) sentenced to pay a $6 million fine;
• SEC Corporation (a Japanese corporation) sentenced to pay a $4.8 million fine;
• Nippon Carbon Co. Ltd. (a Japanese corporation) sentenced to pay a $2.5 million fine.
Other participants in the conspiracy were accepted into the Justice Department’s Corporate
Leniency Program.
In the matter of Carbone of America Industries Corporation, the guilty pleas were to charges that
the company and its executive participated in meetings and conversations with cartel members to
discuss prices, agreed to certain price scenarios, agreed to market share maintenance, and participated
in several other anticompetitive actions.
At first, antitrust enforcement against makers of carbon electrodes used in steel manufacture
may seem far removed from the consumer markets where business regulation aims to maximize choice
and keep a level playing field. Steel, however, is an essential material in many consumer goods, medical
devices, appliances, transportation, and construction, impacting practically every element of business
and consumer consumption. As you read the list of enforcement actions, note the penalties levied
against individuals who took part in the conspiracies. Review also the “Substantiality Test” as described
in this chapter.

Source: U.S. Department of Justice, press releases for January 19, 2000, Mitsubishi Corporation and
Former UCAR Executive Indicted in International Graphite Electrode Price-Fixing Conspiracy; and
March 13, 2000, New Jersey Company and Chief Executive Officer Agree to Plead Guilty to International
Price Fixing Conspiracy, www.usdoj.gov/atr
SUBSTANTIALITY TEST
Contributing to the lack of precision in business regulation is that enforcement is at the discretion
of the executive branch of government or administrative agencies. Enforcement is discretionary,
just as a police officer may overlook a speeder doing 50 in a 45 mph zone but will ticket a vehi-
cle traveling at 60 mph in the same zone. Agencies responsible for enforcing business legislation
prefer to prosecute infractions with a high likelihood of successful prosecution and conviction.
With limited resources available for investigation and prosecution, violations are often subject to
a substantiality test to determine the extent of the discriminatory practice. The substantiality
test, arising out of a court decision regarding exclusive dealing, serves as an excellent tool for the
marketer to judge the intensity of a situation. Three considerations make up this test:
The size of the organizations involved: (“Size” may be sales volume, financial resources,
market power, etc.) Is a large company attempting to coerce the behavior or business
practices of a smaller company?
The volume of business involved: Is the dollar amount large relative to the size of the
market? Does the offending company have a significant share of the market?
Market preemption: Does the questionable business practice or arrangement prevent
competitive products from access to a substantial portion of the market?
Company Size
Business practices that are overlooked by regulators as not substantial when the company
is small may receive much greater attention as the company grows and develops marketplace
leverage. In 2001, a federal appeals court upheld Judge Thomas Penfield Jackson’s ruling
that Microsoft violated U.S. antitrust laws but sent back to the district court the proposed
remedy to split up Microsoft, directing the lower court to develop an alternative. 14
Eventually, Microsoft and the Justice Department reached a settlement intended to impact
Microsoft behavior in its many markets. Microsoft business practices that may have been
acceptable or at least overlooked when they were small became questionable as the company
and its market strength grew
Some International Implications

Market domination attracts scrutiny. Organizations must recognize the risks associated with
business practices that will attract attention, be regarded as predatory, or construed as limiting
competition or choice in the marketplace, regardless of the intent. The European Union (EU) has
demonstrated the rising importance of regional economic communities and their competitive
regulations. The EU has interpreted market practices and potential acquisitions that have passed
the scrutiny of U.S. regulators differently. Operating with many of the same goals and principles,
the EU naturally places a priority on the European market. Though seemingly settled in the
United States, Microsoft continues to 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) Passed in 1977, the U.S. Foreign Corrupt
Practices Act was the result of a Securities and Exchange Commission (SEC) investigation of
questionable payments made to foreign officials by over 400 U.S. companies.15 The most
common type of payment was made to foreign government officials with the intent of favorably
influencing a business outcome. To be a violation of FCPA, payment16 must be made to a foreign
government official, political candidate for foreign office, a foreign political party, or any person
that may serve as a third party or intermediary in the facilitation of such activities.17
After passage of the FCPA, there was concern among U.S. business as well as the
Congress that American companies would be operating at a competitive disadvantage in
international markets, particularly where legal and cultural norms routinely permitted bribery
(including the ability to deduct the bribe as a business expense on their taxes!). In 1988, the
executive branch began negotiations with major U.S. trading partners to enact legislation
with the same intent as the FCPA. In 1997, the United States was one of thirty-four countries
that signed the Organization of Economic Cooperation and Development (OECD)
Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions.
The FCPA antibribery provisions make it unlawful to make a corrupt payment to a foreign
official, and, since 1998, also applies to any foreign firms and individuals that take any such
action while in the United States.
BASIC PROVISIONS OF THE FCPA Several factors must be present to constitute a violation of
the Act.18
• Who: The FCPA applies to “any individual, firm, officer, director, employee, or agent of a
firm and any stockholder acting on behalf of the firm.”19 The FCPA may be applied to
individuals as well as firms, and may lead to civil and/or criminal penalties.
• Corrupt Intent: The individual(s) making or authorizing the payment must have intended
the payment to corrupt or induce the recipient to misuse his official position to direct
business to the payer.
• Payment: Money, offerings, promises of payment or offering, or anything of value consti-
tutes payment.
• Recipient: The FCPA applies to any public official regardless of rank, title, or position.
• Exception: Payments made to expedite or facilitate performance of a “routine government
action,” such as obtaining permits, licenses, or other official documents; processing of
governmental papers such as visas and work permits; providing police protection, phone
service, power, and water, and so on, are not a violation of the FCPA.
SUPPLY CHAIN IMPLICATIONS

A firm participates in multiple supply chains—assuming the firm has more than one customer.
Competitive circumstances and customer requirements as well as effective market segmentation
and a successful long-term business relationship will result in the supplying firm participating in
many different supply chain designs. Customers that are part of highly competitive industries
(e.g., oligopolies) will strive for every competitive advantage. Efforts will not only focus on
obtaining the best value from suppliers but also extend to the design of both the inbound and out-
bound logistics systems. Suppliers will often be required to match the customer’s materials
handling process and inventory system.
INTELLECTUAL PROPERTY
Intellectual property law provides creators or owners of intellectual property the right to benefit
from its creation, use, and dissemination. Intellectual property is regarded, for legal purposes, as
essentially comparable to any other form of property. We focus on issues related to intellectual
Antitrust Guidelines
Go to http://www.antitrust.org for a review of will also find an “Executive Summary of Antitrust

antitrust policy. Particularly useful is the extended list Laws” written by R.M. Steuer at http://profs.lp.
of recommended practices “Common Sense Guide- findlaw.com/antitrust/index.html. www.findlaw.com
lines” excerpted from The Antitrust Laws, A Primer, provides a friendly, “yahoo-like” interface to many
by John H. Stenefeld and Irwin M. Stelzer. Students business law issues and examples.
property in technology transfer and innovation, such as patents, copyrights, and trade secrets.
This distinction removes trademarks, usually considered as symbols of identity and goodwill,
from consideration.20 From an antitrust enforcement view, trademarks are considered product or
organization differentiating devices and are treated differently, though many of the same legal
principles apply.21,22
Patents are protection or ownership rights granted by the U.S. government to inventors for
their original products, processes, or composition of matter. The patent owner may exclude the
use, sales, or manufacture of the invention for a period that depends on the type of patent.
Functional patents that cover machines, processes, and devices have a protection period of
twenty years. Design patents, applying to the features of a product, are granted protection
periods of fourteen years. Patent owners may sell, license, or trade patents just as they would any
tangible property.23
Copyrights apply to original works of, among others, authors, musicians, and photo-
graphers. Copyrights protect the expression of ideas, not the underlying ideas themselves.
Copyrights are granted to individuals for their lifetime plus fifty years and, since 1989, auto-
matically apply to all work. Signing nations of the Berne Convention also recognize international
status for U.S. copyrights.24 While registration of original works is not necessary, it is always
recommended, particularly if ownership is intended to produce income. Like patent owners,
copyright owners may sell, license, or grant permission for use of the copyrighted material.
Trade secrets are unusual in that their value is dependent on their secrecy. A trade secret is
a process, technique, or competitive advantage whose owner has chosen not to seek additional
legal protection, either in an effort to maintain the secret by avoiding disclosure or because the
secret does not meet legal tests for originality. Protection has no definite term and is conditioned
on efforts to keep the secret a secret. Trade secrets are an unusual category. By
their very nature, owners are not able to license, sell, or trade them with the A license is permission to
same degree of protection as patents and copyrights. Notwithstanding this, how- use an asset as one’s own
ever, trade secrets can be the subject of use agreements between organizations. without any right of
ownership, granted by
the owner of the asset.
Antitrust Implications of Intellectual Property Licenses can be for
specific time periods,
At first glance, intellectual property laws, which grant rights of exclusive use, regions, or countries. All
and antitrust laws, which are aimed at maintaining an open market, may seem to forms of intellectual
be in total opposition to each other. This is, however, not the case. Intellectual property may be licensed.
property protection aims to protect creators and inventors of novel and useful
A cross license occurs
inventions from copying, bootlegging, plagiarism, and other forms of theft. when two businesses each
Without such protection, there would be significantly less incentive to innovate, have patents or other
as the market value of intellectual property would be significantly reduced. intellectual property that
Innovation is a primary motivator in competition and market growth. Businesses is of value to the other.
The cross license may be
spend millions of dollars of research and development programs to create a
structured to allow both
competitive advantage. firms a greater advantage
Intellectual property is but one tool in the creation of an offering for the in the same market or the
customer. Just as the use of other tools (e.g., production, distribution, market agreement may be related
dominance) may or may not be in compliance with business legislation, intellec- to separate markets. At
times, firms will establish
tual property can be used or abused in the marketplace. In business-to-business
a jointly owned third firm
markets, competitors often license or cross license each other’s intellectual to operate in a particular
property. Businesses do this because they recognize that the target market(s) for market with licenses of
a particular offering will adopt a new product, feature, or technology faster if both firms’ properties.
both organizations are participating in its market development. (The relationship between inno-
vation and competition is discussed in Chapter 9.)
Just as would occur with any restraint of trade, antitrust concerns arise when the leverage
provided by the intellectual properties is used to limit access to or competition in the market. For
example, firms may not use cross licensing to prevent new competitors from entering a market,
to divide the existing market between themselves, or to create tying agreements to move unwanted
merchandise.
Cross Licensing
Companies will find that, within legal limits, circumstances encourage licensing or cross licensing.
Suppose that the R&D of a chemical company develops a new solvent for treatment of metal parts
before the finish is applied. The company applies for and receives a patent on the composition of
the solvent. Another chemical company, interested in the same market, has developed a unique
cost-effective manufacturing process that makes it possible to produce the new solvent at approx-
imately the same cost as older, less-effective products. The company applies for and receives a
process patent on the manufacturing method. Both companies are blocked from effectively pursu-
ing the market segment—one by the composition patent and the other by the process patent. The
two companies cross license the patents, enabling each to effectively approach the market.
Without the agreement, the market would not have the new solvent available at a viable value.
Consider an example often experienced by high-technology companies whose major
investment has been in their research efforts. The high-tech company receives a patent for its
efforts. While the company has successfully invested its resources in the development of this
technology, it has neither market presence nor relationships among potential users. The company
now must invest in building a sales and marketing team to approach users. However, the rapidly
changing nature of new technology markets makes this approach risky at best. The time required
to establish a market presence may allow other companies to enter the market and establish a
foothold before our high-tech can get started.
As an alternative solution to the previous example, the company that holds the technology
patent could license the technology to a company that already has a strong presence in the target
market. This combination provides the technology with access to an established customer base
and relationships.
When an organization considers a license of its technology to another firm, there are several
precautions that must be taken. Licensing is legally tricky. Several factors must be considered in a
licensing arrangement.
• Time period: the length of time that the license is valid must be specified.
• Market coverage: the technology owner may want to restrict the licensee to certain
regions—an important consideration in international markets. These provisions are partic-
ularly important if the technology owner plans to also market an offering that includes the
technology. Market coverage restrictions may also limit the licensee to use of the techno-
logy to certain products, offerings, or market segments.
• Technology coverage: the agreement must describe the specific technology to be licensed.
The goal on the part of the technology owner is to avoid creation of a competitor as the
licensee acquires experience with the licensed technology. The successful technology
owner will likely continue to evolve the technology through subsequent research and
development efforts. The license is not likely to include these improvements and should
state the extent of coverage.
An industry adage says that a company should never license its latest technology—only
that technology that it is about to make obsolete. While this may not always be a viable position,
the technology owner must continue to “push the envelope” of innovation in the impacted mar-
ket to maintain its leadership position. Well-defined organization goals and goals specific to the
technology (as well as a good attorney) can create an agreement that works for both parties.
Joint Ventures
Another alternative might be for a company with technology and another company A joint venture is an
with a presence in the target market to come together and form a third company, organization where two
firms combine to
transferring specific assets to the new entity. Many joint ventures are started in approach a particular
this way. A joint venture has some advantages over a simple license arrangement. market or share a
The small technology company will be concerned that the large company could particular technology.
act in a predatory manner, particularly with access to the small company’s techno- The risk of sharing
logy. Assignment of the technology to a separate, new venture creates a barrier technology and lost
investment is limited to
that allows the small company to continue its own research and development assets assigned to the
distinct from any efforts that arise out of the larger company knowledge of the venture. The venture
technology. The license is limited to the venture—not available to the large operates as an
company. The large company invests capital and access to its established independent business.
customers. The mission of the joint venture is part of the agreement, as well as a The two firms benefit
according to their
definition of markets and technology licensed. Each company in the joint venture share of the venture—
is protected from any potential dilution of its investment that may result from the usually 50:50.
other company’s aggressive use of the knowledge and position gained through the
license. The two parties can continue their business development independent of the venture yet
still benefit from the success of the venture. The venture is allowed to use the knowledge and
experience gained to continue technology and market development. The potential for dis-
agreement over developments is lessened because they are owned by the venture, and thus, by
both parties as determined by their share of the venture.
CONFIDENTIALITY AGREEMENTS
Marketers that work with customers in the development of new offerings, where the capabilities of
both the supplier and the customer are brought together to create a new offering, will have access
to future product plans of their customers. To protect both organizations, confidentiality or
nondisclosure agreements are often used. While specific details will vary (and are beyond the
scope of this discussion), most of these agreements contain elements of one or all of the following.
• Customers that rely on suppliers as design and development resources expect that the
information revealed by the supplier to the customer (whether technical- or business-
oriented) is, in the absence of any other agreement, in the public domain. In other words, the
customer without fear of any intellectual property disputes can use whatever the supplier
reveals to the customer. Marketers from supplying firms will be asked to sign a nondisclosure
agreement that states that they are aware that anything they disclose will be considered in the
public domain.
• Suppliers that partner with customers to assist in the development of the customer’s future
products will have access to the customer’s product plans. Suppliers will be asked to sign
confidentiality agreements that bind the supplier from discussions about the customer’s products
or business. These are particularly sensitive agreements that require careful management to
insure compliance. Suppliers that have many customers in the same market that compete with
each other may find it necessary to manage many contacts between members of their value chain
and the various customers’ buying center members. The goal of the supplier is to protect the cus-
tomer’s confidentiality while also working with more than one customer in any given market.
• Customers that rely on partnerships with suppliers to assist in the development of the
customer’s future products will have knowledge of the supplier’s developing technology
and research and development directions. Customers must regard this information as
confidential, and often be asked to sign appropriate agreements. The situation can become
exacerbated when the customer is working with more than one supplier who is applying its
latest technology to the customer’s product.
POLITICAL FRAMEWORK OF ENFORCEMENT

Marketing professionals cannot ignore the politics of business regulation. Different viewpoints
and philosophies are represented by different presidential administrations in our government.
The Department of Though some recent examples have blurred the generalization, historically, the
Justice Web site at http:// political affiliation of an administration in power has been an indicator of the
www.usdoj.gov provides aggressiveness of regulatory enforcement. Regardless of political affiliation or
a thorough though beliefs about regulation versus the free market, there have been times when
somewhat legalistic Web
government intervention was appropriate as well as times when intervention
site with many reviews of
the implications and was either insufficient or overzealous. The marketer should recognize that
intricacies of U.S. Code different views of the markets as well as historical precedent could impact the
and case examples. marketing environment.
PACIFIC DRIVES REVISITED

Recall the opening of this chapter and the difficulties Pacific Drives was having getting its offer-
ing to its customers. With consideration for the legal factors we have discussed, what do you
now think of this situation? Should the obstacles faced by Pacific Drives be accepted as aggres-
sive competition or be considered as illegal activities? Would your opinion change if you were
the marketing manager for Pacific Drives? In the opening situation, what recourse does Pacific
Drives have?
Well, if you were the marketing manager for Pacific Drives, you might first discuss the
situation with your firm’s attorneys. Your next step might be to contact the organizations
(possibly with your attorney—avoid the appearance of collusion!) that you believe are engaged
in illegal activities impacting Pacific Drives and see if a negotiated resolution is possible.
Certainly all parties will have an incentive to avoid litigation. If that strategy is not successful,
you have the option of civil litigation. Who knows? You may not be the only victim of
DynaDrive and Spin Technologies. You might even find that the Justice Department or the FTC
taking up your cause.

As with most any illegal activity, ignorance of the law is not an adequate defense. Marketing
managers cannot successfully plead a lack of understanding should their organization become the
target of an antitrust or price discrimination investigation. Unfortunately, without a sufficient
understanding of the “ins and outs” of business laws, managers may, when operating in a small organiza-
tion or market that is not likely to draw attention, establish practices that become habit or increase in
intensity as the organization or market grows. Certain business practices may seem like “just aggressive
competition” or “finding an edge.” If they infringe on any of the three areas described in the beginning of
this chapter—protecting companies from each other, protecting consumers, and protecting the interests of
society—and meet the substantiality test, they are likely to draw enforcement attention.
Successful market-driven strategy can help avoid many legal entanglements. As you progress to
Chapter 5 and your understanding of business-to-business marketing continues to grow, we hope you
will see that one of the best ways to avoid difficult legal situations is an ethical, market-driven approach
from the start. In later chapters, pricing, channels, and personal selling are discussed. These activities are
particularly vulnerable to the imprecise nature of the legal environment. Understanding the legal issues
discussed in this chapter will greatly assist in the development and practice of market programs that
provide long-term value to your customers.
Key Terms
common law 86 injunctions 82 price maintenance 87
consent decree 84 intercorporate stockholding 83 refusal to deal 89
copyrights 97 interlocking directorates 83 resale restrictions 89
cross license 97 joint venture 99 silent period 86
proportionately equal terms 85 license 97 subtantiality test 94
exclusive dealing 83 patents 97 trade secrets 97
free rider 89 predatory pricing 91 treble damages 82
initial public offering (IPO) 86 price discrimination 89 tying contracts 83

1. How can intercorporate stockholding exist without 6. Overall, it can be said that the unified goal of busi-
raising FTC or Justice Department concerns? ness legislation is to maximize choice in the market-
2. What market factors must be present under place. Of the philosophies of marketing (production,
Robinson-Patman that require a supplier to offer the product, sales, marketing, and societal marketing),
same product to two (or more) different customers? which has as its goal to maximize choice in the
3. What market factors must be present for a manu- marketplace?
facturer to legally refuse to continue to offer its 7. What extenuating circumstances must usually be
products through a particular channel (what are the present for a business practice to be scrutinized
circumstances when a “free rider” condition can by the Justice Department? What limits the
exist)? Justice Department from investigating all poten-
4. Describe the practical importance of good market tial violations?
intelligence in addressing potential competitive 8. When there is significant disparity in size of com-
pricing situations under the Robinson-Patman petitors seeking the same customers, how do
Act. Clayton and Robinson-Patman fail to maintain the
5. When a marketing manager questions whether fabled “level playing field”?
an action may or may not be interpreted as a 9. How can continuous innovation and close partner-
violation of a competitive legislative act, what ships with customers reduce the likelihood that
consumer-level factors can ultimately be used as market managers will be concerned with price dis-
guidelines? crimination issues?
10. Rather than the “letter” of the law as related to spe- of the venture? Why is a willingness to partici-
cific acts and legislation, understanding business pate in a confidential agreement with a customer
regulation has often been described as understanding an important factor in the “resell the job” or
the intent of the law and the temperament of the endgame portion of the buyer decision process
enforcers. Explain. (Chapter 3)?
11. How are the myriad of state and federal legislative 13. Discuss the ways in which use of industrial distrib-
acts and commissions consistent with a free market utors can assist small companies to overcome uncom-
philosophy? petitive price situations that develop in their small
12. What protections does a joint venture offer to the volume purchases. (This may be more easily
two companies that have partnered together? understood if you return to this question after com-
What limitations must be agreed upon at the start pletion of Chapter 14.)
Endnotes
1. A real “Internet Marketplace Exchange,” Covisint, 13. Chapter 10 discusses the importance of different
is discussed in the opening example of Chapter 2. costing methods. A thorough understanding of
2. Marianne Jennings, Business: Its Legal, Ethical, costs related to different channels, volumes, and
and Global Environment (Cincinnati: South- customers is essential as a good justification for
Western College, 2000), p. 172. pricing decisions.
3. Richard A. Mann and Barry S. Roberts, Smith 14. “Living in Microsoft’s Shadow,” The Wall Street
and Roberson’s Business Law, 11th ed. (Cincin- Journal, July 2, 2001.
natti, South-Western College, 2000), p. 83–89. 15. Lay-Person’s Guide to FCPA, Antibribery
4. Jennings, Business: Its Legal, Ethical, and Provisions, U.S. Department of Justice, www.
Global Environment, p. 524. usdoj.gov/criminal/fraud/docs/dojdocb.html
5. Mann and Roberts, Smith and Roberson’s 16. In this context, “payment” means something of
Business Law, p. 876. value (money, property, and so on).
6. Ibid., p. 880. 17. Jennings, Business: Its Legal, Ethical, and
7. Ibid., p. 878. Global Environment, p. 253.
8. Philip Kotler and Gary Armstrong, Principles of 18. Lay-Person’s Guide, Antibribery Provisions.
Marketing, 6th ed. (Upper Saddle River, Prentice 19. Ibid.
Hall, 1994), p. 83. 20. Business-to-Business branding and “branding as
9. Gary McWilliams, Joseph B. White and Jess a standard” is discussed in Chapter 13.
Bravin, “Price-Floor Ruling May Have Small 21. Readers interested in a broader discussion
Effect,” The Wall Street Journal, June 29, 2007, of trademark law, particularly as it relates to
p. A2. the Internet, are encouraged to reference by
10. The Sarbanes-Oxly Act of 2002, http://www. Gerald Ferrera, et al., CyberLaw, Text and Cases
soxlaw.com (Cincinnati, West/Thompson Learning, 2001).
11. Corporate Law Economic Reform Program, 22. U.S. Department of justice and the Federal
Australian Securities and Investment Commission, Trade Commission, Antitrust Guidelines for
www.asic.gov.au. the Licensing of Intellectual Property, issued
12. The method and timing of notification to change April 6, 1995.
suppliers can be indicative of the quality of the 23. Jennings, Business: Its Legal, Ethical, and
relationship between the supplier and the cus- Global Environment, p. 489.
tomer. Many businesses will not easily change 24. Ibid., p. 490.
suppliers unless there is a substantial incentive,
particularly when everything is going well.
Chapter 5
Concepts and Context

of Business Strategy
OVERVIEW
This chapter presents introductory material on the nature of strategy and strategic
planning. While corporate executives are usually responsible for creating corporate
and business unit strategies, marketers at many levels are called upon to contribute
to the planning process. Accordingly, this chapter presents material to help
marketers think strategically and make a substantial contribution to the process.
The opening example is a presentation of strategy management concepts and
processes at work in an organization. Corporate strategy chooses the businesses to
be in and the performance levels that will be achieved. Analytic tools are presented
in the chapter to aid in determining which businesses should be pursued. Business
unit strategy concerns a translation of corporate goals into business unit goals and
objectives. It also includes the configuration of the functions of the business to
achieve the business unit’s goals and objectives.
This chapter concludes with a discussion of the strategy management process.
This process can be used, with minor modifications, at any level of the organization.
Understanding the basic process, as well as its limitations, will help a business-to-
business marketer take an effective approach whenever the need arises.
The opening example shows how Siemens ties together internal operations
and choice of external markets to boost its performance.
Siemens Changes Its Strategy1

In 1998, Siemens of Germany was making progress in productivity improvements in most of its lines
of business. However, it seemed that all its efforts were working well but were simply five years too
late. The problems Siemens addressed—those of quality and costs—were the problems of the late
1980s and early 1990s. Meanwhile, its competitors, such as GE, Cisco, and Nokia, were adapting
products and marketing efforts to adjust to new and changing markets. Net income at Siemens was
slim and falling. Not surprisingly, Siemens’ stock price was headed in the same direction.
CEO Heinrich von Pierer created a ten-point plan to revamp Siemens. The plan placed emphasis
on growing areas of business, such as telecommunications and automotive electronics. Acquisitions were
103
104 Chapter 5 • Concepts and Context of Business Strategy
made to bolster these areas. Existing businesses such as medical engineering and semiconductors received
attention to increase innovation and customer focus while improving operating efficiency. Nonperforming
business lines were sold off. Organizational structure and working relationships were reshaped.
Management positions were trimmed, and top executive positions were filled by key hires.
Not all the old lines of business were divested, though. Siemens held on to and invested in its
electric power business, even while competitors like ABB were divesting power generation lines.
Siemens restructured its rail locomotive business supply chain, acquiring suppliers, and shifting
assembly upstream. At the peak of the technology boom, Siemens sold off its semiconductor and
components businesses and received a premium price.
CEO von Pierer produced encouraging results. Going into the worldwide slowdown, profits
and share prices were up. Technology development has taken on a customer focus as marketers and
engineers collaborate in the design of new products. Even though Siemens’s new strategy focused on
telecommunications and was thus hard-hit with the technology industry bust that occurred in 2001
and beyond, Siemens came out of the recession intact—with a good balance sheet and leadership in
several key industries, such as medical technology.
Siemens’ CEO, von Pierer, managed to weather the economic downturn by offsetting the risk of
high-growth businesses with maintenance and investment in Siemens’ core, “stodgy” businesses. Over
time, von Pierer was able to bring a stronger customer focus and innovative culture to an old conglom-
erate that had a reputation for slow-moving bureaucracy. Coming out of the recession, Siemens was in
a strong competitive position, supported by a healthy resource base.
Later in the decade, Siemens became embroiled in a scandal involving bribes paid to foreign
governments. CEO von Pierer took responsibility, even though there was no evidence of his involvement,
and resigned.
LEARNING OBJECTIVES
By reading this chapter, you will:
䊏 Understand the value of strategy and its role in a complex organization.
䊏 Understand the planning process for defining and executing business strategy.
䊏 Relate mission, goals, and objectives of an organization to the process of developing strategy.
䊏 Develop an understanding of how an entrepreneurial approach to marketing is not limited to
small, start-up organizations.

䊏 Identify ways in which a marketing organization can be made more entrepreneurially
oriented.
䊏 Demonstrate an understanding of different strategy tools (growth-share and business-
attractiveness matrices and balanced scorecards).

䊏 Recognize what it means to create a strategy that “changes the rules” for a market or for
an industry.
䊏 Understand the importance of agility, adaptability, and alignment in pursing integrated value
network or supply chain strategies.
INTRODUCTION
The Siemens example illustrates the importance of two key strategy ideas. First, Siemens
performed better than competitors during and after the recession because of its portfolio of
businesses. Siemens pursued some high-growth businesses, such as telecommunications
Chapter 5 • Concepts and Context of Business Strategy 105
equipment, and suffered the consequences when these industries were severely hit by the
recession. However, its poor performance in these industries was buffered by strong perfor-
mance in several lines of business in which it had core strengths, such as power generation
equipment, even though these were not high-growth businesses. Second, part of von Pierer’s
strategy focused on changing the culture of the company—changing the ways that Siemens
does business. The CEO drove the company to be more innovative and at the same time to be
more focused on customers. Coupled with Siemens’ traditional strength in engineering, these
new cultural elements created strong products across Siemens’s lines of business and greatly
improved its competitive strength.
While the Siemens example illustrates these concepts at the corporate level, the same ideas
apply at the business unit level and the marketing program level. The concept of corporate
portfolio management helps managers manage risk. But strategy does not stop with the corporate
portfolio decision. The strategies of individual businesses, product lines, or products should align
with corporate strategy to make their own piece of the company as competitive as possible. This
is what Siemens has done—it has focused attention on every business in its portfolio to upgrade
the competitive strength of each.
Within the framework of corporate level strategy, the marketer has to create and implement
his own marketing strategy aligned with and in service to the company strategy. This strategy
generally defines the marketer’s direction, that is, the parameters the marketer has to live within
on a day-to-day basis. Daily efforts by all members of the organization must be
consistent with the mission, goals, objectives, and strategies of the firm. The mission of an
Knowing what strategies do and how they work will make the business market- organization is the
ing manager’s decision making more informed and more closely tied to the contextual definition of
what the organization is
intent of the company’s strategy. and what it expects to
In addition to the discussion of strategic concepts, this chapter examines accomplish. Usually
how strategies are created and managed. Too often, popularized strategy a qualitative description,
methods overlook useful ideas and tools because they are not “fashionable.” In it is further defined by
this chapter, some useful ideas and tools are provided that, while updated, have goals and objectives. A
good mission statement
their roots in the past and, when fully understood, are as useful today as when should be useful to all
they were the “in” tools. members of the
organization as a guide
to proper decision making
WHAT IS STRATEGY? and direction.
Strategy is, literally, the “art of the general.” Strategic thinking has been around Goals are usually the
in military matters for thousands of years. At its most basic, strategy is the deter- first quantification of
mination of goals or objectives and the general means for reaching them. a business mission
For the corporate executive, strategy means the choice of businesses for statement. Goals are
a general statement of
the corporation to pursue and what will be emphasized in the running of each desirable outcomes,
business to reach corporate goals and objectives. From the point of view of the directly supportive of
person running the copier room in one of the company’s division headquarters, and aligned with the
corporate strategy is the context in which he works—if he even knows what the mission.
corporate strategy is at all. His strategy focuses on how to get documents done Objectives are specific
on time and with high quality. In either case, strategy helps keep the people measurable expressions
involved working toward a desired outcome and approaching this goal (or goals) of the stated goals, with
in ways that do not violate any constraints that may be relevant. Exhibit 5-1 specific targets and time
shows how strategy in an organization is arranged hierarchically, from the top periods.
level to the functional level.
Corporate Strategy
Business Unit Business Unit Business Unit

Strategy Strategy Strategy
Product Product Product

Strategies Strategies Strategies
Functional Area Functional Area Functional Area

Strategies Strategies Strategies
EXHIBIT 5-1 Hierarchy of Strategy
Developing effective strategy—strategy that leads to higher performance—requires several

elements. First, strategy involves setting goals or objectives. Strategists usually think of a goal as
being a general notion of a desired end-state. Goals are not time limited. Objectives, on the
other hand, are specific targets that can be expressed in quantifiable terms, specifying a specific
time frame in which these targets are to be met. Exhibit 5-2 shows how each succeeding step in
strategy development adds more specificity.
A second element of strategy is gaining an understanding of the environment in which the
business unit operates. A strategist seeks strategies that “fit” this environment or he may, when
in alignment with capabilities, seek strategies that substantially change the environment.
Either way, the strategist will want to obtain an understanding of what he has to work with, or
Mission Goals Objectives Strategy Tactics
Contextual General statement of Specific measurable The plan by which Implementation of

definition of what desirable outcomes, expressions of the the measurable the strategic plan.
the organization supportive of stated goals, with objectives will
expects to and aligned with specific targets and be obtained.
accomplish. the mission. time periods.
To become a leader To become the To have a 50 percent The marketing plan
in the data storage leader in the data market share in data specifies target
services market. storage services storage integration markets for data
market. services sales within storage services
two years. and develops those
markets to achieve
the specified
objectives.
EXHIBIT 5-2 Increasing Specificity in the Layers of Strategy Development

against. The effort to understand the environment is to provide enough information upon which
to make reasoned judgments of what directions to pursue and how to pursue them.
A third critical element is learning from experience. Good strategic management systems,
no matter how formal the process, collect information on the impact of the strategies that are
being executed. In a traditional strategic management process, performance is monitored and
compared to expected performance. In less formal processes, informal interviewing of
customers, channel members, and others may be performed to obtain feedback sufficient to
diagnose problems and suggest strategy modifications.
The fourth critical element is thinking. Strategy development is not a mechanical process in
which a model of the environment is developed, populated with data, the handle is cranked, and an
optimal solution pops out. Rather it involves processes that are much more creative, interpretive,
and learning oriented. Designing strategy is a creative act where decisions are made based on
an interpretation of what is known about the environment and informed “guess-timates” of how
customers, competitors, and other actors in the environment will act and react in the future.
Accordingly, strategy development and management is best considered as a dynamic,
complex process. Indeed, there is no one best process that is usable and effective in all situations.
Processes must be designed and evolved with the company’s situation in mind, which is what is
discussed in the next section.
STRATEGY-MAKING AND STRATEGY MANAGEMENT PROCESSES

The business environment, the competitors’ potential actions and reactions in the market, and
the companies’ internal organization structures make the process of developing and managing
strategy necessarily complex. Over the last half century, when strategic management has
received direct attention from management and academics, different approaches have been tried
and tested. The next section presents some of the key concepts that have emerged as useful in
managing strategic processes.
One idea that has survived over time is a stepwise progression of actions to conceive, imple-
ment, and adjust strategy. Stages in this strategic management process are shown in Exhibit 5-3.
Performing Strategic Management in the Business-to-Business Company

We, the authors, have talked with executives, managers, employees, and consultants over the last
several years asking whether the changing business environment has required the complete
abandonment of the strategic management model presented in Exhibit 5-2. The answer we get is
1. Setting goals and objectives

2. Analysis of the current situation
3. SWOT analysis: Strengths, Weaknesses, Opportunities, and Threats
4. Strategy design and choice of the best strategy
5. Implementation plan design
6. Strategy implementation
7. Monitoring of environment and performance results
8. Analysis of variance from desired performance levels
9. Adjustments based on analysis of variance
EXHIBIT 5-3 Strategic Management Process

“not really,” though some adaptation is necessary. We present it here as a template for applica-
tion, but we add some caveats and adaptations.
Step 1 Develop Goals and Objectives First, distinguish between goals and objectives. As
noted before, this is the distinction between the general and the specific. Goals are
general, qualitative descriptions of some desired state of affairs. For a business, one might
say, for example, that it is desirable for the firm to achieve superior profitability and
leadership in its industry. Objectives, then, are specific expressions of these goals, with
specific targets in specific time periods. Given the example of goals set by the hypothetical
data storage company mentioned above, executive management might say they want to
pursue these goals by achieving a return on investment of 20 percent, after taxes, on a sus-
tainable basis, by the end of fiscal year 2011. In that same time period, they might want to
achieve at least 35 percent market share in their principal lines of business. Further, they
might want to achieve recognition by at least 75 percent of purchasing managers in their
markets in which their offerings set the standards for product and service quality. These
targets are specific in ways that allow measurement of performance against them.
When goals and objectives are set at the corporate level, corporate management
must take care that the goals and objectives are “healthy” or “good” for the company
to pursue. The relevant criteria are that performance must be in line with the expec-
tations of the relevant stakeholders, such as investors, management, employees, and the
community in which the firm is located. The objectives must also be reachable, challeng-
ing, and internally consistent (not contradictory, so that reaching one objective makes it
impossible to reach one of the others). At lower levels in the hierarchy, goals and objec-
tives become expressions of the corporate goals and objectives (see Exhibit 5-4). The
strategy planners must decide what objectives will accurately measure the contributions
of their business unit, product line, or program.
Corporate Level Lower Level
Goals Performance must be in line with Expressions of corporate goals but

the expectations of the relevant specific to the portion of the organization
stakeholders, such as investors, within the reach, control, and
management, employees, and the responsibility of lower management,
community in which the firm not contradictory, so that reaching one
is located. objective makes it impossible for other
units reach one of the others.
Objectives Reachable, challenging, and Accurately measure the contributions
internally consistent. of the business unit, product line, or
program in alignment with the
corporate objectives.
EXHIBIT 5-4 Understanding Level of Goals and Objectives in the Corporate Hierarchy
Step 2 Environmental Analysis In this step, the current situation and future possibilities are
explored. At any level, the environment includes the following elements:
Markets, segments, and customers
Competition
Channels of distribution
Internal company environment

Effects of the economy
Effects of technology change
Public policy
At the corporate level, the environment also includes other stakeholders such as
the financial and investment communities, as well as supplier markets.
The analysis is usually arranged in the form of an analysis of the current situation
and a SWOT—strengths, weaknesses, opportunities, and threats—analysis that is more
future oriented. In Chapter 6, we present a more thorough approach to understanding
two key elements—customers and competitors.
Step 3 Strategy Design Strategy design is the step in which strategy planners decide how to
meet or exceed the objectives that have been set, given the realities of the business envi-
ronment. The tools discussed later in this chapter can aid in the determination of what
businesses to pursue and how to pursue them.
The preferred method espoused by strategic management authors has been to
create alternative strategies and choose the best from among the alternatives. In reality,
strategy planners begin formulating strategies as they perform the SWOT analysis. Very
often, a single best strategy is already in mind when they complete the analysis. When
this occurs, little is gained from creating an alternative or two. These tend to be strategies
purposely designed to be inferior to the original strategy, thus reinforcing the “intuitive”
strategy developed concurrent with the SWOT analysis.
If we are designing corporation-level strategy, such a strategy should include:
• A vision of the business and its industry in the future
• The choice of goals and objectives (which may be revised or refinements of
goals and objectives established in Step 1)
• The choice of which businesses to pursue
• The determination of allocation of resources across businesses
• Determination of which strategic competencies to emphasize and build in the future
• Allocation of resources to invest in building strategic competencies.
Business unit strategy involves these same elements, scaled down to the business
unit level and adapted to fit within the corporate strategy. The content of marketing or
product strategy is addressed in Chapters 7 and 8.
Step 4 Implementation Plan Design After the strategy is designed, the planners must decide
what actions need to be completed to accomplish this strategy. In this step, planners or
managers decide who will do what, when, with whom, and at what cost.
At this stage resources must be allocated to measure results, analyze the mea-
sures, and make adjustments. Too often, strategy plans—at any level—do not include
a specific allotment to accomplish the post hoc data collection and analysis. Without
this monitoring effort, the organization does not learn much about what worked and
what did not, reducing the value of the experience. Often, organizations attribute
success to themselves and failure to outside forces. In this mode of operation, it is diffi-
cult to really know what worked and repeat it, and what did not work and avoid it.
Once the implementation plan is laid out, the costs, personnel resources, skills
needed, and time required are determined. If the implementation plan requires more
than the organization can afford, revisions in the strategy, or even in the objectives, need
to be made.
Step 5 Strategy Implementation Actions need to be taken and supervised, as required in the
implementation plan. Systems should be in place to check that actions are started and
completed per plan. If actions are not being taken or accomplished as scheduled, remedies
need to be sought.
Step 6 Monitoring of Environment and Performance Results As noted in Step 4, part of
the implementation activities should be designated for collecting and analyzing data.
These data should track progress toward the objectives determined in Step 1. In the
implementation plan, subobjectives may have been set to track progress toward meeting
some higher-level performance target. Data need to be collected relative to these
subobjectives as well.
Step 7 Analysis of Performance Any significant variance from desired performance
levels needs to be examined. Both under- and over-achievement need to be assessed.
The purpose of the analysis is to determine why the variance occurred. This may
require interviews with participants, collection and assessment of satisfaction
surveys, or other market research.
Step 8 Adjustments Based on the analysis of performance, adjustments may need to be made
to strategy, implementation, environmental knowledge, or any other planning element,
including the original goals and objectives. Small adjustments can probably wait until the
next planning cycle. Big adjustments may require an entirely new plan to be produced.
Most organizations close the strategic management loop by starting from scratch once
a year; though in rapidly changing markets this timing may not be sufficient.
A Critique of the Model

The implementation of this strategic-planning model is a long, drawn-out process, no matter
at what level it is performed. It takes commitment to both undertake the planning process and
tolerate the extended time it takes to create a good strategy. The process can be fast-tracked to
a certain extent by running some activities in parallel and by making assumptions rather
than collecting data. With the advent of collaborative software, either using the Web or run-
ning internally on a company’s network, much work can be done “together.” This also helps
reduce time or makes the plan better.
To reduce the “time to strategy,” planners may want to use software from reputable
software vendors that helps the planner organize and analyze data about the business environ-
ment. The drawback to using template software is that the software does calculations that are
invisible to the user and may imply a certain direction not entirely consistent with the unique
situation at hand. The planner then does not get the feel for the operation of the market model or
the company’s profit model—the planner misses some of the “hands-on” implications of the
plan. Perhaps a better approach is the use of off-line templates2 that take the user through
analysis quickly but rely on the user to understand the data and to do the calculations.
In the end, it is better to take the time to go through the analysis and planning steps rather
than to give in to the temptation to not do the planning and rely on the company’s ability to
adjust “on the fly.” The insight gained from taking some time to collect data and think about
it seems to outweigh any advantage of being fast, but uninformed. In too many instances
companies try to be first to seize an opportunity, only to fumble the attempt because they didn’t
understand it.
Another problem that this planning process will encounter is the tendency to drain the life
out of a strategy. Related to this problem is the tendency to miss opportunities to innovate or
change the rules of the market or industry, both potential outcomes from stifling the creative
process. This problem stems from a tendency to get stuck in the analytic portion of the planning
process. When it comes to designing strategy, time needs to be taken for a creative exercise. The
difficulty here is to recognize that planners may have already created most of their preferred
strategy while they were in the analysis phase, which may or may not have been done with
a close understanding of the market and its participants. This suggests that a creative exercise
may have to be done during the analysis phase rather than waiting for the strategy design
phase to do it.
In summary, the process laid out here is based on the “old way” of designing strategy. We
believe the drawbacks of doing this process, particularly in light of the time compression forced
by today’s fast-moving markets, can be overcome. The benefits from taking a little time to do
this will pay off in most cases.
KEY STRATEGY CONCEPTS

Philosophies and approaches to strategy have evolved over time. Key ideas that have survived to
form the basis for traditional strategic management are:
1. Business strategy designers should seek to establish a fit between the Fit between the business
business environment and the strategy. strategy and the business
2. The key element of fit in business strategy revolves around providing environment means
that the organization
superior value for customers. pursues purposes and
3. Superior value means that the offering of a company must be differenti- takes actions that are
ated from the offerings of competitors in the minds of the targeted consistent with the needs,
customers. perceptions, and
4. Differentiation is produced by using core competencies to advantage; the behaviors of the other
actors within the
more distinct a company’s core competencies, the higher the customer environment.
value that can be achieved and the better the profit margins that can be
produced.
5. Quality improvement and process improvement are fundamental to providing superior value.
6. Measuring and tracking results creates learning and sets the stage for later improvements.
Modern strategy has become focused on driving change rather than on adapting to it.
Hamel and Prahalad3 espouse the idea of changing the rules, both internally within a company
and externally within the industry. In light of the terms outlined above, the company attempts to
drive change in the environment toward a configuration in which the company better fits the
environment than does its competition. The company is able to provide more value to a set of
customers that has been created than its competition can provide. The company Core Competencies are
identifies its core competencies that give it differentiation. It builds a vision a company’s skills,
of how the industry will change over the next two to five years. Then it builds capabilities, and
a vision of how the company can influence change to create a favorable situation knowledge assets that are
necessary to compete in
for itself. Core competencies to drive that change and to differentiate its offering its markets. They may be
in the future are identified, and methods for building those competencies are competencies that the
laid out. Learning objectives, opportunities, and methods are also spelled out company currently has or
and implemented. This proactive approach is somewhat different from the ones that it will need to
traditional model of adapting to change. obtain.
New views of competitive dynamics have emerged recently, as well. The notion of
“co-opetition”4 says that companies operate in a business ecosystem, where their efforts involve
cooperation as well as competition. Partnerships and alliances form to create combination

offerings; the combinations may be driven by customers seeking to obtain whole products that no
one company has produced or even coordinated. Value creation occurs through the kinds of value
networks and integrated supply chains described in Chapter 2.
These recent ideas on strategy can be summed up as follows:
• Change in customers, channels, and competitors interact to create discontinuities in the
evolution of industries or markets; these are somewhat predictable, with a high level of
imprecision.
• While companies can have an influence on how markets change, they can seldom appreciably
impact the pace of change.
• Companies need to look for ways to “change the rules” of the markets they compete in;
this means proactively creating conditions for success that favor their own business model
instead of those of the competitors.
Business model is • Such changes in the rules are still subject to the constraints of the business
a configuration of the environment; constraints may have some flexibility and this flexibility must be
elements of a business,
how they work together,
recognized.
and how they produce • Strategists need to identify the core competencies that will translate into
profits. advantages in the future 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.5 (See box on page 115 for
a definition of “market ownership.”)
Strategic Resource Allocation

Organizational resources, be they infrastructure, personnel, finances, or technologies, are not
limitless. A major outcome of the strategic planning process is to allocate finite resources to the
opportunities that will have the greatest benefit to the organization. This requires knowledge of
current distinctive competencies and an anticipation of future core competencies that the organi-
zation may develop or acquire. All of this is structured to address the organization’s “strategic
intent.”6 This is the vision of the future that gives the organization direction and a plan to have
a role in the future.
Strategic Business Unit Management

Determination of corporate strategy creates the “strategic architecture” that will guide the orga-
nization over the next five to ten years. Business unit strategy is strategy at the next level down in
the hierarchy and is guided by the corporate strategic architecture. In single product or single
division firms, this is relatively straightforward. However, in firms that are engaged in multiple
businesses that span a wide range of markets, alignment with the strategic architecture is not
always obvious. A plan for a division of a large firm that operates in a long-cycle, mature tech-
nology market would not be suitable for another division of the same firm that operates in
a short-cycle, fast-growth market. Additionally, the existing customer base of a division or firm,
its size and behavior, contributes in the determination of what the best plan may be. Since these
factors can vary between the divisions of a large firm (and in fact should such that a balance
of business opportunities exists), a methodology that provides for incorporation of the firm’s
strategic direction while allowing a strategy at the division level appropriately tailored to the
environment in which the division operates is desirable.
Many large, multidivision/multimarket companies (e.g., GE, Siemens) sep- A strategic business unit
arate businesses into individually measurable pieces called strategic business is a business, department,
organization, or possibly
units. A strategic business unit (SBU) is a business, department, organization, or
even a product line within
possibly even a product line within the larger organization that has separate goals the larger organization
and objectives. These business units must be capable of being planned and mea- that has separate goals
sured separately from the rest of the organization. Note that separate planning and and objectives. These
measurement do not mean complete independence from the larger organization or business units must be
capable of being planned
other SBUs within the larger organization. Firms that use SBU management view
and measured separately
the different SBUs of the firm as comprising a portfolio of businesses. A signifi- from the rest of the
cant management effort is committed to maximizing the productive allocation of organization. Note that
resources to these units. Thus, this business portfolio is a collection of SBUs that separate planning and
serve various needs in the corporate structure. An ongoing firm will need sources measurement do not mean
complete independence
of cash to fund investment in growing markets and new possibilities emerging
from the larger
from research and development that may be valuable business opportunities in the organization or other
future. This balance should be consistent with the culture of the organization. This strategic business units
is not unlike the combination of investments individuals have in their personal within the larger
portfolios—resources that are consistent with goals and culture of the individual. organization.
Strategy at these levels of the organization involves the following: A business portfolio is
a collection of strategic
• a choice of the market segment or segments to target;
business units that serve
• a structure of a portfolio of products (including services) to address various needs in the
the targeted segments; corporate structure. An
• positioning of the offering(s) for that segment or segments; ongoing firm will need
• product and service features to include and emphasize in the offering; sources of cash to fund
investment in growing
• communications and selling methods to address the targeted segment(s)
markets and new
and implement the chosen positioning; possibilities emerging
• a design for managing distribution; from research and
• design of a pricing structure; development that may
• an approach for developing key capabilities and competencies; and be valuable business
opportunities in the
• a design for innovating in the elements of marketing in the future.
future. This balance
should be consistent with
the culture of the
TOOLS FOR DESIGNING STRATEGY organization. This is not
unlike the combination
So far, we have discussed what strategy is, a strategy management model that can of investments individuals
be used at any level of the hierarchy of a firm, and the key ideas for structuring have in their personal
strategy, no matter at what level of the organization. Our focus has been on the portfolios––resources
that are consistent with
business marketing manager who makes strategy for an individual product, for
goals and culture of the
a product line, or for the marketing function of an SBU. The rest of this chapter individual.
concerns the structuring of the portfolio of products and creating an entrepreneurial
approach to marketing strategy. The prior discussion should give the future business marketing
manager some idea of what will be asked of him concerning strategy and strategy development. The
question then arises regarding what tools are available for strategy planners to use. In the next
section, we discuss three tools. The first, the growth share matrix, may have its most relevance as
a tool for students to understand some of what business strategists attempt to do with corporate
strategy. The second, the multifactor matrix or attractiveness-strength matrix is used more often in
the real world. The third is the balanced scorecard, which attempts to help the manager see the
relationship between strategy and performance.
Relative Market Share

High Low
High
Stars Question marks

Market
Growth
Rate
Cash cows Dogs

Low
EXHIBIT 5-5 Growth-Share Matrix
The Growth-Share Matrix

Exhibit 5-5 shows the growth-share matrix, which was developed by the Boston Consulting
Group over thirty years ago. Students may recognize this resource allocation tool and its
categorizations of SBUs as stars, cash cows, dogs, and question marks. This tool is probably best
used to illustrate the construction of business portfolios to create a company that will evolve and
remain profitable over time. The idea underlying the growth-share matrix is that organizations
seek to develop and nourish those business opportunities with the greatest potential for growth;
maintain those that are self-sustaining producers of resources; and “harvest”—exit, while
reaping as much benefit as possible—those that are no longer able to function productively
within the organization. This is not unlike an individual seeking the greatest return from his or
her personal investment portfolio.
Application of the matrix requires the user to identify those businesses—or products, if used at
the level of the business marketing manager, —that generate resources for the parent organization
(cash cows); those that need resources from the parent organization to keep pace with a fast-growing
market and provide substantial returns in the future (stars); and those that may never be significant
contributors to the corporation in the future (dogs and question marks). Without a thorough under-
standing of the tool and its nuances, the complexities of today’s business environment will not be
well reflected in its use. However, the matrix provides a useful starting point to discuss and illustrate
portfolio strategy issues. This discussion also sets up a nice transition to the attractiveness-strength
matrix, which can be more useful in light of today’s business environment.
The definitions of the four elements of the matrix follow. Note the addition of the analogy
to the product life cycle (PLC). Just as an offering can move through the stages of the PLC,
a business unit, product line, or product will often evolve from question mark to star, star to cash
cow, and cash cow perhaps to dog, counterclockwise around the grid:
• Stars: High-growth markets and large market share. The organization must invest heavily
to maintain position in the growing market. A star could likely be a business unit with
a prominent position in a product/market that is in the growth stage of the PLC. Stars
should be managed with market ownership as an objective.
• Cash cows: Relatively slower-growth markets where the business unit has prominent market
share and may be the market owner, albeit in a slower market. As the name implies, these busi-
ness units generate cash that fuels other parts of the organization. Business units identified as
cash cows are often in the late-growth, mature, or even decline stages of the PLC.
• Dogs: Slow or negative growth relative to the goals of the organization, with a less than
prominent market share. While a direct analogy to the PLC places dogs in the decline
stage, dogs can occur at any stage of the PLC except growth. Organizations must choose to
either divest the business or continue to harvest it for short-term cash. In some instances, a
dominant market share is not sufficient to make these SBUs attractive, particularly when
the resources to maintain the business can be more effectively applied elsewhere.
• Question marks: Significantly attractive market potential, though the business unit does
not have a significant share. Question marks are appropriately named. The business
may require significant investment, may not be directly associated with the competen-
cies of the firm, and may never grow to be a prosperous business. This situation could
exist when an organization discovers a technology or business opportunity not aligned
with corporate goals and/or in a new and unfamiliar market or not consistent with
the company’s core lines of business. Question marks raise the question, “Should the
organization diversify (new product/new market) or divest?” Question marks can be
viewed as in the introductory or early-growth stages of the PLC.
RETHINKING THE MATRIX The growth-share matrix has several characteristics that can limit
its usefulness in today’s business environment. First, one of the key assumptions is questionable:
the relationship between market share and profitability is suspect. This tends to undermine the
validity of the analysis and its implications, depending on the organizational measurement of
success. A myopic market view can be an implication of market share as a principal measure of
success. (Later in this chapter, “market ownership” is discussed as a more dynamic, market
focused measure of success. Market ownership is summarized in the box below.)
Market Share Is Not Market Ownership
In “Marketing Is Everything,”1 McKenna discusses markets that serve the owners’ customer
owning a market. From his discussion, we can form base. Third parties define their products
three indicators of market ownership: as compatible with market owner. In this
ancillary product development process, the
1. Market owners define a market niche as theirs
market owner may be consulted by the devel-
and work toward dominating it. Their brand is
oper to ensure compatibility with future
immediately identified as the standard in that
products. The owner thus gains insight to
market. Examples are Hewlett-Packard Laser-
other points of view about its market.
Jet printers and GE Lexan Polycarbonate Resin.
These branded products are defacto standards Market share is not a defining parameter
in their industries. Competitors to both prod- that leads to market ownership, as is often mistak-
ucts note their equivalence to those offerings. enly implied. Market share is more likely a result of,
2. Market owners continue to evolve their offer- not a cause of, ownership.
ings with the next generation as defined by 1
Regis McKenna, “Marketing Is Everything,” Harvard Business
the value presented to the customer. Review (January–February 1991).
3. Market owners benefit from other organi-
zations developing ancillary products and
The second characteristic is that the distinctions between the categories of star, cash cow,
question mark, and dogs tend to be circumstantially defined. Organizations must place business
units in the matrix based on internal standards and perceptions of the relative market positions
and growth opportunities of the business. Thus there is an inherent subjectivity in the analysis
that makes it less likely that a business will be viewed the same way by two different organiza-
tions (e.g., one organization’s dog could be another organization’s star—see the example on
page 117). Since there are no universal rules, an SBU’s position in the matrix is meaningful only
when compared to SBUs within the same corporate organization. Because of the subjectivity of
the measurements, the investment implications of the categories are not consistent. Stars may not
provide the investment return suggested by the model when compared to opportunities not on the
matrix but available if the organization were to look outside its own portfolio; cash cows may not
throw off as much cash as would be expected; dogs and question marks may be very viable
businesses when freed from the restraints placed on them through the relationship to the other
SBUs in the portfolio.
Perhaps the most telling problem is that the matrix is a snapshot in time. Current market
growth may have little to do with future market growth and, indeed, that future market growth
may be very unpredictable. Such unpredictability is one of the key reasons that Hamel and
Prahalad advocate trying to change the rules of the market or industry. Notwithstanding these
considerations, growth-share analysis still illustrates for the student the ideas underlying
consideration of the portfolio, whether it’s a portfolio of businesses within a corporation or
a portfolio of products within a product line.
Multifactor Portfolio Matrix

Our experience is that most companies do not use the 2 ⫻ 2 growth-share matrix to allocate
resources across business units. Rather they use a similar, but more sophisticated tool, the
GE market attractiveness—business strength matrix, shown in Exhibit 5-6, or something
Market
attractiveness
Protect position Invest to build Build selectively

High
Build selectively Limited

Medium Build selectively or manage for expansion or
earnings harvest
Invest/Grow
Low Protect & Manage for
Divest
Selectively Earn refocus earnings
Harvest/Divest
Strong Medium Weak
Business strength
EXHIBIT 5-6 Attractiveness—Strength Matrix
similar to it. This model assumes that, at lower levels of abstraction, no new competencies will
be built and gives preference to those businesses or products in which the company already has
competencies in place.
This tool also does not directly consider synergies between businesses or products. Unlike
the growth-share matrix, though, future business strength can be defined in such a way to give
a higher score to a business or product that makes better use of available resources. Thus this tool
offers more sophistication than the growth-share matrix.
Even though the idea of building a business portfolio is not new, it still has relevance today. It
makes sense to have businesses that create resources that can be used in other businesses that
require investment. Then, augmenting the portfolio idea with today’s strategy concepts, a company
may stick to businesses in which it has special competencies.
INCOMPATIBILITY OF CULTURES WITHIN ORGANIZATIONS Companies whose cultures feed

on rapid change and “pushing the envelope” of new markets and technologies find that they must
quickly abandon established, older offerings—their dogs. Alternately, they may become multi-
offering companies with several businesses at different stages of the PLC.
This evolution to a large, multioffering (read “bureaucratic”) company is not natural to
many technology-oriented or entrepreneurially oriented companies—in fact, it may be consid-
ered an aberration! Thus, portfolio analysis creation may be naturally resisted. Older products
are often discontinued rather than harvested. When two lines of business operate differently, such
as cash cows versus stars, a rivalry for resources will likely arise. The corporation that does not
handle this situation will see its cash cows stifle its future stars.
PORTFOLIOS AND VALUE Another factor that must be considered in this discussion of portfo-
lio strategy is the relationship to customer value and the value network. As noted in Chapter 2,
the most productive way to create an offering with maximum value for a particular market or
customer is often to include several elements from other organizations. As designed, the matrix
tools provide little assistance in partnership and network development. The internally defined
rules do not provide effective evaluation of businesses across organization borders, and, as is
often the case with internal metrics, a market perspective of value for customers is ignored.
General Electric Leaves the Small Appliance Business
An example of “one organization’s dog could be profitability. If placed on the growth-share matrix
another organization’s star,” albeit a consumer exam- and compared to other SBUs, this business would
ple, is the departure of GE from the small appliance likely be a “dog” by its internal measurements.
(“countertop”) market. Black & Decker, the tool manufacturer, was
Under CEO Jack Welch, GE established guide- interested in establishing a presence beyond the
lines to create a more dynamic organization. These garage. The GE Small Appliance business was an
guidelines said essentially that a GE SBU must be #1 ideal opportunity to obtain a major market pres-
or #2 in its market, fit with the vision and goals ence. By Black & Decker measures, the return was
of the “new” GE, and meet certain levels of prof- more than acceptable and the technology fit very
itability. The small appliance SBU, while the major well into existing competencies. When Black &
market player, was faced with a changing yet Decker acquired the SBU from GE, it is unlikely they
slow-growing market and poor (by GE standards) considered it a dog.
The shortsightedness of not fully considering customer value can be problematic

whether the company is engaged in a value network or not. The organization engaged in
a value network to create unified solutions for customers may lose the possible synergies
between internally generated businesses. At the same time, the conglomerate that uses
portfolio analysis without recognizing synergies across businesses may find that different
business units are qualitatively supportive of each other in the marketplace. Consider the
example of Siemens acquisition of UGS Inc. in 2007. UGS contributed its product lifecycle
management (PLM) software to Siemens’ Automation and Drives group that offers automat-
ed production equipment. This move adds a line of business that allows Siemens to offer
software for design and control that integrates Siemens manufacturing equipment more fully
into a customer’s supply chain.7
In summary, then, portfolios are a useful way to think about corporate strategy, business
strategy, or product line strategy, but they are not, by themselves, sufficient. Strategy requires
consideration of other important factors.
The Balanced Scorecard

Another tool—one that can integrate the steps of the strategic management process—has
received a great deal of attention over the last ten years or so. The balanced scorecard8 is as
much a process itself as a tool for strategy content. It focuses on the goals of the organization
and quantifies these into specific performance targets. The idea is to get away from sole
reliance on measures that are rooted in the past—such as return on investment (ROI), sales
growth, and market share—and concentrate also on measures that are forward looking, given
the company’s particular situation. Goals and measures are specified in four core areas:
financial performance perspective, customer perspective, internal business perspective,
and stakeholder (for instance upper-level management, partners, and channels) value per-
spective. Linkages between these perspectives are defined, and a limited number of measures
are sought.
The process pursued in developing the scorecard starts with managers discussing their
vision of the future and what will contribute to it. A facilitator draws a list of potential score-
card criteria from these discussions and presents it to the strategy-making participants. They
discuss these and come to some agreement on strategy and a shorter list of measures. Further
discussions set the vision, objectives, and measures. A set of activities to address the perfor-
mance targets is designed and implementation plans instituted. Data are collected and
compared to the targets. Performance is then the driver for strategy and strategy changes.
Note that this approach is consistent with the strategic management model.
TAKING AN ENTREPRENEURIAL APPROACH

TO MARKETING STRATEGY
Strategy often includes elements for shaping the internal workings of the company. It has
become evident that building an entrepreneurial culture within a company helps the company
adapt to environmental changes. In the last decade, entrepreneurial companies have also proven
that they can create change as well.
Creation of an entrepreneurial culture and approach to strategy is presented here, as well as
in Chapter 9, because the approach can be instituted at any level. If the business marketing
manager is involved in setting strategy at the corporate or business unit level, he may want to
address the reward system and organizational structure for creating a flourishing entrepreneurial
orientation company-wide. If the manager is working on strategy at the business unit or the
functional level, an entrepreneurial orientation can also be created with rewards and structure.
However, the constraints of the overall company organization must then be accommodated while
doing so.
As a first step in creating an entrepreneurial culture, companies begin by setting a mission
for the company that sets the tone or context. In the new strategic planning environment, com-
pany executives are likely to ask business marketers to participate in these efforts, either directly
in a planning group or indirectly through a representative participating in such a planning group.
To assist the business marketing manager to think in these terms, it is useful to discuss what goes
into a good mission statement, which can be developed for any level of the organization. The
discussion then recasts this with the spirit and dream of the entrepreneur, which enlivens an
otherwise static mission.
The Organization Mission

The mission for the organization must be an informed mission. In preparation for creating or
reviewing/revising the mission, information should be developed on the future scenarios that
the company is likely to face. This task should be done by the person in the organization who is
responsible for tracking industry trends. If no one is responsible, then outside consultants can
be utilized for this purpose. The information needs to be digested and disseminated to planning
participants. Participants then work toward envisioning how the company will help create its
future, as is discussed in the first section of this chapter. From this vision, the mission and broad
goals are derived.
So how do you know that you have an enlivened mission and a good set of useful goals? The
principal criterion is a sense of “ownership.” If individuals at all levels of the organization have
a sense that they are working toward something that they feel is significant to them—that the goal
is their own—they will be motivated to pursue it. If they feel that this is the goal of the “company’s
executives,” something separate from themselves, and they are pursuing it because they are being
paid to do so, then the goal will take second position to the individuals’ own agenda items.
Similarly, if they feel the goal comes from the company’s internal cultural code, they will have
less sense of motivation.9 Cultural codes generally do not produce a vision or goal that is particu-
larly challenging. This is particularly true in large organizations.
FOSTERING OWNERSHIP How is ownership created? It is done best by involving individuals

in determining vision and goals. A particularly entrepreneurial person may arrive at a unique
vision for the organization. To get others on board, the executives need to provide support for
such individuals and help them in persuading the other employees in taking ownership of the
entrepreneur’s vision and goals. Innovation should be rewarded with both monetary and organi-
zational compensation. Innovators should be given freedom from traditional organizational
constraints in the pursuit of their ideas. Management needs to be cognizant of the social effects
of their reactions to the innovators. Management creates the context in which innovation can
grow by its role model and attitudes toward innovation and should help create an environment
in which the “whole is greater than the parts.” Management can foster this by ensuring that all
participants reap rewards from the new venture, commensurate with their contribution. Efforts
to enhance the dream and the design of the product, project, or new venture should be encour-
aged and reinforced, as well.
Changing the Rules

The ultimate way for a company to act entrepreneurially is to change the rules of the market, as
was discussed in the early part of this chapter. However risky it is to attempt to change the rules,
if the new rules come to be adopted by the market, the action may have the effect of upsetting the
current competitive balance and starting the process of establishing a new market owner.
Research in Motion Ltd. (RIM) launched its BlackBerry smartphone in the late 1990s with
a concept that changed the rules of the game. The key differentiating feature of the BlackBerry
was the wireless service, run by RIM, that allowed the user to send and receive e-mail. The
primary customers were businesses that enabled their company e-mail systems to connect
through the RIM service. The e-mail access that this produced for companies’ employees, partic-
ularly professionals, managers, and executives, upset the competitive rules of the game in PDA
and smartphone markets that existed at the time.10
We will return to developing an entrepreneurial approach to business marketing when we
discuss innovation in Chapter 9. For now, it is important to note that developing a culture that
facilitates entrepreneurship and pursuing strategy that changes the rules of the marketplace are
integral to producing superior results from strategy.
SPECIAL ISSUES IN BUSINESS STRATEGY

This chapter provides an introduction to the nature of strategy and the process for developing and
managing strategy. In this final section we explore the implications of the principal issues and
themes we have raised in this text.
Strategy Implications of Value Networks and Integrated Supply Chains

In this volatile environment, winning strategies will hinge on developing a portfolio of core
competencies. One of these competencies must be flexibility to change strategies and operating
models rapidly. The value network concept, discussed in Chapter 2, provides a model for
businesses to rapidly forge new offerings through a combination of both internal and external
resources. This process can be viewed as analogous to a “fast vertical integration.”
The idea of building in flexibility through “fast virtual vertical integration” stands diamet-
rically opposed to the current trend toward integrated supply chain management. Most efforts to
integrate supply chains have tended toward a reduced number of suppliers, lean inventory struc-
tures, and supply chains serving the primary interests of one large customer. These supply
chains have been structured for efficiency and cost minimization. Supply chains have achieved
lower costs at the expense of being able to adjust to changing supply economies and changing
customer needs.11
The dynamic nature of competitive markets must be accommodated in strategy design.
Flexibility is also required to cope with sudden contingencies, such as natural disasters, manmade
disasters, or terrorism.
Strategy Development and the Internet

A special consideration is what happens to strategy management with the increased use of
the Internet. As with most dramatic improvements in communications ability, markets can
change more rapidly and with potentially different patterns. The Internet is thus a tool that can
improve value to both suppliers and customers. In many business markets, new intermediaries
have created market exchanges of one sort or another. Competitive dynamics, customer require-
ments, and the nature of relationships have all changed as a result.
The Internet can be used to do several things that ought to factor into the strategist’s
thinking:
• It can increase the speed with which the environment changes.

• It can reduce transaction costs, shipping costs, information costs, and inventory costs.
• It can increase the level of information available to customers and competitors.
• It can increase the capability to create an offering that is seamlessly pieced together from
several partners’ offerings, particularly when a Web site is a principal delivery mechanism
for the offering.
Strategic Implications of Market Ownership

The portfolio of strategic competencies—either internal, the result of diversification or inte-
gration, or external, the result of relationships developed through a network of value
providers—is key to pursuing market ownership. If the company chooses competencies to
develop that are important in multiple businesses, the company can hope to produce value for
customers across a range of possible futures. By taking a proactive approach and “pushing
the envelope” within a market, the company can shape that market and the nature of its
participants. The process to produce this strategy does not have to differ much from the
process described earlier. While traditional strategic-planning processes are not geared for
the uncertainty or speed of change engendered by the Internet, the process can be adapted to
focus on monitoring the environment and performance, updating knowledge of the environ-
ment, and adjusting strategy accordingly.
Strategy Development in New Businesses

Strategy development in new business-to-business organizations is a particularly relevant topic
in light of the activity in business-to-business Internet start-ups over the past decade or so. One
advantage of starting a business-to-business operation is that often one customer can be the prin-
cipal reason for going into business. That customer can provide all the financing, in whatever
form, that the new business needs. The danger is that the new venture’s business will become
completely dependent on the one customer and will ignore any opportunities elsewhere. This
may leave the new company in the unenviable position of having “all its eggs in the same
basket”—being too dependent on the one customer.
Even though problems persist, executives in new companies should not forgo the
strategy-planning process. New ventures that plan tend to do better than new ventures that do
not, even if their plans rapidly become works of fiction as the environment changes. This is
why venture capitalists require a business plan before they will consider funding a new
venture. The planning process for a start-up is not so onerous—other than the founders’ loss of
sleep—than the process in an established company. Fewer people are involved; hence, fewer
arguments occur over interpretation of trends and courses of action. The business is usually
not as complex as that of an established company. Also, the people involved are routinely
energized and enthusiastic. The important factor, though, is that the founders know the market
and the business better after having done the planning. The pieces of the business tend to fit
together much better as a result.

Much of the last forty years’ thinking on business strategy and strategy development processes still
has relevance today. Businesses develop goals and objectives and then find ways to try to reach those
goals. Businesses try to reach those goals by providing superior value to targeted customers. The strat-
egy must fit the requirements of the business environment, including the requirements of all the
relevant stakeholders. A portfolio of businesses is chosen that allows the business to grow and create
profit into the future. The process for creating and managing strategy starts with developing goals,
then uses knowledge of the environment to create strategy that can be implemented and adjusted.
Newer thinking on strategy and processes changes the nature of strategy to include a vision of
the future and core competencies required to create that future. The process today is often more encom-
passing, involving more people throughout the organization. Very often it is driven by close attention to
performance measurement that is customized for the company’s particular situation. Measures are set
and performance tracked. Performance against the measures is the basis for making adjustments.
The business-to-business marketing manager has to live with the strategy that is developed
at the corporate level and may have to participate in its development. Knowing what is being
done and why helps the manager to be a full participant and guides the manager’s attempts to
implement the strategy.
The Siemens vignette introduced at the beginning of this chapter illustrates several of the
points made in this chapter. It shows Siemens altering its portfolio to improve its performance. It
shows Siemens changing its core competencies to improve its performance in current and future
lines of business. It shows Siemens attempting to alter its internal environment, making the
company more customer focused and entrepreneurially oriented. One thing it does not show is
a company that has changed its strategy through a drawn out strategic planning process. Rather,
the CEO, Heinrich von Pierer, initiated the changeover. Think about the advantages and disad-
vantages of this approach. Would the outcome have been better or worse if von Pierer had
involved hundreds of people within the organization to rethink Siemens’s strategy?
Now that the discussion has examined strategy at the corporate and business unit level, it
can move on to the development of marketing strategy within this strategic context. Chapter 6
presents the specifics of gathering and analyzing data concerning the relevant business environ-
ment. Chapters 7 and 8 discuss using this data to develop the specifics of the marketing strategy.
Key Terms
balanced scorecard 118 goals 105 objectives 105
business model 112 growth-share matrix 114 strategic business unit 113
business portfolio 113 market attractiveness—business strategy 105
core competencies 111 strength matrix 116 strategic management process 107
differentiation 111 market ownership 115
fit 111 mission 105

1. What is the difference between corporate strategy 3. How can a company mission statement be made to
and marketing strategy? What are the similarities? provide motivation and guidance for a company,
2. What is the process by which marketing strategy rather just giving lip service to a set of unrealistic
ought to be formulated? values and goals?
4. Suppose you are working on constructing a portfo- 8. To what extent are entrepreneurial marketing and
lio of businesses for your company to pursue in the the strategic management process consistent?
next three to five years. What makes for a good Inconsistent? Explain.
portfolio of businesses? What makes for a good 9. Discuss the relationship between market ownership,
portfolio of products? value networks, and the trend toward integrated
5. Is the balanced scorecard consistent with the strate- supply chains in today’s market.
gic management process outlined in Exhibit 5-3? 10. Discuss typical planning cycles other than the
Explain any inconsistencies. often-used annual cycle. How should rapid innova-
6. Suppose you are involved in starting a new business tion and fast-paced change impact the frequency
in a fast-changing environment, such as radio fre- and duration of strategy planning?
quency identification (RFID) products. To what 11. The chapter related the BCG growth-share matrix to
extent would the strategic management process be the PLC. Other than the pace of changes in the mar-
useful in planning strategy for such a new business? ket, what are the similarities in the marketing mix
7. Suppose a company follows the strategic manage- between stars/the growth stage, cash cows/maturity,
ment process with a degree of diligence. Yet, the question marks/introduction, and dogs/decline?
company executives recognize that the business 12. How can moving from a question mark to a star
environment is rapidly changing. How might such (in the counterclockwise evolution around the
a company adapt the strategic management process growth-share matrix) be compared to crossing the
for such an uncertain environment? chasm?
Endnotes
1. Based on: Jack Ewing, “Siemens Climbs Back,” 5. Peter Dickson, “Toward a General Theory of
Business Week (June 5, 2000), pp. 79–82; Jack Competitive Rationality,” Journal of Marketing,
Ewing, “Siemens Proves Prudence Is a Virtue: It’s 56(1) (January 1992), pp. 69–83.
Healthy, While Fast-Growth Rival ABB Is in a 6. Hamel and Prahalad, Competing for the Future.
Shambles,” Business Week (November 11, 2002), 7. “Siemens acquires PLM leader UGS,”
p. 33; The Economist, “Business: A European Manufacturing Business Technology, 25(3)
Giant Stirs; Conglomerates” (February 15, 2003), (March 2007), pp. 8–9.
p. 65; Jack Ewing, “All Eyes on the Corner 8. Robert S. Kaplan and David P. Norton, “The
Office; The Race to Succeed Siemens’ Longtime Balanced Scorecard—Measures that Drive
Chieftain Has Begun in Earnest,” Business Week Performance,” Harvard Business Review
(March 1, 2004), p. 52; Jack Ewing, “Is Siemens (January–February 1992), and “Putting the
Still German?; The Jobs are Going Where the Balanced Scorecard to Work,” Harvard Business
Customers Seem to Be—Abroad,” Business Week Review (September–October 1993), pp. 134–142.
(May 17, 2004), p. 50; PR Newswire, “Siemens 9. Paul Sherlock, Rethinking Business to Business
ultrasound number one in the U.S. for the fourth Marketing (New York: The Free Press, 1991).
year in a row” (August 9, 2004). 10. Lisa Bransten, “Start-Up Joins Hand-Held-
2. Robert W. Bradford and J. Peter Duncan, Device Battle,” Wall Street Journal (Eastern
Simplified Strategic Planning (Worcester, Mass.: Edition) (May 9, 2002), p. B.5.
Chandler House Press, 2000). 11. Hau L. Lee, “The Triple-A Supply Chain,”
3. Gary T. Hamel and C.K. Prahalad, Competing Harvard Business Review, 82(10) (October
for the Future (Boston, Mass.: Harvard Business 2004), pp. 102–113.
School Press, 1994).
4. Adam M. Brandenburger and Barry J. Nalebuff,
Co-opetition (New York: Currency Doubleday,
1996).
Chapter 6
Market Research and

Competitive Analysis
OVERVIEW
As stressed in prior chapters, business-to-business marketing is different from
consumer marketing, necessitating somewhat different approaches for
understanding buyers than is commonly done in consumer markets. In this chapter
we examine the market climate created by the influences of customers and
competitors. In Chapter 3 we discussed the nature of the buying center and the
business buying decision process to provide a framework for understanding buyers,
their decisions, and the behaviors that impact them. The first section of this chapter
demonstrates various methods to obtain that understanding. The second part of this
chapter examines methods for understanding competitive activities in the market.
Well-developed marketing organizations nurture data acquisition from all
sources. A major asset in the development of a competitive view is the ability to
combine bits and pieces of information from multiple sources to form a larger picture
of the competitive landscape. The ability to anticipate the type and range of
competition in market segments is necessary to make informed judgments about a
firm’s ability to compete in those segments. Similarly, the design and development
of a truly competitive offering depends, in part, on anticipating the value offered by
competitors in those segments. Market research and competitive analysis develop
information that increases the ability of marketers to make those informed
judgments.
Example: IBM Relearns Its Customers’ Perspective1

In 1993, Lou Gerstner took over the reigns at IBM, having previously been CEO at American Express.
At the time, IBM was in a funk. Its stock price was slipping and it had lost its industry position in
personal computers. Executive management at IBM was considering breaking the company into as
many as a dozen separate businesses to reinstill competitive fervor in the operating units.
The old adage had been that “no one was ever fired for buying IBM.” But IT managers couldn’t
count on that any more!
124
Chapter 6 • Market Research and Competitive Analysis 125
Gerstner examined the business and decided that IBM was stronger as an integrated company
than as a bunch of separate businesses. He took IBM back to its roots to begin the turnaround and began
visiting major customers personally, one on one. For second tier customers, he held meetings with CEOs
of twenty or more customers at a time. He asked questions. He listened.
For the better part of a decade, IBM had moved away from this model of customer learning.
Increasingly, it had called on lower and lower levels in the customer organizations, down to the IT man-
ager level, and it lost touch with corporate customers’ problems. Now Gerstner was setting the example
of visiting and listening and prodding his marketers and salespeople to do the same. Gerstner nurtured—
in fact required—his team to be sensitive to bits and pieces of market data. New products followed, as
well as new software and service initiatives. One of the principal contributions Gerstner made was to
create IBM Global Services, which quickly became one of the largest consulting organizations in the
world. By 1996, IBM was back to being a major force in the information industry.
The important part of the strategy for the purposes of this chapter is the way that Gerstner pursued
his initiation into the computer industry. His approach to learning the markets was to go to customers
and find out what their problems were. Then he sought solutions to their problems and the customers
responded. This typifies market research in business-to-business markets. It works because the markets
are often oligopolies—the number of customer companies is relatively small. The more the marketer
talks with and listens to customers, the greater her empathy for their situations and problems and the
more likely that she will find something that can meet their needs.
Notice that the focus was on customers, not on competitors. By understanding customers, a
strong competitive positioning evolved.
In 2002, Gerstner decided to retire, turning over the reigns to Sam Palmisano, a veteran IBM
employee who joined the company in the mid-1970s. Palmisano, who came up through the IBM sales
organization, pursues the customer-focused methods espoused by Gerstner. Since assuming the top
position, Palmisano typically spends 60 percent of his time talking with customers. Out of these dis-
cussions, Palmisano has learned that IBM needs to further integrate the pieces of customer solutions that
have typically been offered by its various business units2.
Today IBM continues to perform well and to lead or mingle with the leaders in most major parts
of the industry. One of the strongest parts of its business remains in services and consulting. Many
industry reports3 conclude that IBM Global Services is a leading “global market maker” for Customer
Relationship Management (CRM), Service Oriented Architectures (SOA), and other consulting
services. This demonstrates IBM’s leadership in helping clients become on-demand businesses, with
business processes that are integrated across their company as well as externally with key partners,
suppliers, and customers. This gives them a natural way to continue to listen to their customers and learn
where the new problems are cropping up.
LEARNING OBJECTIVES
䊏 Appreciate the rationale for market research in business-to-business markets.
䊏 Understand the differences in market research between consumer and business-to-business
marketing.
䊏 Understand the kinds of market research methods employed in business-to-business
marketing versus consumer marketing.

䊏 Understand how current trends influence how market research is done in business-to-business
marketing.
126 Chapter 6 • Market Research and Competitive Analysis
䊏 Understand the theoretical context guiding the collection of competitor data.

䊏 Know what kinds of data need to be collected on competitors and likely sources for
these data.
䊏 Understand the effect of current trends on competitive information collection. Obtain practice
in performing competitive analysis in a business-to-business setting.
INTRODUCTION
A marketing orientation necessitates that you know as much about customers, competitors, and
the business environment as can be effectively and ethically collected. This implies that you
will collect information about markets, your customers, your prospective customers, your cus-
tomers’ markets and customers, and your existing and potential competitors. All of this
information collection and interpretation falls in the general domain of market intelligence.
Market intelligence includes the results of both formal, planned investigations as well as the
collection of data that, without centralized collection and informed interpretation, would appear
as a number of random, unrelated events. The methods of collecting and interpreting these data
are often quite different. The portion of market intelligence that involves the design of a
research approach and the systematic collection, analysis, and interpretation of data on
customers and channel members belongs to the subset of market intelligence
Market research is the
systematic collection and known as market research. The other portion of marketing intelligence, less
interpretation of specific formal and seemingly random, most often includes activities directed at com-
data related to the petitors and is known as competitive intelligence (Exhibit 6-1).
resolution of a specific Formal market research involves rigorous adherence to research design,
problem or to satisfy a
careful data collection, careful analysis, and interpretation. This effort requires
specific objective. Such
efforts usually begin with an informed starting point—knowing what the research problem and objectives
a knowledge base, albeit are. Competitive intelligence gathering is less rigorous—often called “informal”
sometimes rudimentary, research. Competitive intelligence efforts, seldom part of a formal plan, still
that leads to the basic require information assembly and interpretation discipline. However, the data
premise of the
collected may tend to be more qualitative; and the data collection is more of an
investigation.
ongoing process, rather than a series of projects with identifiable starting and
Competitive Intelligence ending points. The intent of all this effort, though, is to learn about the market,
is the collection and its players, and the directions the market is taking.
informed interpretation In this chapter we specifically address market research and competitive
of what might appear at intelligence in business-to-business marketing. We begin with a review of
first as a number of
random, unrelated
the fundamentals of the market research process and the role it plays in the
events. organization.
Market Intelligence
Market Research Competitive Intelligence
EXHIBIT 6-1 Portions of Market Intelligence

MARKET RESEARCH
In a customer-oriented organization, the marketing process begins with knowing the organiza-
tion’s customers and prospective customers, just as Lou Gerstner sought to do when he went to
IBM and as Sam Palmisano did after taking over for Gerstner. To truly know customers, the busi-
ness marketer needs to understand the following elements:
• The customers’ technologies and processes. Learn your customers’ technology—how it

works and how they apply it. A willingness by the customer to apply technology will
impact the application of the supplier’s products.
• The customers’ products. What is your customer going to use the product or service for?
What will they expect of it? By understanding your customers’ products and their fit in the
market, you can better anticipate the needs of the customer.
• The customers’ markets and customers. Your distinctive competency may well provide an opp-
ortunity for your customers in their market; but first you have to know what they are attempting
to achieve. Know where the customer’s next opportunity is and make it your next opportunity.
• The customers’ competitors. This shouldn’t be a surprise, but your customers’ competitors
are your customers also—or should be—unless they are excluded from considering your
organization as a supplier by other considerations.
• The customers’ channels. How do your customers reach their customers? What level of
missionary sales effort, such as customer education and inventory assistance, do your cus-
tomers provide? Can you assist with channel logistics, beyond the expected supply chain
coordination, in any way? Are there buying habits in the end-user market that dictate a
particular channel behavior that isn’t ordinary (i.e., accompanying a companion product or
offering, or a channel dictated by the way customers buy related products)? Often products
that are accessories or supplies to an offering will flow in the primary channel as well as
different service channels to effectively reach customers. Knowing Your
• The customers’ buying center and buying patterns. How do your cus- Customers
tomers make decisions? Do they have several levels of decision making, Knowing your customers
includes knowing your
or are decisions made quickly with little oversight? Are there patterns to customers’
their buying that you can correlate to other events, such as climate, holi-
• Technologies and
day seasons, and natural calamities? processes
• The customers’ culture. Just as you may treat a market or technology differ- • Products
ently from your competitors in an attempt to differentiate yourself from • Markets and
them, your customers are doing the same thing. “Certain companies buy customers
• Competitors
from certain companies.” Tradition, long-term relationships, logistical con-
• Channels
siderations, common enemies, and many other factors contribute to the cul- • Buying center and
tural makeup of your customers. There are some things some companies buying patterns
will be reluctant to do and some risks that they may not be willing to accept. • Culture
Many information sources must be combined to provide this level of customer understanding.
Initial efforts include existing, though sometimes scattered, sources.
• The marketing manager may have had experience in the customer’s company, perhaps as
an engineer or salesperson. In such a case, the marketer understands customers because he
or she was one!
An Example of Different Cultures and the Effect on Choices of New Markets
AT&T was once a leader in the development and One approach to overcome its deficiencies was
use of computer technology. However, the U.S. to acquire a company that could compete. AT&T
government, who had granted the company a acquired NCR in 1991 in an effort to address the bank-
monopoly on the telephone service business in the ing computer market. However, the combination of
United States—until the breakup of AT&T in 1984, the two companies was still unable to overcome their
heavily regulated AT&T. cultural differences and AT&T spun off NCR in 1996,
AT&T knew a lot about computers—it had leaving the enterprise computing market for good.
been making computers for its own use for 35 The current AT&T, which is based in San
years. It considered the computer business one area Antonio, Texas, was formed in 2005 by SBC
in which it could effectively compete. Unfortunately, Communications’ purchase of its former parent
the culture within AT&T lacked the urgency needed company, AT&T Corp. As a part of the merger, SBC
to quickly develop and market cutting-edge products shed its name and took on the iconic AT&T moniker
in a fast-paced market. and the T stock-trading symbol (for “telephone”).
Secondary data can be • A marketer can talk with salespeople and customer service people who
internal information deal directly with the customers. She might talk with channel partners
compiled for other pur-
who also deal directly with customers.
poses, such as existing sales
tracking information, as • The marketer can obtain research from a research firm that has studied the
well as research conducted customers and their markets.
by someone else, such as a • The news media (newspapers, local magazines, and so on) in the city or
market research company, town of the customer may provide insight into the activities of the
usually for a purpose some-
customer (as well as competitors).
what different than the
marketer has in mind. For
instance, companies such The first two types of data, though useful, have unknown biases and are
as IDC, Gartner Group, difficult to generalize. The last two types of data, often referred to as secondary
and Jupiter perform gene- data, do not always provide the necessary direct knowledge about specific
ralized market research customer needs, preferences, and behavior. Just as a local news story may be the
related to computer and
result of public relations efforts in the community, much of this information
software markets. They then
sell the research reports to originated for purposes other than competitive analysis. In such a case, the
interested companies. The marketer needs primary market research.
marketers who buy the
reports do not have control
over the kinds of questions Market Research Fundamentals
that were asked or issues
addressed. Secondary data Market research is a powerful tool, but it is only a tool. Like any tool, it can be
can also be the results of a used properly, it can be abused, or it can be used to complete a task without
research effort developed providing the required result (ever been in the kitchen and, needing a screw-
for another reason. driver, ruin a butter knife?).
Primary market research The steps of the market research process are shown in Exhibit 6-2.
is the collection of data This is a general depiction of the market research process and is applicable
directly from respondents in both consumer market research and business-to-business market research.
in the population in
The validity and usefulness of market research are strongly impacted by the
question. The marketer
determines what data quality and accuracy of each step in the process. Marketers should be
needs to be collected and reminded that market research results are a snapshot in time and that
sets out to obtain it. markets will change.
1. Define the problem and research objectives

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
What respondents will be sought?
What sampling method should be used?
Design the research instrument.
3. Collect the data
Control the quality of data collection.
Enter data in database.
4. Analyze the data and draw conclusions
Apply appropriate analysis techniques.
Control for nonrandom error.
Draw appropriate conclusions, given the results and quality of data.
5. Present the findings
Apply information to decisions.
EXHIBIT 6-2 Steps in the Market Research Process
The following discussion summarizes some of the more elementary but salient points of
the steps in the process. The discussion is presented as if the process involves two principal
participants—the marketing manager and a market researcher. In reality, the marketing manager
may take both roles, or several people may be involved on the side of the manager and several
more on the side of the researcher.
DEFINE THE PROBLEM AND RESEARCH OBJECTIVES In this first phase of the market
research process, the marketer and researcher must define the problem and research objectives.
One reason often cited for poor market research is a failure to separate symptoms of problems
from the actual problem. Consider that poor sales are not really a problem, but a symptom of
other offering shortcomings. The researcher must investigate the “problem” or purpose to
know what “answers” are needed from the research. Without this guideline, the marketer and
researcher can collect lots of information about markets without having much use for it.
DESIGN THE RESEARCH METHOD TO ACHIEVE THE RESEARCH OBJECTIVES A sample is the members
Who in the market—or what part of the market—has the information needed to of the population to be
support the decision process? The results of the research will be greatly impacted respondents in a
research study. If you
by the selection of respondents, or sample. want to obtain an
What is asked and how it is asked will also impact the results. Sample size accurate representation
will determine the accuracy of statistical analyses, but more importantly, of the population, you
the method of sampling and design of the research method (survey style; open- will need to be careful
ended or closed-ended questions, delivery via mail, in person, or electronically; about how a sample is
selected. Ask your
personal interview, etc.) must be tailored to the type of market segment instructor to recommend
under investigation. Oligopolistic business-to-business markets (only a few a market research text
customers—see Chapter 2) will require an entirely different approach than to review sampling
market research in business-to-business markets with many buyers and sellers. issues.
COLLECT THE DATA In any primary market research effort, data collection has traditionally
been the most expensive step because it is usually the most labor intensive step. The quality of
data collection will be highly dependent on the knowledge, training, and attention to detail of the
research personnel. In business-to-business market research where there is a need for in-depth
personal interviewing, interviewers must have an adequate knowledge of the market, acquired
through either personal experience or secondary research efforts prior to the interviewing process.
The services of an outside market research firm may be appropriate, particularly when expertise in
specific markets is desirable (see the box, “Working with Market Research Vendors”).
ANALYZE THE DATA AND DRAW CONCLUSIONS In doing good research it is necessary to
remember what to do with the information collected and knowledge gained. While the type of
research instrument determines the style and character of the information that is generated, the
researcher must avoid drawing any conclusions not directly supported by the data or by the
respondent group. Marketers need to be wary of evidence seeking—interpreting the data
optimistically in a way that supports the conclusions the marketer wants to reach.
PRESENT THE FINDINGS As simple as it may sound, applying the information 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.
Implications of Types of Decision Support

There are three basic decision types that research can be used to support: a targeting decision, a
design decision, or a go/no-go decision, summarized in Exhibit 6-3. A thorough understanding
of market segmentation supports targeting decisions while an understanding of customer needs
and customer reactions to design variables supports design decisions. Go/no-go decisions are
made before launch of a new strategy, product, or program and can occur at several different
points before launch.
RESEARCH TO SUPPORT TARGETING DECISIONS When selecting market segments to target,

the researcher usually wants to have information that can be generalized to the market as a whole.
Such information would characterize the whole market and provide estimates of the size of the
segments that comprise it. Very often, a marketer will envision a new market for which little or no
information is available or easily obtained. In such a case, the marketer wants to gather enough
information about the segment or segments of interest to be confident that the identified market
segments are large enough to deserve attention. To get generalizable information, the research
must use sampling that is done well enough to determine the intricacies of the whole market
sufficient to categorize respondents into groups representing market segments. The first attempt at
A thorough understanding of segmented markets supports

Targeting Decision
the target decision process.
A thorough understanding of customer needs, reactions,

Design Decision and perceptions regarding features and attributes of the
offer supports the design process.
Continuous information provides better decision making

Go/no-go Decision
at critical stages or points in the development process.
EXHIBIT 6-3 Research Supports Three Types of Decision
Working with Market Research Vendors
Market researchers often need help from outside collection and analysis. The parties should discuss
agencies. Market research vendors come in all what levels of uncertainty are acceptable and pre-
shapes and sizes. Large ones often can provide ferred. They should also discuss the consequences if
resources to support integrated marketing programs. the research schedule should slip, as well as the
Smaller research firms often specialize in types of advantages gained if the research is completed early.
information collection, types of problems addressed, This will give the researcher a good sense of context so
or markets studied. In working with market research that the researcher can adapt the study design appro-
vendors, common sense will go a long ways toward priately as events unfold. The parties may decide to
getting the most from the relationship. There are, build incentives into the research contract so that the
however, some special circumstances that need to be research vendor will have good reason to strive for the
kept in mind when dealing specifically with research preferable levels of uncertainty and timeliness, rather
vendors. than settle for the merely acceptable levels. By talking
Research, by its nature, is a process of dis- about the trade-offs, the parties will tend to have
covery. When negotiating a contract, enough flexi- more open communications as the project progresses,
bility needs to be built in so that the process can which also leads to better project outcomes.
be changed as required. By the same token, the Finally, marketers seeking the services of a
researchers need to understand that deadlines for research vendor usually need to specify the problems
decisions must be met. Early in the process, the client that need to be addressed rather than the specific
and the researchers should discuss what dimensions tasks of the project. Professional researchers usually
of the research are the highest priorities. have a better understanding of the latest methodol-
Then potential trade-offs between the dimen- ogy than do marketing managers. Once vendors
sions of the research should be agreed upon. For have submitted proposals, the managers can seek
instance, a potential trade-off may exist between explanations from the vendors as to the advantages
level of uncertainty and the time required for data and disadvantages of the methods proposed.
segmentation will often be a product of the marketer’s best educated guess about the market. The
researcher must have a good idea of how the market will be segmented prior to starting the
research. Unfortunately, it is not often possible to have a good idea about likely segments without
doing some research. The implication of this is that good segmentation research is usually a two-
stage research design. The first phase is exploratory research and produces the basis for effec-
tively segmenting the market (usually based on differences in kinds of value sought—see Chapter 7).
Secondary data can make a significant contribution to the exploratory phase.
Exploratory Market Research
How can you tell just by looking at a city’s skyline jumped 30 percent this year, while the two major
how its business is faring? Just count the cranes! European manufacturers—Liebherr and Potain—
“They are the immediate indicator for the were so backlogged that Italian and Chinese
state of the economy,” says Leight Sparrow of cranes were taking a growing share of the Gulf
www.vertical.net, the UK-based online magazine market. A new tower crane costs $100,000 to
for crane cognoscenti. In 2007, 5–7 percent of all $1.9 million depending on the size. With demand
cranes were up in Dubai, Shanghai had about so high the second-hand market is booming: The
1,200, and Spain was the true tower-crane hub. cranes being used to erect the BURJ Dubai
The big players in these markets are Liebherr, were previously used on the PETRONAS Tower
Manitowoc, and Potain. A recent article in Con- in Malaysia. See Monocle, January 2007. www.
struction Week magazine said crane prices have monocle.com
Before designing the project, the marketer and researcher need to decide whether the project is to be
exploratory or conclusive. This decision depends on how much is already known about customers and
prospects.
Exploratory research differs a great deal from conclusive research. Exploratory research is
intended to get a sense of context and maybe some insight into possible relationships, trends, causes,
and effects. Typical exploratory methods include analysis of secondary data, in-depth personal inter-
views, and focus groups. Conclusive (causal) research is theory-testing research. It answers questions
such as, “Will our new product be attractive in the market?” or “Which message gets the most interest
from our target audience?” or “Do customers prefer online technical support or waiting to have a tech-
nical support person visit them?” A conclusive study might use laboratory experiments; large-scale
sampling for mailed or interview surveys, with multivariate analysis of this primary data; or direct obser-
vation of customer behavior.
In determining whether to do exploratory or conclusive research, the business marketer must
first understand what is known about the intended target markets. Conclusive research alone may be
sufficient if the marketer knows how a particular market works and wants to make some important
choices about specific parts of the marketing plan. If the marketer knows only a little bit about how a
market works and really is only guessing when making marketing decisions, then exploratory research
is called for. Some other factors to consider are the cost, both in terms of money and time. Conclusive
research is usually more costly in both money and time than exploratory research would be. However,
exploratory research is not costless. Sometimes focus groups can be more costly and difficult to
arrange than performing a series of phone interviews. Another strike against exploratory research is the
difficulty in keeping bias out of the research. If a company decides to do a series of phone interviews
instead of a carefully prepared mailed questionnaire, for instance, and uses one or two of its own
marketers to do the interviews, the data can become very misleading. The interviewers may tend to hear
only what they want to hear. Also, they may ask questions in such a way that they subtly lead the res-
pondent to the answer most desired by the interviewer. If precision of the data and representativeness
of the market are large issues, the marketer may want to “bite the bullet” and use more rigorous,
conclusive research.
EXHIBIT 6-4 Defining the Purpose of the Research: Exploratory or Conclusive
The second phase is conclusive research. Conclusive research divides the sample into
segments according to the segmentation basis developed in the first phase. It also tests to see
whether the segments are indeed distinct. If the sample is representative, then the research can
produce estimates of relative and absolute segment sizes. See Exhibit 6-4 for a discussion of
exploratory research, compared to conclusive research. Other data about the segments are
also collected in the same study to aid in choosing which segments to target. The additional data
may include such things as strength of need, channels of distribution accessed, size of budget,
and so on. All of these data help the decision maker envision the attractiveness of each segment.
RESEARCH TO SUPPORT DESIGN DECISIONS Segmentation research is very different from

the market research intended to provide insight for designing strategy, offering attributes, posi-
tioning, products, advertising, sales promotion, selling techniques, channel programs, or pricing.
To design marketing strategy, or the offering, a company needs information for each targeted
segment about
• benefits desired
• the nature of the buying decision process
• reactions to product, service

• communications methodology.
Notice that the segments have to be defined before this research can begin. Without the
segments defined in advance, design-related research produces information for offerings without
the benefit of specific segment wants; thus, they tend to be unfocused or generic.
It has been our experience that collecting data for both segmentation and design4 at the same
time is a bad idea. To design the offering, targeted to a group of customers, the marketer needs
detailed, in-depth understanding of the customers’ situation, needs and preferences, and buying
behavior. This goes well beyond the level of detail required for most segmentation research. Trying
to collect enough data to understand segmentation, plus enough data to design a good offering,
requires more data than most respondents can provide in a reasonable amount of time.
RESEARCH TO SUPPORT GO/NO-GO DECISIONS The third type of research is for go/no-go
decisions. In the process of launching new initiatives (e.g., new products, new channel programs,
new sales programs), market-related go/no-go decisions occur at two or three steps or stages,
depending on how new the market is. There are also go/no-go decisions concerning the techno-
logical aspects of the product or the feasibility aspects of new programs.
The first go/no-go decision (see Exhibit 6-5) concerns whether the market opportunity is
worth considering. If the opportunity has many new elements to the organization and the market
is not well understood, this go/no-go decision point is necessary. To determine whether the
opportunity is a “go,” a quick assessment of the size of the potential market and the rate of
market growth needs to be made. This requires data similar to the exploratory assessment of
market segments, including secondary data sufficient to gauge the number of potential buyers
of the product (or respondents to a new program).
The second go/no-go decision concerns whether the market is sufficiently interested in the
offering concept. This decision occurs after the idea for the offering is well developed, but prior
to the execution of the offering. Product engineering, development of promotion, and definition
of channel support programs have not begun in earnest. Very often a product is being designed
Idea Generation Business Case

Launch
and Screening Analysis go
Third go/no-go point—

Does the market
First go/no-go point—a Concept Initiative respond positively to
quick assessment go Testing Development the “almost finished”
of market size, growth product (beta test)?
rate, fit of organization.
go No-go
No-go
Second go/no-go point—Is Market Test X
X there sufficient market
interest?
No-go
X
EXHIBIT 6-5 Go/No-Go Decision Points in the Marketing Initiative Development Process
A beta test is a second for a particular customer with the participation of members of the customer’s
test of a new product or buying center; there is little need for a formal concept test. If the product or
technology, done at
program is to be offered to a wider audience, the research will look more like a
customer sites. An alpha
test is a test done with a concept test for a consumer product.
product or prototype The third go/no-go decision concerns whether the intended target market
internally within the responds positively to the finished (or nearly finished) design of the offering or
company developing it. marketing program. When the company is developing a product or offering in
Alpha tests determine the
collaboration with a key customer, this step occurs automatically. In other situa-
viability of the product
technology. tions when there is no such collaboration, it is necessary to determine whether the
intended target market will respond as desired and, if not, can simple changes be
made to reach the desired effectiveness level. Many companies accomplish this as
part of “beta tests” performed for technical reasons. In beta tests, the product or service is tested
with a select group of real customers to see if the product works properly.
Designing the Research—Differences from Market

Research in Consumer Markets
Market research in business markets has a different flavor than it has in consumer markets. In
Chapter 1, we noted the differences between consumer markets and business-to-business
markets. Given these peculiarities of business markets, marketers must address several problems
that are specific to market research in business markets.
CONCENTRATED MARKETS When a business marketer addresses customers who face oligo-
polistic markets, the traditional tools of quantitative market research lose their relevance: Too few
buyers exist for estimation of population characteristics from statistical inference.5 Data collection
through large-sample surveys, such as are used in consumer research, cannot be performed. Data
analysis techniques based on deriving unbiased estimation of population parameters and statisti-
cally testing their differences have little or no relevance. This means that business marketers need
to use personal interviews for data collection when their customers face oligopolistic markets.
DIVERSITY OF INTERESTS IN THE BUYING CENTER The number of people in the buying center
produces another major difference from consumer market situations. In households, one or two
people usually make decisions. A consumer market researcher can address questions to the
member of the household most likely to make a decision in a product area and the response will
generally be valid. In a buying center for an organization, several people may strongly influence a
decision, making it difficult for any one of them to predict the decision’s outcome. Further, if you
could question them all, they may be able to give their preferences at the time, but such responses
would not take into account any subsequent interaction among the buying center members
(the buying center and its members’ relationship to different elements of the value chain is
addressed in Chapter 3). Consequently, it may be very difficult to predict an organization’s buying
decisions even from primary data. Perhaps the best that can be accomplished is to ask (1) will the
offering meet the customer’s needs and (2) does the customer currently have a budget allocated for
addressing that particular need and then making do with results that are admittedly imperfect.
TECHNICAL EXPERTISE A third difference arises from the technical expertise that resides
in the buying center. For complex products, there is usually someone in the buying center
who understands (or is believed to understand by other members of the buying center) the
workings of the product or service technology. Accordingly, the language Jargon is any
used in market research data collection instruments needs to reflect the tech- specialized language
of a group that is used
nical nature of the product or service as understood by the target market. This
to improve the efficiency
becomes particularly important when the technical expert in the buying cen- of communication
ter comes from a different field than the technical people on the supplier side among members of the
and may operate with a different specialized language. Market researchers group. Specific jargon
then must translate the technical language of the supplier into the technical does not necessarily
have consistent
language of the buyer; similarly, they must translate the buyer’s answer back
meaning across different
into technical language the supplier can understand. At the same time, if the professional
market research is also aimed at non-technical people within the buying groups.
center, the technical language of the supplier needs to be framed in the
language usage that is understood by the buyers.
Designing the Research Approach—Other Special

Circumstances in Market Research
Problems in performing market research in business markets worsen when two of the over-
arching trends we’ve been discussing since the first chapter—time compression and heightened
uncertainty—have an effect. In addition, entrepreneurial marketing poses some special cir-
cumstances that the marketer must address. Under circumstances in which any or all three of
these influences occur, the marketer is tempted to forego market research. This section suggests
approaches that help the marketer to do appropriate research, rather than taking the risk of doing
no research.
TIME COMPRESSION Time compression can have several impacts. The first problem is the
time pressure applied to the market research process. Market researchers must obtain data,
analyze it, and make recommendations in periods that are often measured in weeks, or even days,
rather than months. While technology is making the data collection and analysis less time
consuming, analysis and interpretation of the data still require time for “human processing.”
Some things just take time.
Because most data collection methods obtain data for a “snapshot in time,” time
compression further reduces the duration for which research results are valid. Because the
environment can change rapidly, much of this data has a short lifespan reflecting the state of
the environment only so long as conditions are similar to the way they were at the time the data
were collected.
UNCERTAINTY While time compression itself is one source of uncertainty, other factors such
as unforeseen competition and changing customer preferences also heighten uncertainty.
Additionally, globalization of markets increases both the chance that new competition will arise
and the chance that new customer segments will become evident. As competitors introduce new
offerings at an increasing pace, reactions of buyers to these new choices become more and
more unpredictable. Hence, new competition itself introduces new uncertainty in customers’
preferences.
All this uncertainty drives marketers away from the use of market research, especially for
innovative, complex products or services. For such products, prospective customers have a hard
time reacting to concepts as they often cannot see the usefulness of a new product that is outside
their experience. The complexity of many potential offerings makes it difficult for product
developers to create representative prototypes to which respondents can react. Consequently,

marketers and product developers often decide to spend their money where it will have the biggest
bang for the buck—i.e., probably on product engineering—rather than on questionable research in
which they will have little faith or trust. Still, it is important to get as much information as possible
about customer preferences and needs as early as possible. To this end, the Marketing Operation
Forecast (MOF) and the role of missionary sales/field marketing personnel are discussed in
Chapters 11 and 12.
MARKET RESEARCH FOR ENTREPRENEURIAL MARKETING By their nature, entrepreneurial

situations involve both of the factors mentioned above—high uncertainty and time pressure. This
combination requires the entrepreneurial marketer to take a “learn-as-you-go” approach to
marketing, since there will be inadequate time for the marketer to perform a great deal of
research. The research should be fast and conducted continuously to produce the constant learning
that will allow marketing plans to be adapted rapidly.
MARKET RESEARCH WITH ONLINE DATA COLLECTION AND ANALYTICS SOFTWARE

Online researchers such as Greenfield Online and Harris Interactive have made it much easier,
cheaper, and faster to create surveys and collect data through the Internet and World Wide Web.
Business-to-business marketers would avoid survey research (and still do in many cases, since
the number of customers in many business markets is so small) because of cost and timeliness.
Online surveying, though, removes many of these barriers and many marketers will find such
techniques, when properly designed and managed, to be attractive and useful.
Companies like InsightExpress, Survey Monkey, and Zoomerang give marketers more
control over their own survey creations. The drawback to these services is that marketers without
much, if any, training as researchers can obtain useless or even misleading data. Accordingly,
marketers need to add real research skills, particularly survey construction capabilities, to their
bag of tools.
These advances in software still require a high level of expertise to use. Also, they require
insightful managers to make sense of the results. Unfortunately, most business marketers face a
situation where such support is an unreachable ideal. They must make decisions on research
approaches and priorities that produce the “biggest bang for the buck,” that is, that allow them to
achieve effectiveness in an environment where resources are limited.
Practical Advice for Performing Market Research

in Business-To-Business Markets
In the preceding sections, some of the problems of doing market research in business-to-business
markets in today’s turbulent environment have been highlighted. However, nothing has been said
so far about how to address these problems. The following is a list of the key problems that must
be overcome:
• Small number of prospective customers within many business markets
• Size, complexity, and informality of the buying center
• 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.
When a target market has a small number of buyers, the marketer must obtain data from
enough of them to have data from an overwhelming majority of the market. In many cases, the
largest three to five organizations will represent as much as 75 percent of the market or more.
This means that the marketer or researcher must gain cooperation from potential respondents in
these largest buying organizations and perhaps get a “representative” sample of the rest, making
sure to cover any important market niches.
Addressing the next issue, technical or complex nature of the product, will actually help in
getting cooperation from the respondents. One of the principal ways to foster cooperation is to
show an understanding of the customer’s business and respect for their technical capabilities.
The researcher (or marketer, acting as the researcher) wants to make it easy and comfortable for
the respondent to provide information. When the researcher has done her homework, learning as
much as possible before talking with prospective respondents, respondents generally appreciate
the fact that they do not have to translate too much for the researcher. In areas where the respon-
dent has special knowledge and skills, the researcher should acknowledge the respondent’s
expertise, know enough to be able to ask intelligent questions, and let the respondent educate her.
In markets in which the marketer has experience and contacts, the marketer will generally
take this approach naturally. We have noticed, though, that marketers’ everyday contacts may
occur at lower levels in the buying organization, since these people, such as design engineers or
plant supervisors, have direct knowledge of product and service features that are desired. These
are good contacts, necessary for understanding the important dimensions of the value sought by
customers. Marketers should make special efforts, though, to make contacts at higher levels in
the organization and throughout the buying center. Part of the marketer’s job is to have brief
meetings with upper-level managers, purchasing managers, R&D researchers, and corporate vice
presidents to update them on new products and marketing initiatives and to learn about the buy-
ing center, its processes, and things it finds valuable.
All of this contact activity has two market research effects. First, it helps the marketer
know the customer and its buying center intimately. Long-term contact with exchanges of bits
and pieces of information builds a rich knowledge of what is valued and how the buying center
processes work. Second, when the marketer needs a lot of information in a hurry, she is likely to
have access to the people with the right information. Also, a context has been established which
will make data gathering and interpretation easier—the “translation” barriers to market research
will have been already breached.
CONDUCTING PERSONAL INTERVIEWS One of the inescapable conclusions from the preceding
discussion about performing market research in business markets is that personal interviews are
appropriate in many circumstances. Sometimes, business marketers will need to hire a market
research consultant or vendor to perform this research; often the marketer will decide to do
the research with available resources in-house. If the marketer decides to do the interviews
in-house, she should keep several guidelines in mind (see Exhibit 6-6).
First, if the research is more exploratory than conclusive, the questions should tend to be
open ended. Such questions allow the respondents to give the questioner the benefit of their
wisdom and insight. If the research is more toward the conclusive side, the questions should be
designed more with multiple-choice answers. To get more insight, the researcher/marketer can
then give respondents a chance to explain their answers.
Second, questions for all respondents should be the same. In exploratory research, the
researcher should use follow-on questions to get rich data. In conclusive research, it is even more
important to get each respondent’s choice or score for each question. The questioner will need to
• Demonstrate an understanding of the respondent’s organization

• If necessary, reassure confidentiality of source
• Ask open-ended question—have questions prepared to serve as an outline
• Have some follow-up probe 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
To help get the most out of the interviews:
• Ask essentially the same questions of everybody interviewed
• Take care to ask for what you need to know, but be flexible—be a sponge
• Take good notes; write up a summary of the interview immediately after the interview, while it’s fresh
in your mind.
EXHIBIT 6-6 Improving Cooperation from Interview Respondents
be diligent in getting respondents to answer appropriately—too often the respondent will want to
expound. The researcher should tolerate a certain amount of this, but in the end must induce the
respondent to answer the question as it was asked.
Third, and perhaps most important, the researcher will usually have to strive for a low
refusal rate by prospective interviewees, especially in oligopolistic markets. Since there are so
few companies that comprise the vast majority of the market, even a single refusal could create
an important “hole” in the marketer’s knowledge. Exhibit 6-6 also shows several suggestions for
improving cooperation from interview respondents.
ADDRESSING THE TOUGHER ISSUES To summarize so far, having a network of customer

contacts throughout the buying center—and periodically interviewing them, formally or informally—
addresses several of the problems we have noted. The marketer will be able to
• obtain market research data from all of the relatively few customers that exist in an oligo-
polistic market;
• obtain information across the buying center;
• better translate the complex or technical nature of the respondents’ information, as long as
the marketer has done the homework;
• obtain data more quickly, because much of it has already been gathered through repeated,
ongoing contacts; the marketer needs to only ask for quick responses to a limited list of
questions; and
• avoid much of the problem with respondents’ time compression because respondents know
the marketer and trust that their time requirements will be honored; also, less information
is sought at any one time, so quick responses are all that is usually necessary.
Three questions or problems remain.
• What methods are most effective in markets that are less concentrated, yet where more
customers exist?
• What steps can you take to reduce uncertainty?
• What can you do about anticipating the interactions within the buying center?
When a customer market looks like monopolistic competition (usually before the emer-
gence of a dominant group of players that eventually develop into an oligopoly), with many
customers of varying sizes, but no customer that dominates its market, it becomes more difficult
for the marketer to have a network of contacts that covers the market. While you still strive to
establish a network of contacts among the largest firms in the market, contacts should be devel-
oped in other parts of the market as well. Customer size and distinctive competencies of niche
players will likely be among segmentation variables, as behaviors are not likely to be consistent
over the entire range of all market segments. The network should be built to represent the market
as well as possible. This means that the marketer should try to develop contacts in firms that are
not customers or even near-term prospects. They are cultivated for information purposes. The
marketer can use the non-customer contacts to verify segmentation and targeting ideas. Also, it is
often useful to have the perspective of someone who knows the market, but who sees the market
from the perspective of an objective third party.
APPROPRIATE USE OF SURVEYS IN BUSINESS-TO-BUSINESS MARKETS In markets in which

many prospective customers exist, the distinctions between exploratory and conclusive research
become pronounced. While exploratory research will take the form of qualitative interviews as
with oligopolistic markets, conclusive research will generally involve surveys of one sort or
another. A survey, administered by mailed or online questionnaire, can be an efficient way to
gather the appropriate information from a sample that will generalize to the whole market. With
appropriate survey construction, this can be done more quickly than collecting the same data
through personal interviews, and analysis of the data will leave less room for interpretive
mistakes. When done with such a survey, a conclusive research design for such markets will
resemble conclusive research in consumer markets.
When the marketer must rely on surveys to obtain representative data, the problem of
cooperation becomes prominent again, since the marketer will not use a network of personal
contacts predisposed to cooperation. Providing incentives for participation is one approach to
obtaining respondent participation. Very often, though, participants will view a small monetary
incentive with disdain. Recently, researchers have turned to charitable donations, made in the
respondent’s name, as an incentive. Researchers have received high rates of cooperation when
the donation is large enough, and the respondent is given a choice of recipients.
MANAGING UNCERTAINTY Managing heightened uncertainty remains a concern. Often the

answer lies not in better research, but in strategy designs that maintain flexibility and that have
data collection and interpretation spelled out as strategy elements. On the research end, often care
given to the research design can obtain information that is more useful for peering in the murky
future. For instance, a researcher may face the task of thinking ahead beyond eighteen months in
the future to what product configurations will be most attractive. Respondents will likely give
spurious answers if asked about such features directly—they simply don’t know what they will
want that far into the future. However, by asking respondents about the problems they face and the
trends in those problems, rather than whether a respondent has a need for particular new product
features, the data gathered are likely to give the marketer more foresight into future needs.
MINIMIZE IMPACT OF TIME COMPRESSION The issue of time compression, discussed

previously, can be minimized through the use of market research companies that use respondent
panels. Some national and international research companies recruit thousands of respondents to
serve as respondent pools, or “panels.” When a project comes along, a sample is selected from
the pool to reflect the population that needs to be represented. These people receive the question-
naire and generally return it in a timely manner, all with a low refusal rate. When this process is
managed over the Web, the speed and quality of the data are stunning. Results and data interpre-
tation can be obtained within days or even hours. In a world where decisions must be made
quickly, having real data from which to work, instead of questionable assumptions, can give the
marketer better plans and better outcomes.
INTERACTIONS OF THE BUYING CENTER Finally, we address the problem of the buying
center interactions. Research on the outcome of past interactions may shed light on possible
future outcomes. In other cases, the marketer will have to address the uncertainty caused by such
possible interactions as simply another source of uncertainty: all the more reason to create strong
relationships with all elements of the buying center.
SUMMARY OF MARKET RESEARCH

As we have seen, market research in business-to-business markets has the same general purposes
and follows the same general process and guidelines as market research in consumer marketing.
However, the execution of market research in business-to-business markets is often very different
than market research in consumer markets. As the opening vignette pointed out, Lou Gerstner took
a typical approach to learning about IBM’s markets when he first took the reigns at the large com-
puter maker. He talked directly with a relatively small number of customers and used this
information as the basis for revisions of IBM’s strategies. Sam Palmisano, his successor, continues
this approach to understanding customers and continues to drive strategy based on the
understanding gained. Business-to-business market research often involves a great deal of person-
to-person contact, open-ended questions, and a lot of listening. While competitive information is
important, the effort to understand the markets starts with an understanding of customers.
Obtaining good customer information was the topic of this first section of the chapter.
Once the marketer finds out how customers perceive and pursue value, she can move on to
gaining an understanding of the competition, the standard against which customers judge what
will be superior value.
COMPETITIVE ANALYSIS
Customer analysis is the place to start when doing an analysis of the business environment.
There are two reasons for doing this. First, the point of competing is to create value for cus-
tomers. Understanding how customers perceive value gets the marketer started in designing the
offering. Second, customers can tell you who your competitors really are. All you have to do is
ask. To discover competitors that are likely to exist in the near- to intermediate-term future ask
customers who they think will likely have an offering that will interest them. If you are looking
farther into the future, ask customers and prospects what kind of characteristics a strong com-
petitor would be likely to have.
The Nature of Competition

Before getting into the basics of competitive analysis, we need to say a few words about the
nature of competition. We have already described competition as providing superior value to tar-
geted customers. But this does not convey a sense of the dynamic nature of competitive markets.
Markets seldom, if ever, reach an equilibrium state.6 Rather, markets strive for equili-
brium, particularly after periods of rapid growth, but are routinely upset by the innovation
process. In Chapter 9, Innovation and Competitiveness, the innovation process is thoroughly
discussed. For now though, note that you must expect innovation to occur whether it comes from
known competitors, new (both expected and unexpected) competitors, or even from within your
own company.
Innovation has the effect of changing market dynamics, sometimes radically. At other times,
it merely continues the progression of the market with few changes in competitive positioning.
Markets evolve, sometimes in revolutionary ways. Current competitors are always a
concern; even if they are weak, they can reinvent themselves in the future. New competitors are
likely to spring up as existing companies diversify and entrepreneurs attempt to pursue the
opportunities they perceive. The Internet makes many kinds of new venture competitors instantly
viable. So the business marketer must anticipate abrupt changes in the competitive environment
and try to prepare for them. Competitive analysis is a large part of this. However, in today’s
turbulent environment, competitive analysis must be done somewhat differently than it was done
a decade ago. Many of the same ideas apply, but much more emphasis must be given to antici-
pating new competition from new ventures.
The Six Sources of Competition

Porter7 characterized the several sources of competition that a company can face. Exhibit 6-7
shows the five sources that Porter suggested:
• existing direct competition,
• competition from channels,
• competition from upstream suppliers,
• competition from new entrants, and
• competition from substitutes.
We have added a sixth source: current partners that exist as a result of the development of
value networks. In today’s business environment, partnerships are formed to provide the pieces that
complete the whole offering. In many cases, the partners are already competitors in other markets.
Value networks are often temporary alliances of convenience in which either or both parties may
Current Competitive
partners Product Market Substitutes
Direct Competitors— Downstream

Individually or as customers
Value Networks
Upstream New
suppliers entrants
EXHIBIT 6-7 Six Sources of Competition

intend to sever relationships and go their own ways after more is learned about the market and
internal strengths can be built. Technically, these partnerships are neither upstream nor downstream
channel relationships, so we show them as a separate source of potential competition.
To start to understand competitors, then, the marketer must identify who the direct com-
petitors are, either individually or as opposing value networks. Current partners must then be
examined for their competitive potential. The marketer must also look upstream and downstream
for any signs that existing suppliers or channel members have potential to become competitors.
Next, the marketer must scan for indications that major companies from other industries are
looking to enter the market (new entrants). Finally, the marketer should search for potential
substitutes that could disrupt the existing industry. This disruption may come from some sur-
prising sources. (See the boxed discussion, “Unexpected Competition—Antimatter Propulsion?
Warp Drive?”) Substitutes usually come from competing technologies, but not necessarily. The
innovation could come in the form of a channel design substitute, making existing products more
available or less expensive. Dell Computers offered such a channel design innovation in personal
computers. By offering computers through direct sales rather than going through VARs or dealers,
companies could buy computers more cheaply and easily than they could from vendors such as
IBM and Hewlett Packard.
After these real entities are examined, the marketer can turn to building hypothetical
configurations of start-ups or substitutes that might disrupt the marketer’s place in the industry.
The marketer often knows direct competitors in familiar markets simply through
experience. This may not be the case in emerging markets or when the marketer contemplates
taking the company’s offering to new markets. If the marketer knows who the direct competitors
are, she can begin working on collecting data on them. In any case, though, the marketer must
begin talking to customers and prospective customers as soon as possible. (Other sources for
identifying potential competitors are discussed in the next main section, “Sources of Competitive
Information.”)
Information to Collect on Individual Competitors

Information about competitors’ future actions and reactions reduces uncertainty. In particular,
the marketer wants to identify threats and opportunities that emerge due to competitors’ percep-
tions and activities. To find opportunities and threats, the marketer wants to first understand the
direction that a competitor will take if the marketer’s company does not change its strategy or
tactics. Next, the marketer seeks to understand the competitor enough to anticipate how the
competitor will react to strategies, programs, and tactics that the marketer may take in the fore-
seeable future.
Porter, again, offers a framework for understanding individual competitors. There are four
areas in which the marketer will want to collect information: goals, strategies, capabilities, and
assumptions.
COMPETITOR GOALS Goals, of course, refer to the levels of performance the competitor
wants to achieve. Often the competitor has a desired market position it wishes to obtain, for
example, dominance or largest market share. The marketer should not assume that the com-
petitor always wants to achieve market leadership or dominance, though. Large companies
are often satisfied with merely being a major player in a market. Smaller companies are often
satisfied with having a small share of a market or an ownership position in a small but
Unexpected Competition—Antimatter Propulsion? Warp Drive?
A few years ago, Technology Strategic Planning, antimatter with matter releases a great deal of
Inc., a technology consulting firm, was performing energy.
competitive research for a client that makes chem- Competition from this unexpected technolo-
ical propulsion systems (engines) for space vehi- gy achieved higher credibility when Technology
cles. NASA’s mission to Mars was the subject of Strategic Planning calculated the amount of anti-
the research. Instead of investigating future matter produced in the world’s particle accelera-
advances in chemical technologies, the consultant tors. It would reach the amount needed for a
examined large companies that were pursuing any round trip to Mars about the year 2016, the same
kinds of propulsion systems. They found Mitsubishi time as NASA had scheduled for the Mars mission.
working on antimatter technology. Antimatter
subatomic particles are created in particle acceler- Source: Based on Christopher A. Sawyer, “The Case for
ators and can be trapped and stored. Recombining Antimatter,” Automotive Industries (February, 1996): 61.
profitable niche. The goals of the competitor give the marketer an idea of how hard the
competitor will fight to pursue its strategy and how vehemently it will react if its market
position is threatened.
COMPETITOR STRATEGIES Strategies are the means that the competitor uses to achieve its goals.
We can cast these in terms of target segments, desired responses in the marketplace, value offered,
marketing mix employed, core competencies employed, and core competencies being acquired. This
is the crux of the marketer’s understanding of how the competitor will behave and react.
COMPETITOR CAPABILITIES Capabilities are the resources, both financial and organizational,
that can be brought to bear in pursuit of the competitor’s strategies. A good reading of the com-
petitor’s financial statements may give clues to its future ability to fund major initiatives. It is
also important to understand the competitor’s culture and core competencies. Such issues as how
flexible the competitor’s organization is, how creative it is in designing new strategies, and how
effective it is in implementation all give the marketer a sense of the competitor’s tendencies and
limitations.
Another indication of changing capabilities of competitors can be their activity at the
patent office. New patents can be a major indication (though potentially late in the game) of the
R&D focus of the organization. Naturally, this focus will be a result of how the company sees the
future of the markets and how it expects to leverage its capabilities.
COMPETITOR ASSUMPTIONS How a competitor views a market—the assumptions that have

been made—is the most difficult dimension of competitive information to access. Executives of
competitors have mental models of how their markets work. These models drive their choices of
strategies and tactics. Seldom do competitors state their assumptions outside of internal business
plans (although today more companies are publishing their views of the market mechanics on the
Web—see the next section). Sometimes a CEO or other company executive explains her vision
of the market in an article or interview for the trade or business press or she will give a presenta-
tion at a conference or trade show. More often, the marketer must infer a competitor’s assump-
tions from the behavior of the competitor.
Within this framework, competitive analysis becomes an exercise much like solving a
jigsaw puzzle. The marketer gathers bits and pieces of evidence. A competitor’s actions and
reactions to competitive dynamics are studied over time. The marketer needs to think about why
the competitor did what it did. Over time, the competitor’s motives and beliefs may become
evident. Often the marketer never will get to the root of what drives the competitor. The
marketer must remember that strategy is emergent as well as purposeful; often, something that
looks purposeful was unintended. Also, competitors learn from their mistakes and successes,
leading their belief systems to change. Consequently, the marketer faces a moving target when
trying to fathom the competitor’s assumptions. In the investigation of competitive assumptions,
recognize also that your own assumptions act as a filter on a clear view of the market.
If the marketer learns that the competitor’s assumptions are wrong, this knowledge can
become a powerful lever. For example, a small printing company with three local weekly news-
papers found that a regional chain of newspapers had acquired its principal competitor. The
chain was purportedly offering advertising rates that the small printing company could not
easily match. By quietly talking with its most important advertiser, the printer learned that the
competitor was assuming that important accounts would want combination ads—ads that would
run in several of its newspapers simultaneously. The competitor’s advertising rates for ads that
run only in a single newspaper were much higher. The printer, though, relied mostly on single-
site retailers for whom the combination ads were of little or no use. The printer did not have to
lower its rates and was actually able to take some business away from the chain, whose manage-
ment was slow to learn about the true nature of the local market drivers.
Sources of Competitive Information

While competition has intensified over the last decade, the amount and quality of competitive
information has kept pace. Some new sources of competitive information have even emerged.
THE CUSTOMER The first source for competitive information, as was suggested earlier, is the
end-use buyer. Customers and prospective customers can give anecdotal data on all four dimen-
sions of competitive information: goals, strategies, capabilities, and assumptions. However,
customers’ perceptions of a competitor’s capabilities may be somewhat myopic. The best way to
acquire the data from customers is through normal cultivation of individual contacts. In the
course of other discussions, the marketer can ask about comparisons between the marketer’s
offering and the competitors’ offerings.
THE INTERNET The obvious new source of competitive information is the Web. Most com-
panies now have Web sites, even if these are only online “brochures,” Web sites with basic infor-
mation and little else. Competitors’ own Web sites make it possible to quickly find information
about all four dimensions of competitor analysis. Even capabilities can often be determined from
a company’s Web site. If the company is public, it often shows all its Securities and Exchange
Commission (SEC) filings and recent quarterly and annual reports. In addition to capabilities,
companies will often publish material describing their goals and strategies. This information
helps prospective customers determine whether the company actively pursues the target
segments and what the offerings for them are. Many companies also publish their mission
statements for the same reason. Also, companies often publish their views of the industry and the
market. This is done to give prospective customers and partners a sense of how they can work
together into the future. It also gives insight into the company’s beliefs about the market and, as
previously discussed, can provide a competitive lever if the marketer believes the competitor is
wrong about the workings of the market.
BUSINESS AND TRADE PRESS A third good source of competitive information is the business
and trade press. The business press includes articles written about a wide range of industries; the
trade press sticks closely to one industry or set of related industries. Articles based on interviews
and analysts’ interpretation can give insight into all four dimensions of competitive analysis. In
addition, the press can provide a history of past events or actions, which may also shed light on
the competitor’s tendencies.
TRADE SHOWS Trade shows, a fourth source, can also provide a great deal of information to
marketers. The trade show has booths and displays for any company of note within an industry.
The importance of a competitor’s product line relative to its other offerings may be obvious in
the emphasis placed on it. The competitor’s display is a view of how the competitor perceives the
needs of the market—what assumptions it is making about the market. The marketer, or another
person operating on the marketer’s behalf, can make the rounds and get a close look at current
products and programs. In the speaker sessions, which also are part of the show, competitors’
executives or managers may give talks or make announcements that define or give clues to the
competitors’ goals, strategies, and assumptions. The hallways, coffee lounges, and bars in and
around the conference hall and surrounding hotels may also have revealing conversations that are
easily overheard without being nosy. (Chapter 15, Communicating with the Market, discusses
the use of trade shows and the trade press to establish a corporate image.)
OTHER SOURCES Other sources also provide insights into the four dimensions of competitive
analysis. Many of them can be seen as outward indicators of trends and facts that lie beneath
the visible surface. The business-to-business marketer may watch competitors’ advertisements
and publicity announcements. Classified advertising having to do with employment or real
estate may also indicate changes in resource deployment that are a result of a change in stra-
tegic directions.
One common way of gathering and sifting through competitive information is to hire a
consultant who does this on contract. Some consultants maintain extensive networks of
contacts within their industries. Others have no immediate contacts but have good methodo-
logies for obtaining information. As with any vendor, the marketer must check the credentials
of such consultants to ensure that the consultant is not feeding more information back to some
of the marketer’s competitors. (The ethical implications involved in the collection of competi-
tive information are discussed in Chapter 16, Business Ethics and Crisis Management.)
SUMMARY OF COMPETITIVE ANALYSIS

In a volatile, competitive environment, business-to-business marketers must learn as much as
possible about competitors after they have come to understand something about their own cus-
tomers. Competitive analysis sets the standard for customer value, which the marketer’s firm
must exceed. Competitive analysis is forward-looking. The marketer tries to anticipate competi-
tors’ future moves and reactions. The goal is to anticipate the threats to the marketer’s strategy
posed by competitors’ strengths, as well as to identify opportunities presented by the constraints
they face, their predisposition to certain behaviors, or other weaknesses in their offerings.

Learning about the business environment is much like an education process. A great deal of
studying is done early in the process, and then continuous learning is necessary. This chapter dis-
cussed the early studying that must be done, focusing on customers and competitors. Remember
that all of this learning helps create and manage value for customers, so customers are the start-
ing point in the analysis. Just as Lou Gerstner did when he started at IBM and just as Adobe did
when it reorganized its company, everything starts with learning about value from the customer’s
perspective.
Chapter 11 presents one of the uses of this information—conducting forecasting.
The chapter discusses on the practical aspects of forecasting, particularly the construction of a
marketing operations forecast.
In the next chapter, we show you another major use of the information gathered in the
analysis of the business environment. Information gathered about market segments and com-
petitors that address them leads to decisions on choice of target segments and positioning.
Then, in later chapters, the detailed information on customer needs and buying behavior
obtained in the analysis helps in forming the marketing strategy, programs, and tactics.
Key Terms
alpha test 134 exploratory research 131 primary market
assumptions 143 goals 142 research 128
beta test 134 go/no-go decision 130 sample 129
capabilities 143 incentives for secondary data 128
conclusive research 132 participation 139 sources of competition 141
design decision 130 market intelligence 126 strategies 143
evidence seeking 130 personal interviews 134 targeting decision 130

1. Why is market research needed in business-to- 5. Why do the authors assert that research for seg-
business marketing? Why can’t decisions always menting markets and research for designing offerings
be made based on the manager’s experience and aimed at target markets should be kept distinct,
intuition? instead of run in the same research study?
2. What factors make market research in business-to- 6. In what kinds of markets would you want to use
business markets different from research in consumer quantitative research similar to that often used in
markets? What are the resulting characteristics of consumer research?
business-to-business market research? 7. Why is it more difficult to do competitive
3. Compare the data requirements for go/no-go deci- analysis in today’s market than it was a decade
sions, targeting decisions, and design decisions. or so ago? Explain in terms of the six forces of
4. What are the differences between exploratory and competition.
conclusive research? When could exploratory 8. From a general viewpoint, what are you trying to
research be used effectively without progressing to determine about competitors when doing com-
the use of conclusive research? petitive analysis?
9. How would you go about collecting information on 11. Discuss the strategic implications of trade shows as
each of the following competitor characteristics: sources of competitive information. What types of
goals, strategies, capabilities, and assumptions? information will be available?
10. Describe how competitive analysis is like doing a jig-
saw puzzle or creating a mosaic. Why is it like this?
Endnotes
1. Based on Ira Sager, “How IBM Became a A.C. Burns and R.F. Bush, Marketing Research
Growth Company Again,” Business Week (London: Prentice-Hall, 2001).
(December 9, 1996), pp. 154–162; and Brian 5. This does not mean that business marketers can
Bergstein, “Aggressive Strategy for Market get by without understanding statistical analy-
Growth Transforming IBM,” Seattle Times ses. Recall that business marketers must under-
(August 24, 2004), p. C.3. stand their customers’ customers. So a thorough
2. “Leading Change When Business Is Good: An understanding of the customers’ markets usually
Interview” with Samuel J. Palmisano, Harvard requires a basic statistical knowledge to under-
Business Review (December 2004). stand the secondary research available on con-
3. Jim Adams, Ed Mounib, Aditya Pai, Neil Stuart, sumer markets or large-population business
Randy Thomas, and Paige Tomaszewicz, markets.
“Healthcare 2015: Win-Win or Lose-Lose? A 6. This section is based on Peter Reid Dickson,
Portrait and a Path to Successful Trans- “Toward a General Theory of Competitive
formation”; OpenClinical 2007. Rationality,” Journal of Marketing, 56(1)
4. Yoram Wind, “Issues and Advances in (January 1992), pp. 69–83.
Segmentation Research,” Journal of Marketing 7. Michael Porter, Competitive Strategy (New
Research, 15(3) (August 1978), pp. 317–337; York: The Free Press, 1980).
Chapter 7
Segmenting, Targeting,
and Positioning
OVERVIEW
In this chapter, we examine the process of segmentation, a process that partitions a
market into subgroups based on similarities and differences in customer needs and
perceptions of value. The notion of partitioning large, complex societal groups or
markets into smaller subgroups for better management understanding is not unique
to customer markets. The approach is conceptually no different than decentralized
management of complex organizations. The goal is to improve understanding of and
effectiveness in the subgroup, creating opportunities for more profitable
relationships.
Segmentation affects the marketing strategy of the business-to-business firm
through targeting, a process of selecting the best segments for the success of the
organization, and through positioning, the establishment of competitive
differentiation within targeted segments. In this chapter, we consider segmentation
in terms of value and the value chain, and how different segmentation methods
allow the formation of effective strategy. Two approaches for determining market
segmentation are explored, an analytic approach and an innovation translation
approach. Once market segments have been identified, the marketer reviews the
likelihood of success in each segment, based on the values sought by the segment
members and the values most likely to be successfully provided by the marketer’s
organization. Segments can be ranked by the highest level of return,1 as viewed in
light of the goals of the organization, and the willingness to commit resources. Those
segments that demonstrate the highest potential for success become the targets of
the organization’s marketing efforts—they are the chosen target segments.
The creation of information by which these decisions are made—the
information necessary for effective segmentation—is one of the major uses of
market research and the competitive information (discussed in Chapter 6). Once
target segments have been chosen, the process begins for designing strategy and
offerings to engage each segment. The structure for this effort is the determination
of positioning relative to competition.
The opening example shows how marketers at Panasonic positioned its
offering for a segment of the larger market.
148
Chapter 7 • Segmenting, Targeting, and Positioning 149
Example: Panasonic Targets the Rugged Laptop Segment 2

In 1996, four Japanese personal computer (PC) makers, Fujitsu, Hitachi, NEC, and Sony, “invaded”
the U.S. PC market. Unlike these four, Panasonic did not address the U.S. consumer market, even
though Panasonic’s parent company, Matsushita, had successful consumer computer offerings in
Japan. In the United States, Panasonic targeted organizations that needed durable, portable computers.
Priced at roughly twice that of a standard notebook, in 1999, Panasonic only sold 400,000 units
worldwide. Panasonic margins were among the highest in the industry at a reported 30 percent gross
margin per unit.
Would more customers be willing to pay the price? The U.S. Army equips a large number of per-
sonnel with standard business notebook computers. In Iraq and Afghanistan, however, the failure rate of
these “business” notebooks was estimated at 80–90 percent. The cost of one notebook, plus the cost of
its replacement or repair (including the field logistics to support the effort) could easily exceed the cost
of a Toughbook. Learning from this experience, the Army purchased 7,500 Toughbook notebooks for
use primarily in Iraq. The failure rate for those units was 8–10 percent. The Army has expressed a sig-
nificant interest in Toughbook.
Panasonic’s focus on the “rugged notebook” allowed it to have a clear, concise message and to
structure distribution channels that provide value while not competing in the more aggressive consumer
market nor conflicting with other offerings. Organizations that deployed significant numbers of note-
books to employees in the field who perform on-site customer service, field repairs, field sales, or other
damage-susceptible active duty as might be encountered in police or military uses comprise a significant
“niche” in the market. In these applications, customers want good performance that is not interrupted by
frequent breakdowns.
When Panasonic launched the line in 1996, the communications messages all revolved around the
durability of the machines. The notebook line is named Toughbook, which of course immediately com-
municates the key core benefit. Print advertising was simple, elegant, and pointed, with the notebook sit-
ting on an anvil or shown in some other industrial-strength pose. It received a great deal of publicity
from a well-designed promotional event in which one of the hosts of a television network morning show
drove a Hummer over a Toughbook at the Comdex trade show. The advertising campaign “Own the
Road” won an EFFIE award (from the New York American Marketing Association for effective adver-
tising) in 1998.
The “toughbook” segment initially was too small for the larger competitors to see it as promising
segment. By the mid-2000s, Panasonic’s success drew attention and several new competitors. To keep
ahead of the competition, Panasonic has continued to innovate to improve its offering, extend its prod-
uct line, and address newly emergent subsegments. These subsegments, or “niches,” include such
Toughbooks in such situations as managing vegetation in utility right-of-way and managing inventory in
shipping and warehousing. While it does not own the PC market as a whole, Panasonic continues to own
this segment and it continues to be profitable in doing so.
LEARNING OBJECTIVES
䊏 Reinforce your understanding of segmentation as a tool to manage markets and resources.
䊏 Recognize segmentation as an effective management tool.
䊏 Develop an understanding of segmentation based on the concepts of value and the value
chain.
䊏 Be introduced to the market information needs necessary for successful segmentation.
䊏 Understand how segmentation supports business-to-business marketing decisions.
150 Chapter 7 • Segmenting, Targeting, and Positioning
䊏 Understand when and how an analytic approach to segmentation is useful.

䊏 Understand customer involvement in business-to-business segment translation and evolution.
䊏 Understand segment evaluation and the targeting process to maximize market opportunities.
䊏 Strengthen your understanding of market-positioning philosophy by seeing positioning as a
tool to enhance both customer and supplier value.
INTRODUCTION
Three of the most important concepts in marketing, whether in business-to-business marketing or
consumer marketing, are segmenting, targeting, and positioning. The process of segmenting
markets makes it possible to know a market well enough to tailor an offering to the specific needs
of a few customers rather than creating an offering whose attributes are compromised (e.g., too
little, too much, or not exactly as desired) in an attempt to appeal to a broad market. The process
of targeting involves choosing segments to address based on matching the firm’s strengths to the
segments that will place the greatest value on these strengths and yield the greatest success.
Positioning is the creation of greater value for targeted customers than is offered by competitors
and the communication of that difference relative to other offerings aimed at the target market
segment. This chapter shows how segmentation and the choice of target segments work when
based on the concepts of value and the value chain, discussed in previous chapters. From these
concepts, the criteria for a good segmentation framework—a method of segmentation used in
understanding a given market—are derived, as well as criteria for the choice of a good set of tar-
get segments. Once target segments are chosen, the marketer determines how the offering for
each of these segments ought to be positioned.
THE RELATIONSHIP BETWEEN SEGMENTING,

TARGETING, AND POSITIONING
Recall that in business strategy, discussed in Chapter 5, the organization decides in what business
to compete and how, generally, to compete. Well-defined market segments are distinct from each
other in what they need or how they buy. Within each segment, the needs or buying behavior of
individual buyers are very similar to those of the other members of the segment. In other words,
it is desirable to create segments whose members tend to have homogeneous needs or buyer
behavior within the market segment and distinctly different needs or buyer behavior when com-
pared to members of other segments. With smaller size and reduced variability among its mem-
bers, as compared to an unsegmented market, a good segmentation framework simplifies the
approach to a market, allowing marketers to select segments for targeting where the firm can
have the best advantage for success. Customers are also better served through the creation of
offerings whose value is more closely aligned with their needs.
The Panasonic example illustrates these ideas well. The market segment that Panasonic
discovered has only one primary value dimension—the need for durability. There is little varia-
tion within the segment on this dimension. The simplicity of the segmentation structure makes it
easy to target and straightforward in providing the required value.
After alternative segments have been identified and understood, choosing target segments
follows. It involves combining information about the opportunity within each segment and
information about the organization’s capability and desire to pursue each of the opportunities.
The analysis creates a measurement of the overall attractiveness of each segment. The marketer
chooses the most attractive segments that the company can address.
In the Panasonic example, the durability laptop segment was chosen because of four main
attractiveness factors. First, the need was obvious and it was important. Second, no competitor
was doing a good job of meeting this need and none was expected to do so in the near future.
Third, this need matched well with Panasonic’s capability. Fourth, the segment was projected to
grow quickly. The only drawback was the relatively small size of this segment, but even this
worked in Panasonic’s favor. Because Panasonic did not set out to dominate the entire U.S. mar-
ket for laptops, the size of the durable segment was acceptable. Meanwhile, it was too small for
the major competitors who were market-share driven or wanted to dominate the entire market. In
this market, these distinctions gave Panasonic a competitive edge.
As part of the process of selecting segments to target, the marketer analyzes the value
sought within each target segment, as well as the value provided by the principal competitors,
and determines how to create a competitive position to address each targeted segment. The posi-
tioning of an offering for a segment is the definition of which dimensions of value will be
emphasized. The purpose is to offer more value than competitors on some key dimension or
dimensions. Positioning establishes the framework for the marketing strategy. It defines
the product or service features to be emphasized, the general message to be communicated to
selected audiences, the channels that will be used to create value for the buyer at the point of sale,
and the price level that the customer should see.
Panasonic positions itself well for the durable laptop market. First, the product is well suited
to this market. Second, Panasonic has done well in communicating its message through advertising
and publicity. Third, Panasonic has done a solid job in supporting its channels with specialized soft-
ware and sales promotion. And fourth, the price tag meets expectations without charging too much
of a premium. The following discussion examines additional details of the relationship between
segmenting, targeting, and positioning.
MARKET SEGMENTATION
The concept of market segmentation has been around for a long time.3 In practice there is much
confusion surrounding the idea.4 This is unfortunate, as the segmentation process is intended to
reduce confusion and assist marketers to better understand how to serve particular markets. In
this section we examine the basic ideas of segmentation and then we examine segmentation in
the context of business-to-business marketing. We then note important implications and current
ideas on the practical aspects of measuring and analyzing segmentation.
Basic Framework of Segmentation

FINDING GROUPS WITH SIMILARITIES IN WHAT THEY BUY OR HOW THEY ACT As
described earlier, segmentation involves dividing a market into subgroups or categories of cus-
tomers in such a way that the marketer is more able to serve particular needs and thus gains a
competitive advantage. Broad segments, such as those in consumer mass markets, require prod-
ucts that appeal to the large population of the segment. Selecting smaller segments reduces the
number of potential customers that one offering must satisfy. The offering may then be defined
with more specific attributes that have value to that smaller customer group rather than with a
compromised offering that can only almost satisfy the members of a larger market. This is not
intended to imply that a greater number of smaller segments is always better than a few large
segments. Markets can become oversegmented. Oversegmentation can result in fragmentation

and diversity that make it difficult to profitably serve the smaller markets.
Generally, marketers will strive to create segments that have characteristics of measurability,
accessibility, substantiality, and actionability. In business-to-business markets, measurability is
important because marketers need to understand the size, value needs, and purchasing characteristics
of a particular segment. If the potential success of marketing to segments cannot be measured, it
becomes difficult to not only choose among alternative segments but to design offerings that provide
superior value for members of a segment. Accessibility is a measure of the marketer’s ability to com-
municate with the market segment and reach them with distribution channels in a manner that makes
serving the segment possible. Substantiality implies a market segment that desires the particular
value offering an organization presents, such that the segment is profitable enough to serve differen-
tially from other segments. Actionability is a measure of the capabilities of the organization to create
a total offering with a competitive advantage with respect to the specific needs of the segment.
A reminder here is appropriate. The discussion above specifically refers to the total offering,
not just “a product.” Similar, if not identical, products are marketed to different segments with dif-
ferent total offerings for each segment. Economic utility, form, time, place, and possession contribute
to the differentiation of the offering. In consumer markets, this economic utility differentiation
leads to the same product being offered at specialty retailers and at warehouse clubs. In business-to-
business markets, economic utility differentiation can lead to customer-specific supply chain
requirements. In this view, it may be appropriate to recognize that supply chain productivity and
efficiency based on customer standards is often a defining parameter in business-to-business markets.
NEED FOR MEASURABILITY CREATES INFORMATION NEEDS This discussion of segmenta-

tion implies that information about the prospective markets is readily available. This available
information is not only the outcome of market research efforts, but also the product of informa-
tion collection that attempts to forecast markets. Forecasts are predictions—there are no guaran-
tees. Many processes, both quantitative and qualitative, are used in the effort to predict market
behavior over time, though few, if any, are specific. When in doubt as to the needs of a market, it
is always best to go to the source of the need—the customer.
The oligopolistic nature of many business-to-business markets offers the opportunity to
discuss needs with every potential customer in a way that is not feasible with mass markets. A
benefit of positive relationships with customers is the availability of information. Business cus-
tomers, while tempered by proprietary concerns, will have forecasts of their own markets used in
the customer’s business planning decisions. Suppliers must be able to effectively provide offer-
ings that match the full needs of the plan. These needs may be technical (assistance in the most
effective user of technology in design and development) or logistical (the planning necessary to
serve diverse supply chain requirements).
TYPICAL BASES FOR BUSINESS-TO-BUSINESS SEGMENTATION There are many bases for
segmentation, some straightforward, some obtuse. A business must choose the segmentation
strategy that makes the best use of its strengths and positions it effectively against competitors.
Exhibit 7-1 shows the typical bases for segmenting business-to-business markets. In the opening
example in this chapter, Panasonic identified a segment based on preferences of the customers,
borne out of a special need for portability and durability of the computers. While other potential
customers in the market had a need for portability, their need for durability was not so acute as it
was for those targeted by Panasonic. Because many potential users’ buying patterns were substan-
tially different from mass-market computers (government, law enforcement, and so on), Panasonic
• By product offered : A company may treat all customers who offer the same kind of product as a
market segment.
• By geographic region : Customers located in the same geographic area may be treated as a market
segment.
• By industry in which the customer participates: All companies in the same industry group may be
treated as belonging to a market segment.
• By size of customer’s company : Companies of the same general size may be treated as belonging to
a market segment.
• By size of account : A company may treat all its customers who order roughly the same amounts
from the company as a market segment.
• By buying behavior or preferences : Segments may consist of companies whose buying centers act
in similar fashions or whose needs are very similar.
• By technology used by customer : All companies that use the same general product or process tech-
nology may be treated as a segment.
• By process and supply chain requirements: Companies may have differing standards of inventory
control and on-time performance as well as a need to control elements of the value network that is
providing the offering.
EXHIBIT 7-1 Common Bases for Segmentation of Business-to-Business Markets
developed specialized marketing channels—providers of economic utility—to reach those buyers.

It turns out that, no matter how segments are initially defined, the marketer should almost always be
looking for special, common needs that can be addressed by the marketer’s company.
Value-Based Segmentation
No matter which of the segmentation bases in Exhibit 7-1 is chosen by a business, business-
to-business marketers, like consumer marketers, should target segments that have similar needs
or buying behavior among their members. If most companies in a target market want the same
thing, a great deal can be saved on costs by providing one product that is well designed and
offering it with efficient and appropriate communications and sales methods. On the other hand,
if after segments are defined, every company in a target market segment were to think and act
uniquely, it would be very costly to meet the needs of multiple customers within this segment,
suggesting that a new segmentation strategy should be investigated.
A more complete and often more effective way to think of segments is to say that segments
should be based on differences in value sought. While simply defined—value is the sum of the
benefits minus the sum of the costs—the perception of value will not remain constant across
many customers. Exhibits 7-2a and b show the value concept again and the difference between
two combinations of value chains and offerings. The first combination addresses a second seg-
ment whose members vary considerably in the kinds of value they seek. The second combination
is built to provide value to a segment whose members all seek similar sorts of value. The offering
and value chain for the first combination display considerably more complexity and, hence, will
be more difficult to construct and probably will be more costly to execute. The implication is
simple. Companies should try to choose and address segments that are homogeneous in the kinds
of value sought, rather than heterogeneous. The marketing organization will then find it easier to
discern the needs of the customers and translate these into an offering that provides superior
value, enabling the marketing organization to be better able to manage its costs and businesses.
Value Chain Offering Segment
Value Enabling Value Creating

a Subgroups
– Infrastructure – Input logistics 1
with differing
– People management – Operations b 2 needs
– Technology – Delivery logistics c
development & 3
– Marketing
management d
– Service 4
– Resource acquisition
Key elements of value chain Key elements of Several sub-

contributing to offering— offering ad- groups in the
complicated chain of activities dressing sub- market segment
because of complicated offering groups in the due to differing
market segment— needs
complex offering
Exhibit 7-2a
Value Chain Offering Segment
Value Enabling Value Creating

a
– Infrastructure – Input logistics 1
– People management – Operations b
– Technology – Delivery logistics
development & – Marketing
management – Service 2
– Resource acquisition
Key elements of value chain Fewer key Fewer sub-

contributing to offering— elements of groups in the
simpler chain of activities offering ad- market segment
because of simpler offering dressing sub- due to more
groups in the homogeneous
market needs
segment
Exhibit 7-2b
EXHIBIT 7-2 Segments and the Value Chain
The Process of Determining Segmentation

Two useful ways of determining a segmentation framework to employ are in general use in
business-to-business marketing. They are, first, an analytic approach and, second, an innovation
translation approach. The approach to use depends on the situation that the company faces.
Marketers tend to use an analytic approach when they face a market with many customers or an
unfamiliar market they are trying to enter. When a marketer has only a few large customers and
is looking to extend its existing offering into new customer groups, the marketer often takes an
innovation translation approach. Both approaches work well under the right circumstances. In
some instances, a combination of the two approaches often would improve the segmentation and,
hence, the positioning and strategy that result.
ANALYTIC APPROACH TO DETERMINE A SEGMENTATION FRAMEWORK An analytic

approach employs research and data interpretation to derive a segmentation framework.5 The
approach attempts to develop two sets of information. The first set has to do with the relative size
and growth of considered segments. These data help support decisions of which segments to tar-
get as well as whether or not it is a good idea to proceed with the project at all. The second set of
data has to do with an individual segment’s needs and buying behavior. These data are much
richer in terms of the value sought by segment members. Combined, these two sets of data sup-
port design decisions on products, services, communications messages, media choices, selling
approaches, channel design, and pricing.
The first type of information—having to do with segment size and The North American
growth—must often be gathered quickly, particularly for decisions made early Industry Classification
in the planning process regarding likely target segments and go/no-go decisions. System (NAICS) code is
a scheme of industry
To aid in analyzing segments and making these decisions within a compressed classifications designed
time frame, the marketer must often rely heavily on secondary data. and used by the U.S.
Government or trade organizations collect much of these secondary data. These government, as well as
agencies collect data so that many people and organizations can use them for Canada and Mexico. To
various purposes. The data are usually arranged by industry, as embodied in the see a full description, go
to http://www.census.gov/
North American Industry Classification System (NAICS) code (see the naics/.
accompanying box and Exhibit 7-3), by geographical location, and perhaps by
11 Agriculture, Forestry, Fishing, 53 Real Estate and Rental and Leasing

and Hunting
21 Mining, Quarrying, and Oil and 54 Professional, Scientific, and Technical Services
Gas Extraction
22 Utilities 55 Management of Companies and
Enterprises
23 Construction 56 Administrative and Support and Waste
Management and Remediation Services
31–33 Manufacturing 61 Educational Services
42 Wholesale Trade 62 Health Care and Social Assistance
44–45 Retail Trade 71 Arts, Entertainment, and Recreation
48–49 Transportation and Warehousing 72 Accommodation and Food Services
51 Information 81 Other Services (except Public Administration)
52 Finance and Insurance 92 Public Administration
EXHIBIT 7-3 Top-Level Industry Groups in the North American Industrial Classification System (NAICS)
Source: www.census.gov/eos/www/naics/index.html
size of company (i.e., the data are usually arranged demographically). The marketer, however,
would usually like to have the data arranged in more fine-grained fashion so that they are closely
linked to differences in value sought. Consequently, to use the data quickly, the marketer will
need to make some reasonable assumptions to convert the demographic data to usable estimates.
Before discussing the second type of data, consider the following hypothetical example to
show what the marketer might have to do.
Suppose the marketer was investigating entering the market for online surveys for small
business to assess customer satisfaction. The marketer’s company provides online surveys for larger
companies for various kinds of market research. He has gotten wind of this potentially unmet
need among smaller companies. In initial talks with CEOs of small companies, the marketer
believes that several possible segments exist among companies that recognize they have a need:
• Companies that are receiving frequent customer complaints and that are losing occasional
customers. This segment can be designated as Segment 1: Major Turnaround.
• Companies that believe that their relationships with customers are generally weakening
and are seeking to stop deterioration before it is too late; designated as Segment 2:
Stopping Deterioration.
• Companies that have high levels of customer satisfaction but that believe they are facing
increasingly competitive markets in which they must achieve ever-higher levels of cus-
tomer satisfaction if they are to remain competitive. This segment can be designated as
Segment 3: Competitive Improvement.
• Companies that believe they have problems in specific areas, such as meeting delivery
schedules or performing effective customer training, and that seek to improve performance
in these specific areas; designated Segment 4: Specific Area Improvement.
It should be obvious from the foregoing listing of categories above that it is unlikely that
the marketer will find secondary data that will break out the numbers of small companies into
these groupings. The marketer will need to find a way to make reasonable assumptions about
how large each of the groups is and how fast they are growing. One way might be to talk with
several small business consultants to get their opinions of how large these segments are. Another
might be to examine third-party financial data such as that provided by Dunn and Bradstreet to
get a breakdown of financial performance categories and use these as rough approximations of
sizes for the segments.
Suppose that the marketer finds data on the number of small businesses from the U.S.
Bureau of the Census and develops a forecast of segment growth. The marketer believes that the
relevant size range for small businesses is 50-500 employees: below 50 and they are not large
enough to see the $5,000 per year price as worthwhile; while above 500 and they are already
likely to have a customer satisfaction tracking solution in place if they desire one. The hypothet-
ical data are shown in Exhibit 7-4.
On the basis of Exhibit 7-4, the marketer estimates that by 2012, the stopping deterio-
ration segment will become the largest of the first three segments, at 156,000 companies
(0.2 ⫻ 390,000 = 78,000 companies in 2010; +100 percent = 156,000 companies in 2012).
In addition, the specific area improvement segment of the market will increase to 292,500
companies (0.3 ⫻ 390,000 = 117,000 companies in 2010; +150 percent = 292,500 companies
in 2012). This information and the resulting calculations give the marketer an estimate of
relative segment size, both now and in the future. The segment sizes for 2010 and 2012 are
shown in Exhibit 7-4.
From secondary data:

Number of U.S. businesses with more than 50 and fewer than 390,000
500 employees
From quick survey of consultants:
Segment 1: Major Turnaround. Assumed percentage of small 10%
businesses with customer satisfaction problems
Segment 2: Stopping Deterioration. Assumed percentage of small 20%
businesses seeking to stop deterioration in customer satisfaction
Segment 3: Competitive Improvement. Assumed percentage of 30%
small businesses seeking to improve competitive performance
Segment 4: Specific Area Improvement. Assumed percentage of 30%
small businesses seeking to improve specific functional areas
contributing to customer satisfaction (can overlap with above categories)
From a Delphi estimate of a small business consultants:
Segment 1: Assumed percentage increase in major turnaround 100%
segment by year 2012
Segment 2: Assumed percentage increase in stopping deterioration 100%
segment by 2012
Segment 3: Assumed percentage increase (decrease) in competitive (50%)
improvement segment by 2012
Segment 4: Assumed percentage increase in specific area 150%
improvement segment by 2012
EXHIBIT 7-4 Hypothetical Data for Segmentation for Online Customer Satisfaction Survey Service
Source: Number of businesses is projected from United States Bureau of the Census, U.S. County
Business Patterns (2006). Other data are hypothetical.
With these estimates in mind, the marketer can evaluate the segmentation framework with
respect to measurability, accessibility, substantiality, and actionability. First, concerning mea-
surability, the estimates shown in Exhibit 7-5 illustrate that the segments in this framework can
be measured. The estimates could be refined with more primary research, if need be. In terms of
accessibility, assume in this hypothetical example that the segments as defined can be reached
through normal distribution and communications channels. Small businesses, whether finan-
cially well off or financially strapped, can be contacted through mail, print, and Internet media;
data can be provided to them through physical or digital distribution channels (further research
may show preferences for certain types of media and channels within the segments). With
respect to substantiality, assume that the sizes of these segments are large enough to warrant
consideration, given the goals of the research supplier. The marketer will later need to examine
more closely the sustainability of profits within segments that are chosen. Finally, concerning
actionability, assume that the needs of each segment can be met by an offering that the marketer
feels his company can provide. Accordingly, the segmentation framework is one that is viable
for the software supplier.
Number of Number of Percentage

Small Small Increase
Businesses in Businesses in (Decrease) from
Segment 2010 2012 2010 to 2012
Segment 1: Major Turnaround 39,000 78,000 100
Segment 2: Stopping Deterioration 78,000 156,000 100
Segment 3: Competitive Improvement 117,000 58,500 (50)
Segment 4: Specific Area Improvements 117,000 292,500 150
EXHIBIT 7-5 Hypothetical Sizes of Market Segments for Online Customer Satisfaction Survey Service
This simple example shows how an analytic approach might be used in making quick esti-
mates of segment size and growth. This is not enough information for choosing segments, but it
is a start. The marketer will need to develop and use information on needs within the segments,
competitors’ offerings and strategies for addressing the segments, and his own company’s
strengths and weaknesses in providing value to the segments.
The second type of data—data on the needs and buying behavior exhibited within individ-
ual market segments—needs to be mostly primary data. These data are used early in the plan-
ning process to suggest the bases for segmentation. They are also used for suggesting
assumptions the marketer might apply to secondary data to determine market size and growth,
as was done in the preceding example. For these two purposes, data gathering can be fairly
quick, particularly if the marketer has a good network of contacts in the relevant market.
However, data on needs and buying behavior are also used for design decisions, starting with
decisions on positioning. These decisions require the development of in-depth information and,
hence, require more time. The decisions themselves, though, also take some time to reach a
conclusion, so there generally is more time for acquiring and digesting primary data (though
this is still subject to pressure from the time compression trend, discussed in previous chapters).
Using effective market research techniques, the marketer can obtain data on the prospec-
tive customers’ needs, buying center behavior, reactions to messages, reactions to pricing
options, and channel preferences. During this data gathering and analysis, the marketer may dis-
cover information that calls into question the original choice of target segments. Such discover-
ies ought to be anticipated; the decision process should allow for performing some iterations that
change the emphasis among target segments or even discard a segment from consideration.
Before the investigation starts, the manager needs to predetermine what kinds of negative infor-
mation will trigger reconsideration of the targeting decisions. If such controls are not in place,
too much effort may be spent in unnecessary reconsideration of prior decisions, rather than in
proactive problem solving.
Before we follow the example to the stage of choosing target segments, let’s take a look at
the other approach to segmenting markets, the innovation translation approach.
SEGMENTATION BY INNOVATION TRANSLATION In markets in which only a few customers

exist, a company may provide an offering to only one or two large customers. In time, the company
may decide to look for additional customers who are attracted to the offering or to an offering that is
similar to the original. The process of looking for these new customers is really a process of verify-
ing the existence of a segment by translating the technology of the offering to additional customers.
When a supplier’s technology or offering is familiar to a market, customers may find new
uses for the product or service without additional assistance from the supplier; or the supplier
and customer together may find a new use through collaboration with each other. This new use
may or may not be pursued as a new market segment for the supplier. The supplier can undertake
a market development effort to determine the validity of the new segment. Stated another way,
the supplier will need to validate the new use of the product by translating the new use to other
customers with similar needs. Hence, a successful innovation translation of new business can
create a new target market. Many new market segments are established through this exact
process. Segmentation by innovation translation emphasizes the nature of many business-
to-business market segments—they exist because a customer pulled technology through a rela-
tionship with a supplier rather than a supplier having pushed a new offering to the customer.
The marketer, with the help of field marketers (i.e., missionary salespeople) and their head-
quarters counterparts, must be well coached to recognize the importance of information about
how their products are being used, as well as to recognize new translatable business opportu-
nities. Once the opportunity is recognized, the headquarters marketing team should develop a
marketing plan focused on serving the new segment. This plan should, of course, develop
translation tools that expand on the distinctive features or competencies that make the offering
the ideal choice in this new market, as well as further defining potential players in the market.
These translation tools (data sheets for new product variations, examples of the “new business”
application, press releases, collateral materials, etc.) should aid the field marketing team in
implementing the translation of the innovation to new customers. Ultimately, should the new
segment progress in a manner that the supplier’s offering “owns” the market, customers auto-
matically know the offering as the standard.
One barrier to discovering new segments that may have to be overcome is the resistance
encountered from new customers who are wary of the marketer’s prior relationship with one of their
principal competitors. In markets with a few large players, success at one customer may not lead to
success at another, even if the rational needs are similar. In oligopolies, players in the market often
resist ideas and developments that have their beginnings at a direct competitor. This resistance can
result from an extreme concern about proprietary information. If the offering is well tailored to the
competitive need, the customer who is the target of the translation may be suspicious of the level and
type of communications that take place between the suppliers and the first customer. Cultural and
competitive factors can also play a large role. Some oligopolistic competitors avoid any sign of
imitating major competitors, particularly if customers can discern who was “first” in the market.
Obviously, such resistance creates an additional burden on the field market development
team or missionary sales force. Before they can assess whether a market segment can be developed,
they must overcome the second customer’s reservations. This is another reason for establishing a
strong field market development organization so that the preparatory work for such translation
efforts has already been done when the marketer decides it is time to attempt a translation.
Essential to the translation segmentation process and the missionary sales approach to mar-
ket development is an understanding of the role of field market development (FMD) personnel
and their relationship to direct sales, end users, and headquarters marketing personnel. This mar-
keting effort requires a value-added or value-based price approach to be margin supportable.
Suppliers whose offerings require significant customer education to take full advantage of the
value offering will employ a field marketing team whose compensation and position structure
enable the team to spend the time with customers in the education process. This is significantly
different from the role of a direct sales team. As these issues relate to field sales and other aspects
of business-to-business promotion, they are dealt with in greater detail in later chapters.
Summary of Segmentation
Two approaches to segmentation, the analytic approach and the translation approach, have been
discussed. To review, the analytic approach seems to emerge when the marketer faces a market
with many customers or when the marketer is looking to enter a new market in which his company
has little or no experience. The analytic approach can be helped by introducing some elements of
translation, particularly in developing in-depth information on value sought and buying behavior
within segments. Translation can be helped by some analysis, as well. The marketer and the
field missionary sales force may want to collaborate on gathering data from the field and on
interpreting the data to suggest possible new market segments. This analysis may lead the
missionary sales force to target high-potential segments even though these might not be the
easiest for gaining initial access. Whether the marketer uses a process that is largely analytical or
largely translation, the next step is to choose target segments.
CHOOSING TARGET SEGMENTS

Once segments are defined, the process of identifying the best opportunities for the organiza-
tion begins. Of the segments chosen to address, the marketer may decide that one or a few
should be targeted as primary, that is, they receive emphasis. To make these choices requires
application of criteria in two stages. First, the marketer makes a judgment of how attractive
each segment is; then a group of segments is chosen that allows organizational objectives
to be met.
Attractiveness of Segments
Exhibit 7-6 shows the factors to be taken into consideration in determining the attractiveness of
each segment. Notice that attractiveness is determined from information that comes from all the
elements of an environmental analysis.
Attractiveness is obviously not a concept that can be easily quantified. Some organizations
may want to allocate weights to the various factors and then assign attractiveness scores based on
a qualitative assessment for each segment.
• Size of Segment
• Growth Rate of Segment
• Intensity of Unmet Need(s)
• Reachability of Segment through Communications Channels
• Readiness of Segment to Seek and Adopt a Solution
• Likelihood of Competitive Intensity
• Sufficiency of Channel Reach
• Likely Value Contribution by Channel(s)
• Match Between Segment Needs and Supplier’s Strengths
• Differentiability of Supplier’s Offering
• Opportunity to Achieve Strategic Goal by Addressing Segment
• Opportunity to Achieve Learning Goal by Addressing Segment
EXHIBIT 7-6 Factors in Assessing Segment Attractiveness

MARKET ATTRACTIVENESS Segments that are large and growing fast are usually more attrac-
tive than smaller or slower-growing segments, all other things being equal. As part of the effort
made in “knowing the market,” the marketer can estimate the size and growth rates of various
segments. At this point, qualitative judgments about the priority of needs as seen by the market
segment are appropriate. In other words, how important is the marketer’s offering when com-
pared to the other opportunities or solutions under consideration by the customer? The answer to
this may show up in the level of urgency displayed by the customer, whether or not the customer
is willing to take the lead in a new development or application, and/or whether the customer is
likely to outsource solutions to difficulties or develop its own solutions.
Boeing and Airbus are facing this kind of a question in considering the segment of the
commercial airplane market for “superjumbos.”6 The question is not so much whether a market
exists for super jumbos—jumbo jets with 500+ seats—but whether the market is attractive
enough to warrant design of a completely new plane. Boeing believes that airlines will move
away from the hub-and-spoke model that currently dominates air traffic routing patterns. It
believes airlines will migrate to longer, direct routes, requiring mid-sized fuel-efficient planes.
Hence, Boeing does not believe the segment is attractive enough to warrant a new super jumbo
design. Airbus is counting on the hub-and-spoke to have staying power as a dominant model at
least in the Middle East and Asia, so Airbus has proceeded with a super jumbo design.7
Early indications seem to bear out both interpretations of the market to some degree. Airbus
has built a 555-seat new jet, the A380, which it first tested in 2005 and began to ship in limited
numbers in the late 2000s (first few units in 2007).8 By mid-2005, it had acquired commitments
for over 100 aircraft, indicating that demand may be sufficiently high to warrant the $13 billion
development effort. Boeing has seen orders for its venerable 747 passenger plane slow consider-
ably (freighter versions do better) since 2000. To compete in the super jumbo market, Boeing
modified the existing 747 to create a 450-seat “stretch” 747.9 Meanwhile, preorders have been
brisk for the Boeing 787 “Dreamliner,” a 250-seat jetliner capable of flying nineteen hours non-
stop, launched in 2009. Airbus has countered with its own mid-sized, long range jet, the A350.
Early orders for the A350 have confirmed that this market segment is also probably viable.
However, there is still uncertainty left to resolve. For instance, in the market segment for super
jumbo jets, the economic turmoil of 2008–2009 caused many airlines to cancel or renegotiate their
orders. This economic upheaval, coupled with the technical and production problems that delayed
introduction of all new products, illustrates the problems that many business-to-business marketers
have in trying to anticipate the future. Time horizons are often so long—development work on the
A380 began in the mid-1990s—that research data only provide a glimmer of what will occur.
Adaptability may be very important when considering market segments for a new product
or service. If potential customers are able to easily adopt a new product or service because they
already have in place the required infrastructure for adoption, they are more likely to act on an
intention to buy. Related to this may be the existence of relationships with existing buying center
members. Again, potential customers are able to act more quickly if the participants already
understand their buying center roles and are used to fulfilling those roles.
Available budget also adds to attractiveness of a market segment. A prospective customer
may indeed want the product, but, if the buying center cannot access available funds, the inten-
tion to buy may go unfulfilled.
COMPETITIVE ATTRACTIVENESS—CHOOSING YOUR BATTLES A good competitive analysis

will provide the marketer with information on the existence or likely existence of strong competi-
tion vying for business from segment members. The marketer must think ahead to how strong the
competition is likely to be. Just because a competitor’s offering to the market segment is currently
weak does not mean that this will remain the case. Also, a market segment that is currently
unaddressed by a competitor may be pursued vigorously once the competitor realizes there is
potential in the market.
A segment is competitively attractive if there are significant barriers to entry for other
competitors. For instance, suppose it is apparent that the first company to enter a market seg-
ment is likely to acquire critical mass of customers quickly, leaving little room for new competi-
tors to enter. This market would then be competitively attractive to the first entry only, as the
marketer should recognize the “first” in a market could create a substantial defense from com-
petitive intrusion.
CHANNEL ATTRACTIVENESS The ideal situation is to find segments that are not already
served by well-established marketing channels, but could be addressed by channels that are
looking for new business and can readily adapt. The channel power situation in such a case is
favorable. The next best situation would be segments that are already addressed by existing
channels, but in which no channel members are dominant. The marketer positions the new
offering as a competitive advantage to the channel members. Two kinds of segments vie for the
honor of least attractive: those segments for which no suitable channels address them currently
and for which development of new channels would be difficult and those segments for which
well-established channels exist with one or a few dominant channel members. The marketer
will face a difficult power position in trying to access these segments through the dominant
channel members.
When there are not any obvious suitable channels, a market view of competition is
mandatory. Even when the offering is new to the market, customers will have already been sat-
isfying the existing need with less than ideal solutions and may be in the habit of seeking these
solutions through particular channels. The appropriate channel may be the one in which cus-
tomers expect to find solutions rather than the channel that is readily accessible or available.
COMPETITIVE ATTRACTIVENESS—SUPPLY CHAINS AS A DISTINCTION Integrated supply

chains provide important value to final buyers. Supply chains create value in lower costs by mit-
igating the bullwhip effect. Also, if information is shared conscientiously within the supply
chain, the right products can be developed and produced to fulfill final buyers’ particular needs.
Consequently, a company can provide distinctive value for customers by having a well-run, inte-
grated supply chain.
As a product category matures, the cost, time, and place benefits provided by an integrated
supply chain are likely to increase. Dell’s supply chain allows it to customize computers for cus-
tomers’ specific desires and deliver them rapidly. This is typical of the kind of value that is
sought by many market segments when the market is mature.
At first glance, a firm that produces and markets components or raw materials may seem to
have limited need to understand segments among final buyers—the component supplier merely
has to meet the product specifications, along with quality targets and delivery schedules.
However, if the component supplier makes the effort to understand the final buyer segments, it
may be able to find creative ways to meet the needs of the final buyer that had not been anticipated
by the supply chain driver. The component supplier could then avoid the trap of supplying a stan-
dardized, undifferentiated product. The component supplier may also find other segments that
could want similar component parts in the after market, thus creating a new opportunity that
would have been otherwise ignored.
INTERNAL ATTRACTIVENESS—PLAYING TO YOUR STRENGTHS The marketer’s environmen-

tal analysis identifies the company’s current core competencies and those that it is building for
the future. When a segment’s most important needs can be met by using the company’s core
competencies, then the segment is more attractive. The Panasonic example at the beginning of
the chapter illustrates this point. Panasonic was very good at creating sturdy portable computers.
It also had proprietary technology for a touch screen interface. This interface proved to be very
useful in field-use situations where ruggedness was also needed. Accordingly, Panasonic was
well matched to the market segment it identified.
ATTRACTIVENESS—OTHER CONSIDERATIONS Other parts of the environmental analysis may

lead the marketer to rate a segment higher or lower in attractiveness. The analysis of public policy,
for instance, may lead the marketer to downgrade the attractiveness of a segment because meeting
the segment’s needs may encounter more government regulation. In the forestry industry, for
instance, addressing a market segment focused on using high-quality wood for luxury interior
designs may have become less attractive with more regulation that protects the high-quality wood
found in old-growth forests.
The organization’s goals may have a significant impact on how attractiveness is assessed.
Suppose a company’s goal is to be the leader in its industry. Then the segments addressed will prob-
ably either have to reach a minimal size or be the market leaders or market owners in the segments
they serve. The industry also probably has one or more closely watched segments that reflect the
health and direction of the industry. If a company wants to be recognized as the industry leader, it
must participate in those segments, even if doing so is not particularly attractive strictly on profitabil-
ity grounds. For instance, to be recognized as a leader in the automotive tire manufacturing industry,
a company such as Goodyear or Michelin must be a major supplier of original equipment tires to
vehicle manufacturers. Since this is a rather closed, oligopolistic market with significant entry
barriers, some tire manufacturers, such as Cooper Tire, will not be recognized as leaders as they do
not participate in the OEM market but focus on the second tier or aftermarket for replacement tires.
Choosing Targets
Once segments have been assessed for attractiveness, segments need to be chosen to target. If the
marketer takes the analytic approach, a rational approach for choosing must be followed. If the
marketer takes a translation approach, based on translating existing business, some analysis can
aid in the selection of the next trial customer or customer type. In either case, the marketer needs
to take a careful look at the objectives that he is attempting to meet. The choice of segments must
at least allow those objectives to be met.
PROCESS FOR CHOOSING TARGET SEGMENTS ANALYTICALLY The main idea for choosing
segments analytically is to start with the most attractive segments and to target as many as are
required to assure that the organization will meet both financial and nonfinancial objectives.
Most sets of objectives include a desired sales level and a desired growth rate in sales. The objec-
tives include a profitability level and a growth rate for profits, as well.
Nonfinancial goals such as recognition as the market leader, learning about a line of
business that is new to the company, reduction of risk by spreading the sources of revenue, or
achieving synergy across other marketing programs may be relevant to the attractiveness of
segments. The marketer should rank attractiveness by choosing the most attractive segment and
any others that are relevant for special reasons such as those already noted. The marketer should
then ask whether the company could meet its goals by targeting only these segments. If the
marketer does not believe that the company stands a reasonable chance of meeting its objectives,
the marketer should look to the next most attractive segment on the list. After adding this segment
(or perhaps a group of related segments), the marketer should again determine the likelihood of
meeting the stated objectives. This process should continue until the marketer is satisfied that the
objectives will be met or until there are no more attractive segments.
Return to the example of the online customer satisfaction survey service. Exhibit 7-7
shows the factors contributing to the attractiveness of the four segments discussed earlier. The
first three variables concern customer and market considerations. The next, competitive attrac-
tiveness, then channel reach and communications reach. All considerations having to do with the
match between customer needs and company capabilities have been combined into one variable.
An additional variable, sensitivity to price, has been added. For each variable, a score has been
assessed on a 5-point scale, with 5 being most attractive and 1 being least attractive.
The scores are summed and listed at the bottom of the table. Notice that each variable was
weighted equally. A marketer might weigh the variables differently depending on how important
each is judged to be to the selection of target segments. Other variables could be applied as well,
depending on the situation.
Attributes Segments
Scores on Segment 1: Segment 2: Segment 3: Segment 4:
5-Point Major Stopping Competitive Specific Area
Scale Turnaround Deterioration Improvement Improvement
Potential size year 2010 2 3 4 4
(in $ million) $195.0 $390.0 $585.0 $975.0
Growth, percent 4 4 1 5
increase by 2012 100% 100% (50%) 150%
Need strength 5 4 3.5 3.5

(High variance)
Competitive strength 3 3 4 3
(High variance)
Channel reach 5 5 5 5
Communications reach 4 4 4 4
Capability fit 2 5 5 2
Price sensitivity 2 3 4 3
Overall attractiveness 27 31 30.5 29.5

(sum of attribute scores)
EXHIBIT 7-7 Segment Attractiveness for Hypothetical Example Source: Based on Peter Doyle and
John Saunders, “Market Segmentation and Positioning in Specialized Industrial Markets,” Journal of
Marketing, 49(2) (Spring 1985), p. 30, table format.
In this hypothetical example, the second segment receives the highest score, followed by the
third segment, the fourth segment, and the first segment. To pick target segments, the marketer
would first select the second segment, comprised of small businesses with deteriorating perfor-
mance, whose managers are seeking a turnaround. The marketer would then compare the size of this
segment to the company’s objectives. Assume that the company is seeking $2 million in operating
profits per year. If the company’s operating profit margin on its products is typically 20 percent of
the price paid by ultimate customers (assumed to be $5,000 in this case), then sales must be
$10 million per year ($2 million divided by 0.2). The marketer compares the $10 million needed to
the $390 million current market potential, which is expected to grow to $780 million within two
years. What happens if the marketer is uncomfortable with the prospects of obtaining 2–3 percent
of market potential during the first year of addressing this market segment? The marketer does not
know how fast customers in this segment will adopt the new service and how quickly competition
will enter the market. On the basis of prior product introductions, she may feel that 10 percent of
the market potential is the maximum sales that will be realized in the first year of an early market.
If competitors enter the market, the chances of reaching the target profit level may dissipate quickly
as competitors take part of the business and price competition erodes margins. The marketer would
then be left addressing only one segment and not reaching desired profit levels (even if sales levels
are reached). Accordingly, the marketer would probably decide to address the next most attractive
segment as well, the segment of small companies seeking to improve competitive performance.
Together these two segments represent about $975 million in market potential for 2010 and $1.073
billion in 2012. The marketer would probably be much more comfortable that the objective of
$10 million annual sales could be reached.
At this point, the marketer would probably stop adding segments to be targeted. Objectives are
reachable with the targets already chosen. The other two segments, while attractive, still have some
major drawbacks. Both the specific area improvement segment and the segment needing a major
turnaround in customer satisfaction present problems in the fit with the company’s capabilities. For
whatever reasons, the marketer has scored this category as a 2. Given the offering that can be
provided, the value that can be delivered will probably not satisfy these customers. Accordingly, in
this hypothetical example, the company will probably target only the two most attractive segments.
Looking at the process again in general, if a marketer reaches the point at which there are
no more attractive segments and objectives still appear unreachable, then the process reverts to
an earlier decision point. The marketer may try defining segments differently in search of greater
opportunities. Alternatively, the marketer may seek to change the objectives of the organization
related to that particular market segment.
Changing objectives may be difficult if upper-level management is unwilling to alter the
objectives. The part of this process that is most problematic may be assessing whether
objectives can be met or not. At this point in the analysis and planning process, there is proba-
bly not enough information to do a good forecast of revenues, let alone of profits. There is
probably a great deal of uncertainty in anticipating sales and profits that are likely from any
given segment. Also, without a strategy and offering fully defined, it will be difficult to get an
accurate idea of what market response the company can expect in each segment. Accordingly,
this assessment will probably need to be done qualitatively by examining the market potential
for each segment and by making reasonable assumptions about the level of market response
and the costs involved. This analysis can be refined later, after more data are gathered about
the segments chosen and after the offering is fully developed for each segment. The marketing
operations forecast (Chapter 11) can provide significant insight to market conditions and the
likelihood of succeeding with translations of the new offering.
It should be noted that the actual design, development, and commercialization of the total
offering are taking shape at the same time as, and with significant input from, this market seg-
menting and targeting effort. This luxury—developing the offering as more is learned about spe-
cific target markets—is afforded only to those organizations that operate from a marketing
concept. Organizations that develop a new offering from the point of view of their own needs and
then look for customers to fit to the offering have no such luxury.
UNCERTAINTY AND TIME COMPRESSION—THE NEED TO USE ANALYSIS AND TRANSLATION

TOGETHER The problem in choosing target segments based on reaching these objectives is that
we do not really know whether our best offering will meet the objectives. We do not know at this
point in the analysis whether we can grow fast enough to reach target sales growth, sales levels,
and profitability. To compound this problem, the marketer generally will not have enough time to
perform the analysis necessary to remove the uncertainty.
A decision-making approach in which the marketer is somewhat confident must be used to
make choices quickly and at least somewhat accurately. Whether an analytic approach or a trans-
lation approach, some conscious effort needs to be spent on choosing segments to meet goals if
the outcome is to be good. We believe that either approach—analytic or translation—can be
improved under conditions of heightened uncertainty and time compression by adding elements
from the other approach. So, if a marketer gravitates toward the analytic approach, he will bene-
fit from adding elements of translation into the choice of target markets. Similarly, if the mar-
keter tends to use a translation approach, the choice of target markets will improve with the
addition of some analysis into the process.
In the first instance, the marketer takes an analytic approach, but time compression does
not allow much collection and analysis of data. It is also highly likely in fast-moving, emergent
markets that the nature of likely competition will be largely unknown. So, it is not certain the
extent to which competitive action in the segment will allow large market share or high prof-
itability. Instead of trying to obtain more data when there is not much good data to be found, the
marketer can make the targeting decision by choosing tentative target segments. This would
probably involve more segments being targeted than might have been chosen otherwise. In addi-
tion, the strategy and offerings chosen may involve some investment in flexibility until results of
the strategy implementation indicate which segments are likely to be better performers. The
strategy would involve reassessment of segment attractiveness after six months or so. At that
time, the company might invest more heavily in pursuit of some segments and pull out of others.
Suppose a marketer uses a translation approach. The company has developed a product
that works for one large customer and is now looking to translate this business into other seg-
ments, usually within the same industry initially. A close look at which elements of value are
best addressed in the relationship with the first customer—that is, by analyzing the value
obtained by the first customer—may give some clues as to which types of customers or customer
situations to look for as the next best translation. Then the translation process of the missionary
sales force can be more closely directed in market segments that are more likely to bear fruit.
POSITIONING
For each target segment, the members of that segment will have one or more value dimensions
that are most important to them and are likely part of the defining parameters of the segment.
Recall that in the Panasonic case the targeted customers had “durability” as their most important
value dimension. The marketer designs an offering for each segment that creates value for seg-
ment members, thus differentiating the offering from competitors. Panasonic created the
ToughBook, which is more durable than other laptops. Through differentiation and communica-
tion, the marketer attempts to obtain the segment members’ perception that his offering is better
than the competitors’ on one or more key value dimensions. Panasonic used a combination of ads
and other promotion to get across its message of superior durability. The perception that prospec-
tive customers (and existing customers, too) have of the competitive offerings, in relation to each
other, is the positioning of the offerings. In the Panasonic case, customers see the Panasonic
Toughbook as more durable than the competing brands.
Positioning, then, is foremost something that occurs in the mind of the prospect or the
customer. Marketers attempt to influence this positioning, but, ultimately, it is the customer that
creates “position.” Marketers have very real limits on “positioning” their products and offerings.
The potential customer’s perception of position is influenced by many factors: articles in trade
journals, discussions with other buyers, discussions with salespeople, advertising from all rele-
vant competitors, presentations at trade shows, and product trials, just to name a few. Suppliers
that are part of companies with multiple divisions may find that the positioning held by
prospective customers has been set by another division whose products may be totally
unrelated to the market in question. Initially, prospects will perceive the marketer’s communica-
tions with a skeptical eye. Seldom would they consider the marketer an objective source of eval-
uative information about his own product. If credibility is required for the prospect to accept a
communicated message, then the marketer must find ways to build that credibility.
The situation is somewhat different for the existing customer. Positioning ultimately
depends on the customer’s own experience with the product, the service, and all other dealings
with the supplier and the supplier’s agents (such as resellers). Communication can help the cus-
tomer pay attention to important aspects of his experience. Communication can also help cus-
tomers set expectations and interpret results of their usage of the product or service. In the end,
though, customers’ beliefs depend on the value they perceive that they have received; so, good
positioning comes down to some very simple principles:
• Provide better value than competitors on one or more key dimensions of value, as per-
ceived by your prospects and customers.
• Communicate the differentiation that you provide in such a way that the prospect and cus-
tomer have high but reachable expectations.
• Deliver on your promises and occasionally find ways to surpass your customers’ expectations.
These sound simple but, in reality, are difficult to execute. To be successful, marketers need
to find what their companies do best and focus on building superior value from those strengths.
The execution of this positioning begins with a positioning statement which is the succinct state-
ment of the positioning the company hopes to achieve in the minds of its target customers.
FURTHER ISSUES IN SEGMENTATION, TARGETING, AND POSITIONING

The basics of segmentation are mostly straightforward; yet applying them is difficult because
market structures are seldom simple. This complexity arises because business-to-business cus-
tomers are trying to differentiate and adapt themselves to their own complex, changing markets.
The business environment that both marketers and their customers face presents complexities
and turbulent changes. When marketers develop segmentation frameworks, choose target seg-
ments, and develop their positioning strategies, they often have to adapt to this complexity and
accommodate this turbulence. What follows is a discussion of two situations that influence mar-
keters to think and act beyond the realm of simple, static segmentation.
Segmentation and Positioning Based on the Technology

Adoption Life Cycle
As discussed in Chapter 2, propensity to adopt innovations underlies the new technology adop-
tion curve.10 Moore’s ideas about propensity to adopt have implications for identifying segmen-
tation, choosing target segments, and positioning. Moore suggests that business-to-business
companies can divide their markets into adoption groupings, as presented in the box—“Adoption
Categories in the Technology Adoption Life Cycle.”
Moore observed that markets for innovations evolve in a regular pattern. The segments of
adopters of an innovation—technophiles through laggards—enter a market in regular succession,
one after another, and this succession drives the growth and evolution of that market. Early in the
life cycle for a product category based on an innovative technology, buyers always come from
technophiles and visionaries (innovators and early adopters in Rogers’ terms). After visionaries
have bought the product and the infrastructure has developed to support it, pragmatists begin to
enter the market. Once the market has been established and specialized uses have emerged, the
conservatives enter. Laggards may enter the market after prices have come down for specialized
uses or costs of not adopting have risen so high that laggards can no longer afford not to adopt.
All of this suggests that a marketer who markets a product based on a technological inno-
vation needs to have a sense of where the offering is located on the TALC. This will give clues to
the kinds of segments to address in the marketer’s near future.
When a marketer uses the TALC as a guideline for segmenting, targeting, and position-
ing, a strategy of innovation translation creates a focused process that identifies potential cus-
tomer niches. This process must begin prior to reaching the “tornado”—the period of rapid
growth in sales. Efforts to develop business from new customers—often called simply “busi-
A niche is a segment that
ness development”—based on a strategy of innovation translation, become
is relatively small with important after the first adopters (the technophiles in the market) are satisfied.
fairly well-defined A major function of missionary sellers is business development, educating
boundaries. The term is customers and assisting in the most productive application of the supplier’s
often used in a way that new technologies. Using the TALC as a guiding concept forces the marketers
suggests that the niche
can be served mostly or
and business developers to think about how the market will evolve and how
entirely by a single their efforts will influence the type of organization that the supplier designs to
supplier. market the offering. As such, the organization and its responsibilities change
Adoption Categories in the Technology Adoption Life Cycle
Technophiles adopt the very newest technologies, buy until they believe the product is easily adopted
just to try them out and experiment. These adopters with minimum upheaval. They will distrust the ref-
do not require a fully developed product or offering. erences from visionaries. They need a fully devel-
Visionaries see the competitive advantages oped offering.
they can build in their organization with the new Conservatives tend to adopt only when it
technology. They buy before the product or offer- costs them not to adopt. They need to be con-
ing is standardized and require a custom offering vinced that the offering is exactly what they
built around the new technology. need.
Pragmatists want to gain competitive Laggards will find reasons not to adopt,
advantage through new technology, but will not even when all evidence says they should.
as the offering evolves. The TALC and the adoption environment of the customer thus have
significant impact on the design of business development efforts.
Positioning a Product Line

Product lines are groups of products that are sold together or that address similar market seg-
ments. For instance, a machine tool manufacturer11 may have a line of products that perform
related functions, such as tools for cutting sheet metal, stamping patterns or holes into the sheet
metal, and shaping the sheet metal by bending or twisting. The same manufacturer may have dif-
ferent models of each tool, as well. At one end of the line may be machine tools with less
throughput and fewer computer-controlled features. At the other end of the line may be high
throughput, multifunction computer-controlled machine tools. These various models allow the
tool manufacturer to address many different segments. In each segment, the buyers are looking to
obtain machine tools that fabricate parts out of metal or plastic. However, the uses of the tools are
different, requiring different combinations of features and differing purchasing criteria.
In most cases, the supplier will want to maintain consistency in the brand’s image and posi-
tioning across most or all of the segments. There are several reasons for this. First, many of the com-
petitors will be the same from segment to segment. Each of these will have fairly consistent strengths
and weaknesses, allowing the supplier to occupy similar positions relative to these competitors in all
the segments. Second, efficiencies can be obtained in product design, manufacturing, communica-
tions, training, service, and other elements if positioning is similar across all segments. Third, cus-
tomers in closely related segments communicate with each other and pay attention to the same
information sources. In many cases, the same buying center may be buying different products for
differing situations: the people doing the buying are the same; the difference in the segments comes
from the usage situation. Maintaining consistency in positioning across segments then makes it eas-
ier for customers to understand the supplier’s position and to reinforce the positioning relative to
each other. Indeed, many buying center members go to other companies in other segments as their
careers progress. As they move from segment to segment, they take their beliefs along and expect
suppliers to provide similar types of value from segment to segment. As long as all this “cross fertil-
ization” is occurring, the supplier is wise to use it to advantage rather than create confusion.
When the supplying organization is multiproduct or multidivisioned, the overall corporate
positioning strategy and how that relates to the positioning of a line of products must be consid-
ered. Product line positioning must be supportive of the corporate or brand positioning effort. In
most cases, a supplier company will have a few value dimensions that are common differentia-
tors for all its products. These usually derive from the company’s distinctive competencies. For
instance, the manufacturer of the machine tools may differentiate its products on lowest cost of
ownership and flexibility in application. Obviously, this gives the manufacturer the opportunity
to make this a common theme in its communications for the entire line of products (similar to
Panasonic’s use of durability as the common theme for its line of notebook computers).
In some cases, the supplier will want to establish a flagship product—a product in the line
that is well known and conveys the positioning for the whole line. An example would be
Hewlett-Packard’s Laserjet printer for small business. The product produces high-quality output
and is easy to use. The product name has become a brand name that extends over several models.
This positioning has become a central theme for all of HP’s laser printers, for its inkjet printers,
and for its accessory products such as scanners, as well.
This approach is possible when an initial product has achieved notoriety. A company might
establish a flagship product after the product line has been established, but this is more difficult
to do. It requires the existence of a large segment that can be addressed by the flagship and a
clear and enduring advantage that can be embodied by the product and its offering. If the advan-
tage is transitory, the flagship will not obtain the credibility to assume the positioning mantle.
This discussion of product line positioning demonstrates the concept of market ownership
noted by McKenna.12 Setting a high standard, continuous innovation, thoroughly satisfying a partic-
ular niche market segment, and creating credible dominance are factors that help define ownership.

The first part of this chapter discussed two approaches to determining segments—an analytic
approach and an innovation translation approach. The analytic approach involves the use of
secondary and primary research, plus the judicious application of informed assumptions.
A marketer is most prone to use it when the market has many customers or when the marketer is
entering a market in which he has little experience. The innovation translation approach involves
efforts to find new segments based on translating an offering that has already been adopted by
one or a few customers. It involves the use of missionary salespeople or business development
specialists to look for and validate new market segments.
Once segments have been identified, the marketer chooses some of them to target. This is
done by determining how attractive each segment is and then choosing the most attractive seg-
ments. Ideally, the marketer continues to add segments to the list of targets until he feels certain
that the organization’s objectives can be met. If the marketer does not reach such a point, then
objectives or the segmentation framework needs to be rethought.
Once the target segments are determined, the marketer needs to determine the positioning for
each. Ideally, the positioning for one segment should not conflict or undermine the positioning for any
other segment. While the positioning effort is the responsibility of the marketer, the positioning result
is in the mind of the customer. The marketer attempts to aid the customer in establishing this position
in the customer’s mind. The marketer does this by first making sure the offering delivers superior
value to the targeted customers. Second, the marketer communicates a message to targeted customers
that emphasizes the key dimensions of value that create the desired position relative to competitors.
As noted above in the final section of this chapter, markets are complex and ever-changing.
The process of finding a segmentation framework, choosing target segments, and developing
positioning is difficult to do well but rewarding when accomplished, as illustrated by Panasonic
in the opening example.
Key Terms
accessibility 152 flagship product 169 positioning statement 167
actionability 152 innovation translation approach product line 169
analytic approach (to (to segmentation) 159 segmentation framework 150
segmentation) 155 measurability 152 segmenting 150
attractiveness (of segments) 160 niche 168 substantiality 152
bases for segmentation 152 North American Industry targeting 150
differentiation 167 Classification System
field market development (NAICS) 155
(FMD) personnel 159 positioning 150

1. Consider the following segmentation basis vari- would these observations argue against choosing
ables and note potential strengths and weaknesses this segment as a target segment?
of employing each in a segmentation framework: 7. What should a marketer do if, in choosing target
a. Demographics segments, he or she runs out of attractive segments
b. Technology to add to the list of targeted segments and it does
c. Culture of technology adoption not appear that objectives can be met?
d. Perceived value subject to industry standards 8. Why can marketers only hope to influence posi-
e. Point of technology adoption of the customers’ tioning and not create it?
customers. 9. Compare the importance of positioning in business-
2. How do the concepts of value and the value chain to-business markets with positioning in consumer
define how marketers should try to segment markets? markets.
3. What is the difference between the analytic 10. How is positioning an offering for new cus-
approach to segmentation and the innovation trans- tomers different from positioning for existing
lation approach to segmentation? customers?
4. What factors do you think will influence how 11. Explain why mass markets require offerings with
strong the airlines’ perceived need will be for super fewer distinctions than niche markets.
jumbo jets seating 600+ passengers in the year 12. What is the difference between a niche and a mar-
2013? ket segment?
5. Why would you say the market for super jumbo 13. How is McKenna’s philosophy of market owner-
jets is a market segment, even though the cus- ship, discussed in Chapter 2, reinforced by the
tomers—the airlines—are the same customers who TALC positioning strategies suggested in this
also buy jumbo jets and other kinds of airliners? chapter?
6. In Exhibit 7-7, the last column of the table shows 14. Define the business segments addressed and
that there is a lot of variation in the strength of the positioning of your business school or marketing
need perceived by segment members and in the program. What could your school do to change or
strength of competition in meeting functional improve your target segments chosen? Your
improvement needs within this segment. Why positioning?
Endnotes
1. Whatever is the highest degree of “return” will Strategies,” Journal of Marketing, 21(1) (July
be based on what the organizational goals are. 1956), p. 4.
These will not be the same for all competitors in 4. See Peter R. Dickson and James L. Ginter,
a market, nor will they remain constant over “Market Segmentation, Product Differentiation,
time for each competitor. and Marketing Strategy,” Journal of Marketing,
2. Based on Geoffrey James, “Standing Tough,” 51(2) (April 1987), pp. 1–10; and John Berrigan
Marketing Computers, 20(3) (March 2000), and Carl Finkbeiner, Segmentation Marketing
pp. 34–42; Frank Tiboni, “Building Tough (New York: HarperBusiness, 1992).
Notebooks” (sic), Federal Computer Week, www. 5. See Peter Doyle and John Saunders, “Market
fcw.com (May 17, 2004); Edward F. Moltzen and Segmentation and Positioning in Specialized
Mario Morejon, “Toughest Notebook Challenge— Industrial Markets,” Journal of Marketing, 49(2)
Trips, Drops and Spills, Oh My! Panasonic, Dell, (Spring 1985), pp. 24–32, for an illustration.
Toshiba, and Acer Put Their Notebooks to the Test. 6. Andy Reinhardt, John Rossant, and Frederik
Which One Survived?” CRN (1251) (October 15, Balfour, “Boeing Gets Blown Sideways,”
2007), p. 32. Business Week, 16 (October 2000), p. 62.
3. Wendell R. Smith, “Product Differentiation and 7. Carol Matlack, “Mega Plane Airbus’ A380 Is
Market Segmentation as Alternative Marketing the Biggest Superjumbo Ever, and Airlines Have
Ordered More Than 120 Already. A Brilliant 11. For the uninitiated, machine tools are those
Leap, or a Great Folly?” Business Week (3857) devices and equipment, usually capital items,
(November 10, 2003), p. 88. employed by manufacturers that perform the
8. Kevin Done, “New Delay to Airbus A380 Jet mentioned functions on raw materials and com-
Deliveries,” Financial Times (May 14, 2008), ponents in the process of adding value. The
p. 21. products of machine tool manufacturers then are
9. James Gunsalus and Rishaad Salamat, “Boeing “the products that make the products.”
to Launch Stretched 747 to Fight Jumbo Airbus,” 12. Regis McKenna, “Marketing Is Everything,”
Chicago Sun-Times (June 14, 2005), p. 58. Harvard Business Review (January–February
10. Geoffrey A. Moore, Inside the Tornado (New 1991).
York: HarperCollins Publishers, Inc., 1995).
Chapter 8
Developing the Product, Service,

and Value of the Offering
OVERVIEW
In previous chapters, we discussed the context, market environment, and behavioral
aspects of business-to-business markets. The elements of corporate and marketing
strategy, and market research have been examined. Regard these facets of
marketing as the tools of the trade. In this chapter you will begin to see how many
of these elements pull together into a plan to develop and position the product
and offering. The development process for new products and offerings is
examined and positioning in the market is discussed as an integral part of the
development process.
In the following examples, the focus is on product failures. Very large
organizations still make mistakes in product development and commercialization.
You may recognize some of the consumer products as “icons” of business failures,
while the business-to-business failures may be more obscure. Regardless of the
market, many of these examples, though complex offerings, are in hindsight a failure
of one of the basic tenets of new product development. The examples start with,
appropriately, the Edsel, an historic and probably the best-known product failure,
albeit a consumer product. An old example by today’s standards, the Edsel set a
standard by which many other “failures” are measured. Every company, business-
to-business or consumer oriented has had its Edsel. The Edsel is an icon.
The Best and the Brightest Still Have Product Failures

In August 1957, Ford Motor Company introduced a car to the American market from an entirely new
division of the company—the Edsel. The vehicle was conceived as a mid-priced vehicle positioned
above the Mercury but below the Lincoln, aimed at General Motors Buick and Oldsmobile line. The
vehicle had been conceived in the early 1950s and developed through the middle of the decade.
The mid-priced market was growing when it was conceived, but by the time the car was introduced,
the economy had taken a dive. The mood in America was hardly upbeat. On the day that the Edsel was
introduced, the Soviet Union announced that they had a missile that could reach America.1 By the end
of 1960, the Edsel was gone, never to effectively compete in a mid-priced market that evaporated with
173
174 Chapter 8 • Developing the Product, Service, and Value of the Offering
the declining economy. The Edsel, a $350 million loss, in 1957 dollars, for Ford Motor Company, was
to become an icon for failure. As early as the 1960s, a cartoon of the SST, the American response to
the supersonic passenger aircraft, the Concorde, was shown, with an Edsel-like “horse-collar” grill,
attempting to take off.2
Not to be outdone in the product failure game, in the 1960s RCA decided to take on IBM in the
mainframe computer business. Codenamed “Project Intercept,” the effort was the largest ever undertaken
by RCA. In September 1971, after a loss of $500 million, RCA eliminated 8,000 jobs, backed away from
an installed base of about 500 customers, and ended the computer effort. RCA stock rose on the news.
The Edsel had been replaced, if not in the minds of consumers, at least in the dollars-lost competition.3
In the early 1980s, Apple Computer introduced the Lisa, a new desktop system aimed at business-
to-business markets. Probably put off by its $10 thousand price tag and ineffective business-to-business
channel, business users were not impressed and stuck with IBM, the established business supplier with
the relationships and service they expected.
In an attempt to translate success in business-to-business markets into the consumer market, IBM
introduced the PCjr. The classic IBM keyboard, once the standard by which others were measured, was
not included. Instead, the “Chiclet” keyboard, with oval, rocking keys was the standard. Also, the com-
puter was not expandable—a benchmark feature of previous IBM desktop computers. Dead wrong for
the market, this product cost IBM $100 million. A pittance.
In 1981, Xerox, the recognized owner of the office copier market, introduced the Star System—a
desktop computer system that used little graphic images as symbols of functions and a small palm-sized
device to move the curser around the monochrome screen. The system received little support—after all,
Xerox was a copier company. Who could be bothered with a “little” computer with a graphical user
interface and that silly mouse to navigate around those little images?
New Coke, DuPont’s leather substitute Corfam, RCA videodisc players, the Susan B. Anthony
dollar coin (even the U.S. federal government competes in the product failure competition), the Apple
Newton, WebVan,—the list goes on. How do so many companies with access to the best resources
create such money losers?
LEARNING OBJECTIVES
䊏 Understand the importance of customer and supplier involvement in the development of new
offerings.
䊏 Know the role of marketing in the development process, particularly in a market-driven firm,
as the source of direction and definition.
䊏 Recognize the concept of the value network as a powerful tool in creating market ownership.
INTRODUCTION
Each of the product failures noted in the opening example has an element of marketing failure
associated with it. Whether an obscure business-to-business product that few consumers have
heard of or a well-known icon of failure, research has shown that the largest single reason for the
failure of new products and services in the marketplace is a lack of a thoroughly developed and
executed marketing plan.4 In this chapter we look at the relationship between technology, prod-
ucts, and marketing. Note that, in the marketplace, customers seek solutions, not technologies or
products. Offerings are perceived by the value they deliver, not by the specific technology that
makes them work. We will see, however, that products, technology, and marketing are signifi-
cantly woven together in business-to-business markets.
Chapter 8 • Developing the Product, Service, and Value of the Offering 175
Business-to-business marketing organizations are influenced by the technology of the

products they offer and the longevity, or survival, of that technology in the market. Succeeding
technologies as well as multiple product life cycles (PLCs) must be measured and planned to
ensure the ongoing nature of the organization. While at first glance, a particular technology may
be viewed as the mainstay of an organization, long-run successful organizations recognize that
the customer acquires the technology for its solution value, not for the technology itself. This
view can be difficult to accept among members of a technology-based organization who are
proud of their technical accomplishments and believe that the technology is the key to their
success. The supplying organization then must recognize the value that the technology provides
from the customer view.5 A supplier’s new product development should focus on the market of
the customer, not the current product or product line of the supplier.
THE PRODUCT LIFE CYCLE

The generalized product life cycle, shown in Exhibit 8-1 (modified slightly from Exhibit 2-4) is
useful as a device to relate many concepts of marketing. Life cycle management makes some
basic assumptions about offerings.6 These assumptions vary from the generalized case depending
on changes in the market environment and the pace of innovation:
• All products and offerings have a limited life.
• All products pass through different stages of evolution. 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.
• The different stages offer the organization different opportunities and threats, and market
segmentation and targeting should reflect the changes.
• 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.
With our understanding of business-to-business markets and market environmental factors,
let us consider the implications of these assumptions.
In markets that are slow to change, accepted products have longer periods of viable
application, passing through the stages more slowly. Basic commodities fit the generalized life cycle
with a greatly elongated maturity phase, potentially many years long; while products in fast-paced
markets, such as computer processors, experience a full life cycle in a much shorter time span.
Maturity
Sales Revenue/
Period
Growth
Decline
Introduction
Time
Development
Pragmatists Conservatives
New Adopters/
Period
Visionaries
Laggards
Technolphiles Time
EXHIBIT 8-2 The Technology Adoption Life Cycle
Within market segments, products and services evolve through the use of new technologies,
materials, and manufacturing methods. This may not change the functionality of the product offer-
ing but may change the costs to provide it. New technologies are accepted at a different pace by
different market segments. This can cause discontinuities such as those demonstrated by the
technology adoption life cycle, Exhibit 8-2, repeated here for convenience from Exhibit 2-5.
THE PRODUCT LIFE CYCLE AND LIFE STAGES OF OFFERINGS7

The generalized marketing mix implications of the PLC, familiar to many students, are discussed
here. Within this framework, this discussion is treated from the view of business-to-business
offerings. Note that, as shown in Exhibit 8-1, five stages of the PLC are considered: development,
introduction, growth, maturity, and decline. Also note that, while in Exhibit 8-1 a line distin-
guishes all borders between stages except the development–introduction
The marketing mix in boundary, these transitions are more likely to be “fuzzy” in application, which
the development stage will be discussed in detail later.
requires some attention.
The product is not Offering Development Stage
completely defined, and
profits do not exist; While not always shown in exhibits of the PLC, the development stage as
though a target price or shown provides a visual reminder of the complexity and potential need for
value point is being
considered. Promotion,
collaboration in the development of new offerings. During this period, the orga-
beyond the selling effort nization spends R&D, prototyping, field testing, and trial use resources (dollars,
at the customer, may be personnel, opportunity costs, emotional investment, and etc.) to prepare the
oriented toward publicity offering to correctly address the customer need. This investment does not neces-
about technological sarily end with the introduction of the offering. Realize, too, that revenues may
development. If the
product development is a
actually begin before the development stage is completed. Very often, a supplier
result of a significant developing a product will obtain a development partner to help defray the devel-
collaboration with the opment costs. In other cases, a supplier may take “pre-orders” before the com-
customer and involves pletion of the final product. In most cases, these revenues do not fully offset the
elements that the development costs, so the net income is still negative.
customer considers
proprietary, the customer
Depending on the degree of customer involvement in the development, a
will have a voice in any specific introduction time for the offering may not exist. If the development is
promotional efforts. a mutual effort of both the customer and the supplier, as is often the case in
business-to-business markets, inclusion into the customer’s product may occur before introduction
to the general market. This can be the result of an agreement in which the customer has exclusive
rights to the offering early in its life or, perhaps, the result of other potential users developing a
wait-and-see attitude toward a new technology.
With high-learning products, those that require the customer to rethink current practices
and/or take on new manufacturing techniques (such as disruptive innovations—see Chapter 9),
the supplier may spend significant resources developing the training and education of customers
at many levels. The customer’s manufacturing operations need to learn the techniques and
nuances of the new offering and the customer’s product service organization may require training
to adequately satisfy field service requirements. Potentially, all elements of the buying center
may require a break-in period to make using the new offering a routine event. The corresponding
elements of the supplier value chain become a major part of the training process as different
portions of both organizations adapt to the new situation.
Unlike education and training of various parts of the customer organiza- During the introduction
tion as described for high-learning products, low-involvement or low-learning stage, profits are negative
or, at best, break through
products are more likely to follow a more traditional path. Resource commit- to the positive side near
ments to training will likely end at the start of the product introduction stage of the end of the stage. The
the PLC, the assumption being that, for low-learning products, the customer and product is somewhat
the general market will adapt more quickly. basic, as competition has
yet to force a need for
differentiation. Price and
Offering Introduction Stage positioning are strongly
related. Promotion is
Many decisions about the offering (its flexibility for translation to other market used to build awareness,
segments, the ability to incorporate additional product attributes in future ver- and distribution is
necessary for other than
sions, the commitment of manufacturing resources, and etc.) are made through
large OEM customers.
the development stage and into the introduction stage of the PLC. The
introduction stage of the PLC is one of low sales volume for reasons on both Just as members of the
sides of the supplier–customer relationship, and many of these factors become customer organization
must learn about the new
key elements in how the new offering is positioned in and priced to the market.
product, supplier
During this stage, the supplier experiences the growing pains of commercial personnel also must
manufacturing and/or mainstream involvement as a member of the customer understand any new
supply chain—often a major part of the new offering. If many of the elements of portions of the value
the new offering have been outsourced or are the result of a unique or first time network. If, in the
development process,
value network, the logistical process experiences a significant learning curve.
designers in the supplying
The customer faces the same learning curve as it incorporates the offering into firm elect to outsource
its operations. elements of the product in
Contextually, the management of the supplying organization must make a a different manner than
conscious decision about market ownership. If the new offering is consistent previous offerings, a
unique or first time value
with previous offerings in that it is the next generation that satisfies an evolving
network is created,
need in the market, then the concept of market ownership8 is likely recognized associated with the new
and pursued. offering. Members of the
If the offering is independently developed in full or partial isolation from new value network
the potential customer base, and presents a high-learning situation to the market, experience a learning
curve as they may not
early users are limited to innovators or technophiles who are willing to accept
have delivered an offering
change and are attracted to innovation. Under these circumstances, price strategy to this particular
is more about positioning in the market than about profitability. Certainly, price customer as a part of this
should not be dictated by early manufacturing or delivery costs. During the team before.
introductory stage, profits are unlikely or may break through to the positive side. This is depen-
dent on many factors, not the least of which is how the pricing scenario is expected to play out
through the life cycle as well as the potential threat of competition in the market.
During the introduction stage, promotion is used to “announce” the offering. If the devel-
opment was the result of collaboration with a customer, then promotional tools that feature the
customer’s use of the offering, with the customer’s consent, are appropriate. If the product is an
innovative effort and the customer owns its market, promotion certainly wants to build awareness
among other members of that market. Field marketing (missionary sales) efforts should be
focused in this area. With low-learning offerings, it may be appropriate to use sampling to
encourage trial.
During the introductory stage, the place element of the marketing mix is influenced by
whether the offering is collaboratively developed and introduced or it is an individual develop-
ment. If it is a collaborative effort between supplier and customer in an OEM relationship, prod-
uct distribution and channel design have likely been part of the development process. As the
innovated offering is translated to other users and market segments and the market “knows” the
product, additional marketing channels or supply chains evolve to meet the needs of new
adopters. Late majority or conservative adopters who are not likely to have the learning needs or
volume to justify a missionary or direct sales effort will seek channels more likely to provide
inventory and ordering convenience.
In circumstances in which the product does not have a pre-established customer or is not
the result of a collaborative effort (likely a low-learning product), the development of distribution
channels by the supplier, targeted at potential market segments, may be the only means of
product delivery.
In the growth stage, profits Offering Growth Stage

increase rapidly as new
customers accept the The good news in this stage is that the target market has accepted your new
product. More adopter offering. The bad news is that success usually attracts competition, and your
categories accept the organization must get through the transition from introduction to growth or,
offering. The need for
product differentiation
as described by Moore, cross the chasm.9 Recall that in Chapter 5 we devel-
becomes apparent, as oped an analogy between the stages of the PLC and the stages of the growth-
competitors seek to share matrix. The transition to the growth stage is not unlike the successful
distinguish offerings. development of a question mark into a star. As with a star, significant invest-
Market penetration pricing ment is required to grow with the market, including the investment required
may be appropriate as
competition puts pressure
to keep ahead of new competitive entries, meet new supply and manu-
on high margins. facturing demands, and meet price challenges to the value position of the
Distribution channels, product.
particularly for low- An offering that grows from the introduction stage to the growth stage
learning products, become crosses several boundaries. The early majority (Rogers) or pragmatists (Moore)
important in the training
and education of
have accepted the product, economies of scale in manufacturing may be neces-
customers. Promotion is sary, product differentiation will now require distinctive attributes, and profits
used to remind and are rising.
reinforce purchase
decisions.
PRODUCT ACCEPTANCE When a product enters the growth stage, it is an
indication that the market recognizes and accepts it as a legitimate proposition.
Customers who had taken a wait-and-see approach (i.e., pragmatists) now recognize that benefits
outweigh the risks associated with use of something new. Often, in business-to-business markets,
the new product has been incorporated into the offering of a competitor of the pragmatist and
the market has recognized the increased value. The pragmatist must now play catch-up with the
visionaries. The pragmatist may seek a way to leapfrog (i.e., jump ahead of) competition through
application of the next generation of evolutionary product. A supplier firm should anticipate the
business opportunities present in these situations with next-generation offerings that capitalize
on the learning curve of the original innovative offering.
PRODUCT DIFFERENTIATION The next version of the offering may very well be offered by your
direct (new or otherwise) competitor. Market entry, including the development of additional
attributes is easier for the competitor. While it may not be known as the market owner, the compe-
titor has a competitive offering that costs less to develop (they piggy-backed on your development
curve); the offering likely is differentiated from your offering with features and attributes, though
still compatible with your established standard; and the competitor has a proven market.
At this point, total offering attributes become increasingly important. The relationship that
the innovative firm has with the technophile or visionary customer base contributes to market
ownership—the reputation for innovation has value in the marketplace. Warranties, services,
design assistance to incorporate the offering into customers’ products, and experience in the
market segment all add to the value of the offering.
ECONOMIES OF SCALE Success in the growth stage is as dependent on the ability to supply
in large quantity as it is on the acceptance of the offering in the marketplace. Recall that busi-
ness-to-business demand is leveraged and volatile. The rapid growth of sales in the growth
stage is not the result of many small users accepting the offering, as it would be in consumer
markets. Growth is likely the result of the business-to-business customer specifying the new
product for inclusion in its own offering. This specification creates a sudden jump in volume
coincident with the start of production by the customer of its new product. The existing
manufacturing capacity, style, or culture of the innovator may not be able to handle the
resultant increase in volume.
To further examine the complexities of this situation, consider the PLC for silicon pressure
sensors as described in the following example.10
As a major innovator and developer of the micromachining process, Sensacon Corporation

has successfully developed a growing market for the micromachined pressure sensor.
Sensacon, a high-technology, start-up operation, has begun to deliver on the profitability
promises that management made to investors. By avoiding large-scale manufacturing,
fixed costs were kept relatively low throughout the introductory period. Sensors were
etched and assembled without much automation. Labor was added or reduced through the
use of an agency that provided skilled temporary assembly workers. Users of the sensors
were technology oriented themselves, and volumes were such that the inconsistencies that
resulted from hand assembly could be adjusted in the users’ operations. Sensacon’s annual
production was in the range of 5,000 units. Most applications of the sensor had been in
self-contained under water breathing apparatus (SCUBA) diving equipment used to mea-
sure pressure underwater and in medical devices used to measure blood pressure.
The Sensacon breakthrough came when the sensor was selected for use in an
automatic tire pressure monitor. Automobile and truck manufacturers had been looking
for a cost-effective system to monitor tire pressures for some time, and the controversy
over tire failures on SUVs had prompted two manufacturers to specify systems for all
of the SUVs they produce. The combined volume of the two companies was forecast to
reach over one million vehicles. With four sensors on each vehicle, the sensor volume
would be over four million units. Sensacon had been selected to supply approximately
50 percent of this volume. The remaining volume was divided up among three competi-
tors. Sensacon monthly sales volume at the start of tire monitor production would
exceed the most recent annual volumes experienced by the company and was expected
to reach an annual rate of approximately two million units. Initial shipments were to
begin in six months. Sensacon employees and investors were ecstatic.
To be sure, the SUV manufacturers did not select Sensacon automatically.
Competitors were entering the sensor market as the potential profitability was a very attrac-
tive lure. Sensacon executives were aggressive in the price to the SUV manufacturers as
they wanted to establish a leadership position in this new market segment. Recognizing the
newly arrived competition, Sensacon had started development of the next-generation offer-
ing, SensorSUV. The aggressive price to the manufacturers did not concern Sensacon as it
was believed that the experience curve combined with economies of scale in manufacturing
would create the necessary low-cost position to enable profits at the aggressive price.
About three days after the new contract was announced, manufacturing manage-
ment attempted to scale up production of the existing sensor. In anticipation of a pro-
duction tryout, additional space had been leased and temporary workers were added to
the regular workforce. Unfortunately, even with added automated etching and manufac-
turing for the brass enclosure and increased facilities and labor, the tryout could not
meet anywhere near the volumes hoped for. In addition, the part-to-part variability of
the sensors was outside of the SUV manufacturers’ specification. While Sensacon tech-
nology was up to the challenge, its manufacturing was not.
A task force of key Sensacon personnel was assembled. It soon became obvious that
the sensor would have to undergo a complete redesign to enable high-volume manufacturing.
The necessary changes in the sensor included redesign of the sensor itself for automated han-
dling and machine insertion into the enclosure; redesign of the enclosure and investigation of
new materials, like plastics, to replace the brass enclosure; new manufacturing expertise in
high-volume plastic molding and assembly; and new high-volume, production-capable seal-
ing techniques to protect the sensor core from the environment. Sensacon management began
the search for a qualified independent contract manufacturer. Hoping to eventually develop
its own capabilities later in the contract period, immediate time pressures from customers did
not allow Sensacon the luxury of developing its own high-volume manufacturing facility.
Concurrent with the revelation that a significant product redesign is necessary,
Sensacon is overwhelmed with inquiries from its new customers. Contract and procure-
ment provisions, supply chain requirements, as well as a significantly more complex and
larger buying center have exceeded Sensacon organizational capabilities. The staff that
served a small number of healthcare and SCUBA equipment manufacturers is unable to
serve the new customer base.
In this example, the impact of the new business extends not only to manufacturing and
product design but to the culture of Sensacon as well. Once a small specialty product company,
Sensacon now must redesign itself organizationally. Crossing into the growth stage can be
traumatic.
Offering Maturity Stage

Offerings that move from the growth stage to the maturity stage often have During the maturity
become “standards” in business-to-business markets. While manufacturers stage, profits will have
peaked and competition
work to maintain distinctions from their horizontal competitors, the market may begin to fight over
owner is already beginning the replacement of the offering with the next- market share. Promotion
generation product. This is not, however, to say that maturity is an undesirable is used to reinforce
stage of the life cycle. In terms of the growth-share matrix analogy, a business in buying decisions and
maturity is a cash cow for the successful market participant and is often capable often focuses on
supplier reputation and
of generating significant cash for development of other opportunities. value. Distribution
During early maturity, profits may continue to rise slightly and the com- efforts intensify to reach
petitors who are now in the market have economies of scale. Proliferation of all possible subsegments
new product versions previously experienced in the growth stage usually of the market. New
declines and, depending on the market circumstances, domestic manufacturers customers will not
replace the volumes
may be faced with foreign competition. Because competitors have economies of lost as old customers
scale and the market is no longer growing as it had been, price becomes a more move to newer
important part of the marketing mix as manufacturers attempt to keep their offerings. Price is a
facilities operating at the most profitable volumes. Promotion stresses the relia- major part of the
bility and reputation of the supplier as well as unique product attributes. When marketing mix.
overall sales stop growing, if any one participant in the market desires increased
sales it will have to come at the expense of another participant.
Recall that business-to-business demand is more volatile than consumer demand. This
places added pressure on markets in the maturity stage. Early adopters of the initial product
begin to replace it in their next-generation product with newer generations of the offering or,
quite possibly, new offerings with significantly different capabilities. Suppliers must continue
after the customer’s initial specification and purchase to make the entire relationship routine so
that they are already in a collaborative role when the product they supply is upgraded or replaced
by the customer design process.
During maturity, marketing may focus on protecting market share. While this is a desirable
strategy in the short term, it is not a substitute for innovation and self-initiated offering development
and replacement programs. Sales volume lost as old customers (pragmatists and early majority)
discontinue use and move to newer offerings is not replaced by conservative or late majority
adopters. Sales volume declines rapidly during this period unless business lost (core churn) is
replaced by new business or translations of other successes.
Offering Decline Stage

As an offering transitions to the decline stage, less-productive or weaker com-
When an offering or
petitors drop out of the market, either through consolidation or by leaving the
business enters the
industry. A few competitors with highly efficient manufacturing capabilities or decline stage, promotion
large commitments to customers may actively seek acquisition of the other is reduced to the minimal
players. For those competitors that remain in a declining market, efforts become levels that will
focused on keeping manufacturing facilities running at productive utilization accommodate existing
customers. Consolidation
rates. Price, particularly associated with long-term contracts, becomes a major
usually occurs among
part of the marketing mix. The product line is reduced to minimize production suppliers, and price
variation and improve economies of scale. Promotion is generally reduced to becomes a major part of
minimal levels necessary to maintain existing customer communications. the marketing mix.
Depending on the circumstances of the company, a business in decline is often viewed as a dog
and is either harvested or divested.
PRODUCT ELIMINATION CONCERNS In theory, an ongoing business works to develop the

next-generation offering in its market. A decision to eliminate an existing product in decline has
implications beyond the immediate profitability of the product. (Chapter 11 discusses mana-
gement of multiple products at different points in the PLC, particularly as related to market own-
ership.) New products replace the declining revenue from a product at the end of its life. Not a
simple financial decision, eliminating a product can have an impact not just on the organization,
but on the organization’s customers as well. The product elimination decision should be
examined through the view of all stakeholders; customers, ancillary products and services of the
organization, and the likely replacement of the offering with a new product.
Some customers may be dependent on the product. If the selling organization is
determined to eliminate the product from its portfolio, discussion with existing customers must
include assurances of supply for their needs. If the relationship has been one of mutual deve-
lopment, a replacement product has been anticipated and the assurance of supply will be for a
specific period of time while the new offering ramps up. If no replacement product is anticipated
and the customer relationship is jeopardized, there are some choices:
• The seller can divest of the product, introducing the existing customer base to the acquiring
organization. This provides an assurance of supply to the customer and can increase the
value of the acquisition to the acquiring firm.
• The seller can sell the business to the customer.
• The seller can introduce the customer to the remaining suppliers (likely to have been the
sellers’ competitors) in the market for the eliminated product. As unlikely as this seems,
it can assist the selling organization with the overall ongoing relationship with the
customer.
A primary concern is to eliminate the product without eliminating the customer relationship.
BASIC NEW PRODUCT DEVELOPMENT PROCESS

Most readers are probably familiar with the basic concepts of the steps of the new product
development (NPD) process. To review, the stages and a brief explanation of the traditional NPD
model follow:
STAGE 1: IDEA GENERATION New ideas come from many sources. The organization must
collect these and bring them to consideration, at least periodically. Ideally, an organization
operating under the marketing concept looks to customer needs for new product ideas.
Unfortunately, this is not always the case, though in business-to-business markets, the highest
percentage of new product ideas originates with customers.11 This should not be a surprise when
the relationship-based nature of the organizational buying process is compared to the consumer
process. The business-to-business marketer is much closer to the needs and wants of the
customer and more able to anticipate the customer need for new offerings and solutions.
STAGE 2: PRODUCT SCREENING A select, multidisciplinary team reviews descriptions of

potential projects to determine those that warrant continuation. While business literature
provides several models for the makeup of the team, the primary concern is to select members
who are at ease with change. Each new product idea usually needs a product champion, intrapre-
neur, or evangelist to successfully get beyond this second stage.
Criteria for screening new ideas generally include the nature of the opportunity weighed
against the organization’s capabilities and the expected costs. A “ballpark” estimate of market
needs and the capability of the new idea to meet those needs is performed.
STAGE 3: BUSINESS CASE ANALYSIS Ideas that survive the second stage Information for
must have the business plan developed more fully. The business plan must have estimates: Note that all of
both a market and a technical assessment. Later in this chapter, we discuss the the information required
to make a good go/no-go
high failure rate of new projects that do not have a complete market assessment decision is not
associated with the business plan. The probable revenues and costs are analyzed immediately available to
to determine the likely financial contribution of each project. If it appears likely marketers. Inputs from
that minimum financial targets will be met, the project continues. The organiza- other parts of the
tion begins to consider additional attributes that will comprise the total offering. organization, accounting
and finance,
When products are the result of collaboration between supplier and manufacturing, and so
customer, the initial market application is usually assured. The design process on, are an integral part of
integrates the product into the offerings of the customer. If the collaborative the decision. This is
nature of the product has led to a design considered proprietary by the customer, easier in a market-driven
the supplier may be limited from taking the product or its technology to other organization where all
parts of the company
potential customers, at least for a period of time. Should this occur, translation recognize the need for
to other customers and segments is delayed and the business case analysis must change. Marketers often
consider that the product is a custom design for one customer, at least for the must “market” new
specified time period. product development
efforts in their own
organization—often a
STAGE 4: PRODUCT/STRATEGY/PLAN DEVELOPMENT In this stage, after the major responsibility of
business analysis has shown a justifiable case for further expenditures, the prod- the marketing team.
uct technology is further developed and refined. Meanwhile, the product’s strat-
egy and implementation plans are developed. The market assessment developed as part of the
previous stage becomes the starting point for the detailed marketing plan. The ability to have
several levels of offering, depending on customer need, may be considered at this point.
In many business-to-business product development efforts, the collaboration between
supplier and customer results in a custom product unique to the needs and circumstances of the
customer. The scenario under which this collaboration operates is one in which the supplier
performs most of the R&D while the customer provides input to the operational needs of the
product, testing various iterations of it in the process. The outcome of this effort is a well-defined
product specification written by the customer that is well matched by the custom offering of the
supplier. The early collaboration is advantageous to both customer and supplier. The customer is
assured of the full understanding and cooperation of the supplier. The specification, influenced
by the collaborating supplier, is written to the supplier’s competencies and technologies.
Competitors must be willing to match the specification as an “or equivalent” offering.
STAGE 5: TEST MARKET If the new product is intended for a broad market rather than the
result of a collaboration with a specific customer, a limited release of the early product is trial
launched in a “beta” test or the final product is released into limited markets or with selected
prime customers. The purposes for doing these full-scale tests is to fine-tune the product, fine-
tune the strategy, build the market’s early awareness, and get final feedback on the product’s
viability in the marketplace.
Basic New Product Development Process
Stage 1: Idea Generation Stage 5: Test Market

New ideas come from many sources. Ideally, an If the new product is intended for a broad market,
organization operating under the marketing con- a limited release of the early product is trial
cept looks to customer needs for new product ideas. launched.
Stage 2: Product Screening Stage 6: Product Launch

A select, multidisciplinary team reviews descrip- Promotion efforts aimed at target markets may
tions of potential projects to determine those that be used to create awareness, interest, and early
warrant continuation. trials.
Stage 3: Business Case Analysis Stage 7: Hand Off to the Innovation

Ideas that survive the second stage must have the Translation/Customer Education Team
business plan, including both a market and technical With a high-learning or custom product, signifi-
assessment, developed more fully. cant missionary effort is required to assist the cus-
tomer base in achieving maximum value from the
Stage 4: Product/Strategy/Plan offering.
Development
The product’s strategy and implementation plans
are developed.
Proprietary disclosure In most business-to-business collaborative relationships, the summary in

agreements aid both the the previous paragraph is not a likely scenario. If the offering is the result of an
supplier and the customer.
Customers working with
ongoing relationship with a major customer, the first-use testing is limited to that
suppliers in development customer. As noted earlier, there may be proprietary customer features that have
of new products want been incorporated into the offering. The customer organization may have objec-
assurance that the supplier tions if features of its new product, contributed by the supplier product, become
is not taking any product known to the market prior to market introduction. While some collaborative
or market information to
competitors. With this
efforts include proprietary disclosure agreements, many collaborations are less
assurance of nondisclosure formal. Suppliers should proceed with any market testing or awareness efforts
from suppliers, customers with extreme caution. Inadvertently disclosing the product plans or technology of
are able to exchange a customer can lead to an end of a business relationship.
proprietary data during
the development process.
In reciprocation, suppliers STAGE 6: PRODUCT LAUNCH If the new product is intended for a broad
are often assured of market, it is fully released once all the fine-tuning is complete. Promotion
receiving 100 percent of efforts aimed at target markets may be used to create awareness, interest, and
the business for a period of early trials. Depending on the degree of newness to the market (from a market
time. Suppliers are aided
by disclosure agreements
perspective), the education portion of the marketing plan should begin just prior
as they allow the supplier to the launch. A public relations effort coordinated with the preparation of
to be on the cutting edge of articles and features in technical journals should be considered as a start of the
offerings in its customers’ customer education process.
markets. After the agreed- If the new product is a customized, collaborative effort with a particular
upon period of time, the
supplier may translate the
customer an introduction to the market is still possible. The timing of such an
product application to introduction, however, should be determined by the launch of the customer’s
other potential customers. product and be done with the customer’s concurrence. A well-timed and
targeted promotional effort that features the customer’s offering should be well received by the
customer. A premature promotional effort has all of the same risks as those discussed for beta
test fine-tuning.
STAGE 7: HAND OFF TO THE INNOVATION TRANSLATION/CUSTOMER The Innovation

EDUCATION TEAM Once market introduction is complete, full-scale customer translation approach is
education can begin. With a high-learning or custom product, significant used to validate a new
market segment. When
missionary effort is required to assist the customer base in achieving maximum new business is realized
value from the offering. Utilizing the innovation translation approach to as a result of
segmentation (discussed in Chapter 7), marketers attempt to translate the collaboration with a
success to other potential customers. customer, the product is a
With low-learning products or those introduced to a broad market, cus- customized offering.
Translation to other
tomer education efforts are not as extensive. Because of the more rapid adoption potential customers
of the low-learning product by the market, product management specialists validates the existence of
become involved more quickly. the market segment.
Without this process, the
Customer/Market Orientation new business is an
isolated application of the
There are generally two approaches to effectively developing new products or design and development
services. One way is to focus on the technology or the product first. In this efforts of the supplier.
Translation activities are
approach, the product is developed with little or no customer input and intro- usually the responsibility
duced to the market. The second way is to extensively involve existing and of missionary sellers or
prospective customers throughout the process. It would appear that these are market development
two ends of a continuum. However, the amount of customer input usually repre- specialists. Chapters 7
sents a philosophy. An engineering-driven philosophy tends to minimize and 11 discuss the
translation approach in
customer input; a customer orientation tends to maximize it. greater detail.
This is not to say that the first approach is entirely without merit; this
approach has many supporters (if only by accident), particularly in high-technology organi-
zations. In many circumstances, a customer orientation resides just below the technology-
oriented surface or can be adapted to it. Consider this example: Suppose members of an
engineering team require a particular type of design software but cannot find a suitable vendor.
The alternatives are to settle for what is available or develop the software themselves. The inter-
nal development leads to recognition that they are not the only engineering team that has a need
for such software. Members of the team split away from the original engineering group and start
their own company to provide such software. These engineers have been customer oriented, even
if they are not likely to recognize it! Though they have not performed any extensive market
analysis, they have discovered other potential users for the software. As long as there are other
potential customers like themselves, they understand customers already. Unfortunately, this is
not likely to lead to translation of the innovation to other market segments. The narrow focus of
a technology or engineering approach can often ignore other potential markets, leading to what
some critics have called an incestuous or closed market.
It is critical for the engineer or entrepreneur to maintain a customer-oriented approach when
new markets are addressed. One of the comments we hear most often from business-to-business
marketers is about the frustration they experience in dealing with engineering staffs that have
little, if any, customer focus. We have also experienced this with many technically oriented
students. Ironically, many first-time marketers that are initially product driven become customer
oriented over time. This transformation can occur suddenly and with some difficulty when a
product is unsuccessful and the responsible marketers decide to talk to potential customers to see
what went wrong. Under severe time pressures, marketers that believe they are customer oriented
may purposely launch a new product with little customer input, just so they can get something
quickly into the marketplace. After launch, which is typically small in scale, they obtain a great
deal of feedback from users and nonadopters. They quickly come out with succeeding versions of
the product. Each version more closely conforms to the desires of prospective customer market
segments. This approach may be used in emerging markets where little is known about how cus-
tomers will react to the new product. Competitors have not yet emerged, so there is some time for
quick adaptation. Perhaps market segmentation has not yet become evident. Unfortunately, the
customer may resent being presented with a product that has no value in his view. The outcome is
new versions of the technology that are more suitable to the customer. The principal implication
here is that paying attention to customer needs makes for better products. The supplier could have
saved time, money, and competitive exposure had the customer been consulted at the start of
the process.
Team Approach
About ten years ago, strategic management visionaries began decrying the “silo” approach to the
management of the firm. The functional approach to management, in which marketing, engineering,
product research, manufacturing, customer service, sales, and so on operated separately in
“silos,” was seen as particularly dysfunctional when it came to generating and launching new
products. To break down the silos, small, cross-functional teams were espoused as appropriate
for managing both the creative effort and cross-functional coordination required in new product
development, launch, and management. Indeed, many companies have found this team approach
beneficial. Recent examples can be found in such companies as Cisco Systems, IBM, Chrysler,
and others.
There are some facets of the team approach that need discussion. A new idea seldom
survives the hurdles of repeated business metrics without a champion to father it. The com-
mitment of an entrepreneurial approach by the “champion” (often referred to as the intrapreneur)
assists the development through organizational hurdles. Products that are more likely to disrupt
conventional processes and thinking in the firm require support at higher levels with each
succeeding stage of the development process. This is understandable, as greater disruptions may
strike at many levels in the organization. Individuals may feel that their current jobs are threat-
ened or that they will have to learn a new technology or way of doing things. There is less short-
term risk in slowing or ending a new product development as each development stage is exposed
to measurements of business potential. The composition of the NPD team should reflect these
different demands and recognize the need for an internal marketing program.
Invest in the Early Stages

One of the ways to help with this process is to use rigorous market-driven standards early in the
development process. Cooper12 lays out the rationale and research findings relevant here. He
explains that the idea of the staged approach to NPD is to identify and weed out likely new product
losers early in the process. The early stages are relatively less expensive than the later stages. In
many instances, the potential market segments may be described as potentially high growth, but the
firm may have little existing presence. The Boston Consulting Group Growth-Share Matrix13
characterizes these opportunities as “question marks,” usually requiring significant commitment
(of management—the intrapreneur again), competency (of the organization, distinctively from
the competition), and heavy investment for success. If a bad fit is identified early on, the heavy
expenditures for development and launch of a product failure can be avoided. By the same token, if
a company is willing to take on additional levels of risk, it may decide to pursue one or more
projects with potentially high payoffs.
Stage Gates and Phase Reviews

Cooper’s conclusion is that progression from stage to stage ought to be governed Stage gates are simply
by use of carefully constructed stage gates. These gates are prespecified mile- checkpoints after each
stones that must be reached—and approved by a high-level manager or stage of the product
development process.
executive—before the project can continue. The gates have two qualitative The ongoing NPD
aspects: technical milestones and market or business milestones. Again, Cooper process is interrupted at
has found that adherence to such stage gates produces superior performance. certain milestones to
Experience suggests that such rigorous adherence to stage gates is prac- ensure that the original
ticed much less often than is ideal, particularly on the market or business side. goals and objectives are
still viable and that the
The principal reasons for this are uncertainty and scarce resources. Given limited development is still
budgets, it is very tempting for the NPD manager to put as much effort into R&D forecast to meet the
as possible. The firm has much more control over internal technical develop- expectations that were
ments. Also, the market is usually more difficult to interpret than is the technical created as a part of its
performance of a product. Consequently, higher priority is placed on what can be initial approval. The
stage gate process is
influenced directly and budgets for market analysis go wanting. fairly rigorous but is a
Whenever we encourage the use of lists or stages in business, we are flexible process to keep
concerned that they will be applied as a recipe or prescription, without consider- NPD on track. While a
ation for the context or intent of the process. It should be emphasized that the development may not
stage gate system is a process to facilitate NPD. It is not a checklist of function- continue to meet initial
expectations, continuous
al items that must be done by each department before the project is handed off to marketing input may
the next group. The process is multidisciplinary, requiring the use of cross- point the NPD team to
functional teams in the development effort. Each stage is market driven but additional or substitute
includes technical, financial, and production activities. With a strong focus on opportunities.
quality in each element of each stage, the development team stays in touch with
the changing market and customer needs.
A modification of the stage gates approach is to reduce the number of stages to three or four
phases. Instead of having to pass a stage gate at the end of the idea generation stage, then the business
case stage, then again at the end of the product development stage, and so on, a project might face
phase review gates only at the end of idea generation, concept development and testing, and com-
mercialization planning and preparation. This cuts down on the time wasted in scheduling and run-
ning stage gate reviews. Yet it still maintains a degree of control and risk management at key points.14
Concurrent Development
One of the concerns about “lists” in business is the implication that things happen sequentially.
Large strides have been taken to improve “time to market” for new products through the recog-
nition that it is possible to conduct many elements of the development concurrently. First to market,
often key in market ownership, has exploitable advantages. The first entry into a new market often
is able to define the parameters of the market, setting the standard for others who follow.
Concurrent development is simple in concept but hard to do. The idea is to identify
activities that can be done simultaneously, in parallel rather than serially. The development effort
is divided into modules that can be developed separately, but with continuous communications
between the module developers. The unifying nature of teams is also critical to effective concurrent
development. Communication and coordination between the teams working on the modules
must be maintained during development.
When a new product idea presents relatively high development risk but
Opportunity costs are the relatively low opportunity costs (high risks, not that much to gain by working
measurement of those on something else), it may not be particularly advantageous to speed up the
business opportunities
development process.15 Stage gate management can become particularly impor-
that are not pursued
because resources have tant as a way to ensure that development criteria are met, providing milestones
been committed to the that re-examine the risk-reward ratio of the project.
new product development.
NPD teams may use No Shortcuts
several different criteria
to make these judgments, One of Cooper’s primary conclusions is that effective NPD relies on doing the
such as internal rate of right things right. There are no shortcuts to be taken, no activities to be ignored.
return, net present value,
The chance of catastrophic failure can be minimized by enlightened application
and market scenarios.
of the above principles. Failure likelihood goes up as “rules” are broken.
THE ROLE OF MARKETING IN THE PRODUCT

DEVELOPMENT PROCESS
Ideally, in a market-driven organization, marketing is responsible for the definition of new
offerings based on a continuous review of customer needs. As customer needs evolve over the
period of the product development, the goals of the development evolve. Thus, marketing is
responsible for the direction and outcomes of the product development process.
The responsibilities of marketing go far beyond the customer interface. Unfortunately,
many NPD efforts minimize the resources committed to marketing while maximizing product
and technology development. Research has shown that the marketing effort is often the most
deficient part of the new product plan.16 In 22 percent of development projects studied (including
firms that considered themselves “market driven”), there was no detailed marketing study at all.
In another 46 percent of the projects, the marketing plan was considered to be poorly done. In all
projects analyzed in the study, a full 74 percent had no market study or plan or had a plan that
was judged as seriously deficient. This deficiency in marketing effort continued through the
development process to the product launch, where, even in a sales- or product-driven organi-
zation, you would expect significant input from marketing. Test-marketing or trial-selling efforts
were deficient or omitted in 58 percent of the studied projects. Also, 52 percent of the projects
failed to have adequate business or financial plans. In these same projects, however, technical
assessments, in-house testing, and pilot production efforts were judged to be sufficient for the
task—reinforcing the dangers of a product or technology focus.
Where should the marketing effort, particularly in “market-driven” firms, show up? In the
first chapter, we characterized marketing as the driving force, the “heart and soul” of the organi-
zation. In this context, marketing has a responsibility to drive the NPD process.
Marketing Defines the Outcomes

The responsibility of marketing is well defined by Sherlock.17 The following are the ways in
which marketing must serve the organization:
• Understand the technology in depth. This is not meant to imply that marketers must have
technical degrees but that they must know the value of the technology, its strengths and
weaknesses, from the viewpoint of the user. Marketers need to know the science in such a
way that they can recognize opportunities in customer needs and the limitations of techno-
logy capabilities.
• Define and redefine current and future customer needs. The continuous evolution of
customer needs creates a dynamic, sometimes volatile environment. An offering cannot be
accurately defined at the beginning of the process and, without modification to the defini-
tion, be correct for the market at the end of the process. In a long period of development as
partners, the supplier and customer will discover and evaluate many different aspects of the
total offering. The needs of stakeholders in the buying center will evolve, requiring the
attention of members of the supplier’s value chain. Marketing must provide definition of
customer’s needs, continuously updated, to research and development and manufacturing
in the supplier organization. The timeliness and quality of the information about customer
needs is a reflection of the quality of the relationship with the customer.
• Motivate other company departments and organizations. The marketers, whether
headquarters or field personnel, must be closely associated with the customer and should
champion the supplier’s development effort toward the best interests of the customer. To
the rest of the organization, the marketer should “be” the customer! Business-to-business
customers expect this, and the degree to which the development effort meets specific
customer needs is evidence of the success of the effort. Marketing can make progress
toward this synergy by involving as many corporate technology and development parti-
cipants with the customer as possible. This not only establishes direct communications
between members of the value chain and the buying center but also instills in the partici-
pants a sense of ownership of the effort to satisfy customer needs.
• Screen and select ideas from all sources. Marketers should know their own companies well
enough to know their strengths and weaknesses. The strengths are tools that can be used to
bring value to customers. Marketers should also know the intricacies and nuances of their
customers. What businesses are they in? What synergies are possible? What competencies
of the customer’s can be matched to strengths of the marketers’ companies to create dis-
tinctive offerings?
• Guide the new product development with the continuous redefinition of current and future
customer needs already noted. Accomplishing this step is far easier when the organization
is contextually prepared for the redefined parameters. This will be assisted significantly by
the participant ownership already described.
• Reward the efforts of the technical and support staff. When the new offering is introduced
and perhaps at milestones along the way, the marketer should reward the participants. Have
a party. Get a wall plaque. Create an event. Positive exposure and association with the
current success bode well for cooperation in the future. Also, make the reward known to
the customer, not only elevating the work of the participant but also demonstrating to the
customer his importance in the supplier’s organization. If there was significant collabo-
ration with participants from the customer, reward them too!
• Catalyze company resources to get the right talent on the job—be willing to cross tradi-
tional company boundaries. Marketing is responsible for a collaborative and synergistic
relationship with other parts of the supplier organization. Marketers should cultivate
relationships throughout their organization. Each of these relationships can become a
positive igniter in the search for the best result for customers. Having working relation-
ships throughout the organization is another resource the marketer can bring to bear on
customer needs.
The level of responsibility prescribed here for the marketing organization is difficult to
grasp for an organization that is not truly market driven. Firms that operate under the product or
sales concept18 often have an internal culture that views the marketing effort as an expense rather
than a defining paradigm.
REDUCING THE RISK OF NEW PRODUCT FAILURES

New products have an element of risk associated with them. To reduce this risk, firms can utilize
many of the development tools described here or any number of other processes described by a
large body of research about NPD. Unfortunately, even with careful planning by organizations
that engage in NPD, there are still product failures.
Why Do New Products Fail?

If the marketing effort in the organization is responsible for the process outcome, as we have
described, then responsibility for the failure of the process also rests with marketing. Indeed, poor
marketing (or no marketing effort at all) is a major cause of product failures. Consider the study
by Cooper, noted earlier, that found that 22 percent of NPD projects surveyed had no detailed
market study performed. While this may be a frightening prospect for true marketers, many man-
agers do not even realize that they have missed a part of the development process. To improve the
chances of new product success, let us look at some causes of new product failures.
THE MISSING MARKETING PLAN At the outset of many NPD projects, assumptions are made
about technology, manufacturability, and markets. These assumptions are often necessary to get
the project off the ground, to get resources committed to begin the first stages of investigation
and development.19 These assumptions—market size, value as perceived by the customer,
growth rates, and desirability of features—that are often used to justify the initial effort can
become ingrained in the project. Studies have shown that once approved, project funds are most
often used to validate technological assumptions, but not market assumptions. In fact, 78 percent
of total resources expended go to technological and manufacturing activities.20
NO REAL NEED EXISTS Some products are the answer to a question that nobody has asked.
These types of failures are often associated with executive attachment to a technology or idea.
The development proceeds in isolation, with little attention to the real needs of the market. With
strong executive attachment, market research results can be overlooked or interpreted to support
the opinions of management. Cooper reports that this accounts for 28 percent of product failures.
THE MARKET SIZE IS OVERESTIMATED OR A “ME TOO” PRODUCT FAILS TO PENETRATE THE
MARKET Few marketing efforts can maintain an exclusive hold on a market. In oligopolistic
late growth or maturity situations, expecting much more than 30 percent market share can be
overly optimistic. In new markets, once the offering is successful and competition seeks a piece
of the action, the innovator that had “all” of the (small) market during introduction is certainly
faced with losing share—while gaining volume as the market grows.
Overestimating market size has implications beyond lower-than-expected 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 unful-
filled 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 intro-
duction stage, less than anticipated sales results tarnish the entire project and, in the case of a
start-up, the entire organization. “Me too” products face a double whammy: market leadership is
usually not an attribute associated with followers. The inability of “me too” products to signi-
ficantly penetrate existing markets contributes to 24 percent of new product failures, second only
to there being no real need for the product.21
THE OFFERING FAILS TO MEET NEEDS ADEQUATELY Accounting for 15 percent of new
product failures,22 products that do not work right can be the result of poorly defined needs—a
marketing deficiency; poor product performance—a technology flop; or a combination—the
product technology would have worked but the offering was rushed to market before all the bugs
were worked out. Timing linked to competitive product launches can suffer in this manner.
In high-technology industries, technophiles and innovators are usually quite forgiving with
regard to new product ship dates. These market segments recognize that the offering is new and
subject to a slow and possibly cumbersome introductory period and are able to adjust the timing
of their own offering to meet supplier schedules. They are usually not dependent on economies
of scale, while their product is likely dependent on the new technology.
High-volume industries, particularly those that serve consumer markets and have major
economies of scale and high fixed costs, usually can tolerate neither inadequate product per-
formance nor inexact delivery schedules. These industries (e.g., consumer electronics, automotive)
adopt technologies later in the life cycle. Only proven technologies are incorporated into their value
network.
In some cases, the product may meet end use needs, but the needs of the channel are not
met by the supplier’s offering or business model. In the 1980s, for example, Monsanto believed
it could translate its Saflex product from the automobile windshield market to the new home
construction market. Saflex is a plastic sheet that allows glass laminators to make a safer, sturdier
form of glass by sandwiching the Saflex between two plates of glass. In the new home market,
Saflex glass for windows would be safer and provide more insulation than plain glass. However,
it would cost more and required thicker window frames. Wholesalers and homebuilders were not
convinced that consumers would want to pay higher prices for the glass and did not want to carry
inventory of wider frames for products with unproven demand.23 Monsanto discontinued the
translation effort when its test market showed the channel problems.
MARKET WILL NOT PAY 13 percent of product failures are the result of a price squeeze24—
either the costs of development and marketing were higher than expected or the market price
adjusted to the new supply. What is important to recognize is that a price that the market is
unwilling to accept is a symptom of other problems. Had there been an effective marketing plan,
the market price of the offering would have been studied such that the change as a result of the
increased supply—the market elasticity—would be anticipated. Competitive reactions should
also be anticipated. It is not unusual for existing suppliers to a market to adjust price downward
when faced with a new competitor.
CONTRARY PERCEPTIONS OF INNOVATION The degree to which a new offering is an innovation

impacts the positioning of that offering in the market. When the supplier perceives the offering as a
breakthrough innovation but the customer perceives the offering as an incremental product, there
will be a mismatch of perceived value, unlikely to result in an adoption of the product by the
customer. When the opposite is true, the supplier regards the innovation as an incremental product
• No Marketing plan
• No real needs exists for the product
• The market size is overestimated
• A “me too” product fails to penetrate the market
• The product does not fully meet customer needs
• Market will not pay
A good marketing plan is a solution to all of these!
EXHIBIT 8-3 Why New Products Fail
but the customer perceives a breakthrough innovation, there is still a mismatch but one of significant
value to the customer. Unfortunately, unimpressed supplier management may not provide the neces-
sary resources to the product to enable it to fulfill its potential in the market. The contrary perception
of the level of innovation and thus value in the market creates shadowed and delusionary products,25
further discussed in Chapter 9. Exhibit 8-3 summarizes this list of reasons for product failures.
COLLABORATORS
Fans of old war movies probably have a negative impression associated with the word
collaborator. Collaborators were those who worked with the enemy for their own (perhaps)
short-term benefit. The second meaning of collaborate in the dictionary is “aid or cooperate
traitorously.” However, developing a collaborative relationship in business can be very positive—
if you are the successful collaborator.
We have repeatedly discussed and referred to the total effective value of the firm, as
viewed by the customer or client. Sherlock’s term for this complete and total impression, appro-
priately, is “value image.”26 Value image, similar in concept to market positioning but with a
much broader vision, can have a great impact on the likelihood of success in business-to-business
relationships. Let us take this concept one step further.
Delivering customer value encompasses more than providing the latest technology,
though continuously providing adequate customer value assumes that innovators expand the
technology envelope. Successful technology companies, such as Cisco Systems, 3Com, and
others, were founded on technology but, as we have noted, cannot rely on technology to maintain
a market advantage. As these companies establish successful markets, competition increases,
tightening margins and forcing a closer look at research and development funding. What are the
alternatives? Why not have someone else fund and manage your early-term, high-risk research
and development?
Enter the high-technology start-up company. As companies like Cisco Systems develop
market ownership, they attract a cadre of smaller companies (satellites? corporate groupies?) that
follow their market. Some of these smaller companies are satisfied to pick up a few crumbs along
the way, while others invest (emotionally and financially) in the next-generation technology that
will replace or threaten or enhance the Cisco portfolio. Cisco is faced with a dilemma. These
satellites provide real value to Cisco’s customers. They can fill in the gaps in Cisco’s product
line, and they often rely on Cisco to help establish customer contact. At the same time Cisco is
partnering with the smaller company, the smaller company is hoping to gain a foothold in Cisco’s
market and, with its new technology, capture market share. While all this is going on, Cisco must
continue to invest in R&D—if not to push the technology envelope, then as a defensive measure.
Collect enough satellites in your market, and the situation can be downright threatening. The
answer: Cisco reduces R&D expenditures and encourages R&D by the smaller companies
through their partnering, or collaboration. Part of the attraction for the small company to become
involved is encouragement from Cisco that, when the R&D effort is proven in the market, Cisco
would be interested in an acquisition. Cisco gets to select from an array of new technologies that
impact its market without the associated development costs or introduction risks.
The result? Cisco acquires one (or a few) of the satellite start-up companies.
The start-up goes the way of many high-technology start-ups—become
acquired by larger, established firms. The other satellites go the way of many Proprietary information
is data that, while not
other start-ups—out of the market. For the winner(s), this collaboration has protected by patents, is
been successful. They partnered with “the enemy” and, over the long term (for a not available to the
start-up), won. For the other companies, the collaboration held a context closer general public and has
to that traditional old war movie. significant value to the
In this narration, the customer for the satellite was, tactically, the Cisco cus- owner. Trade secrets,
process techniques,
tomer and, strategically, Cisco. The value of the satellite to Cisco had to be marketed in and formulas (think
such a way that Cisco had confidence in the long-term relationship. From an Mrs. Field’s Cookies
investor view, the customer was always Cisco. In a new venture, a relationship with and Coke syrup) are a
a large company with coattails to success may be a greater asset than a marketing significant part of the
partner or a customer partner. They can be a collaborator. Not all collaborators win. value of organizations.
Maintaining the secrecy
Collaborations or partnerships are not new to business. Different patterns of proprietary
of mutual development between organizations have always existed. The pat- information can be a
terns, or business models, have changed with changing market conditions. In the significant motivation in
next section, we compare the concept of value networks, introduced in Chapter make-or-buy decisions.
2 with the more traditional vertical integration model of creating value as we Organizations that
outsource part of their
discuss the “make or buy” decision. offering to another firm
risk the loss of this
secrecy.
MAKE-OR-BUY DECISIONS It can happen.
Polaroid, faced with
Closely related to the product development process and marketing’s role in it is
significant capital
the “make-or-buy” decision. The degree to which an organization incorporates investment resulting from
new or unique components into its products, combined with the potential propri- the success of its
etary nature of those components, creates the need for a sourcing decision. “instant” camera,
When market conditions allowed it, many organizations preferred to vertically contracted production of
film to a reputable source
integrate back into the manufacture of parts and materials. Early in the twentieth
for photographic
century, Henry Ford manufactured his own steel, glass, and tires for his company’s supplies—Eastman
vehicles—there just wasn’t anyone else capable of supplying the company Kodak. Later, Kodak
needs. The advent of electronics and home electrical products in the 1920s entered the market with
demonstrated the need for plastic materials, not just for insulators but also in its own instant camera.
Polaroid claimed that
radio cabinets and the bases for vacuum tubes. The volumes associated with
Kodak used proprietary
these consumer applications justified the backward integration into the manu- information learned from
facture of circuit board and plastic materials by General Electric. During the the manufacture of
period of rapid growth of the automobile market, General Motors integrated into Polaroid film in the
the manufacture (often through acquisition) of many vehicle components. development and
manufacture of the Kodak
Market conditions during this period of heavy vertical integration—the early
camera. The courts
twentieth century—may not have given these early pioneers much choice. Many agreed, and Kodak was
of the products that were the subject of the integration were not available from forced to leave the instant
another source, or, if they were, proprietary information considerations camera market.
prevented the company from outsourcing the components. Both of these factors remain a consid-
eration in vertical integration versus outsource decisions in today’s market.
Vertical integration has attributes that speak in its favor. An integrated supply chain
provides assured sources for components and materials. The development back into the manu-
facture of components and materials can also lead to profitable business opportunities. Until
recently divested by General Electric, GE Plastics has been one of the pre-eminent suppliers of
engineering plastics (though they have left the circuit board material business). However, vertical
integration can also lead to the development of large, sprawling organizations. (Business port-
folio management is discussed in Chapter 5.) To many people, large size implies bureaucracy,
and bureaucracy implies slow movement, often devoid of innovation. While this is not meant to
imply that very large organizations cannot respond to rapidly changing markets, it does indicate
the involvement of a different decision-making process.
Large, vertically integrated organizations have an investment in the current form and method
of conducting business and manufacturing products. New technologies, while not overlooked from
an R&D perspective, may not survive the internal standards of the business model if they do not uti-
lize existing facilities or “fit” the current idea of what business the organization is in (often mistak-
enly defined by what the organization produces). This myopia has been demonstrated countless
times27—from ice houses to refrigerators, from vacuum tubes to solid state devices, from photo-
graphic film to digital imaging. Investment in infrastructure can slow the response to change.
Factors in the Decision

Let us return to the Sensacon example (earlier in this chapter) to demonstrate some of the factors
in a make-or-buy decision. Keep in mind that a make-or-buy decision has greater implications
than just attempting the lowest production cost. The development of a successful value network
may include many make-or-buy decisions.
Sensacon has invested in new technology to create the next-generation sensor, to be called
SensorSUV. The new technology gives SensorSUV a faster response time and greater
resistance to shock and vibration, both features in which the market has expressed inter-
est. This new distinction is primarily the result of the incorporation of a new component
into SensorSUV. While the technology of the component is not, by itself, new, it is the
first time it has been used in the sensor market and Sensacon has modified the component
somewhat. Should Sensacon manufacture this “new” component itself or purchase it from
an outside source?
First, Sensacon must assess the component’s contribution to SensorSUV’s value as

perceived by the customer (see Exhibit 8-4, Make-or-Buy Decisions). If the component has only
a minor role in the value of SensorSUV, Sensacon then must decide if it is unique to the sensor
market. If the component is unique, it is in the best interest of Sensacon to either develop a part-
ner relationship with qualified suppliers to produce the component or encourage potential colla-
borators to develop the market for the component. In either case, the partner or collaborator will
have to be assured of purchases from Sensacon and an opportunity to further develop, with
other sensor manufacturers, market applications for the component after a specified period of
exclusive use by Sensacon. Because the component’s role in the value of Sensacon’s product is
minor and technology based, it would not usually be a good decision for Sensacon to make the
Minor
How much does the component
contribute to our product’s value
Is the component
Image in our customers’ view?
unique to our markets?
Major
Yes No
No
Are we good at it?
Purchase as a
Yes Commodity
No
Can we own the market for it?
Yes
No Develop Partnership
Can we or do we want to protect it? with qualified
supplier(s)
Yes
Is it our kind of business?
- Financial justification
- Risk assessment
Collaborate in
- Stability of technology
No development with
Yes technology-oriented
supplier(s)
Make it!
EXHIBIT 8-4 Make-or-Buy Decisions
component itself. If the component plays a minor role in the value of SensorSUV and is not
unique to the sensor market, Sensacon should treat the component as a commodity purchase.
If Sensacon determines that the component plays a major role in the value of the
SensorSUV, an entirely different decision path is necessary. Since the component contributes
significant value to Sensacon’s end product, it may be in Sensacon’s best interest to manufacture
the component itself. Sensacon is, however, in the sensor business, not the component business,
and may not have a distinctive competence in the manufacture of the new component.
If Sensacon is not good at the manufacture of the component, then the sourcing alternatives
become the same as the Minor/Yes decision flow in Exhibit 8-4,—either source from a partner or
encourage a collaboration.
What if Sensacon decides that it has the unique competency required to manufacture the
component successfully? This may be a diversification decision. Using the parameters of market
ownership,28 Sensacon must now decide if it can “own” the market for the component and if it
wants to protect the proprietary nature of the component (patents, trade secrets, etc.). If either
answer is “no,” Sensacon should look to outsource the component through a supplying partner. It
is only at this point, after the market-driven considerations, that Sensacon should fully examine
the business case for manufacturing the component itself.
Supplier Role in the Decision

Throughout this make-or-buy decision process, the potential supplier (either partner or
collaborator) should be involved with Sensacon to determine what value it can provide as a
supplier that will exceed the value that Sensacon can produce for itself. This level of supplier-
delivered value will
• Allow Sensacon to invest in other areas closer to its main business

• Be recognized as a resource by the customer (Sensacon)
• Develop a business opportunity for the supplier
• Create or reinforce a potentially strong relationship between the supplier and Sensacon.
The supplier who knows the culture and competencies of its customer can create win-win
situations for both organizations. The role of the potential supplier to Sensacon is a scenario
that is repeated between each supplier–customer pair involved in the supply chain leading,
ultimately, to the consumer, and is, in fact, what makes up most successful market-driven
business-to-business relationships.
McGrath goes so far as to say that in markets where integrated supply chains prevail,
the cross-functional team developing a product should represent all companies in the supply
chain that contribute value to the product. In the Sensacon example, any subcomponent or
material suppliers to be involved in the manufacture of the new sensor should be represented
in the team. This collaboration is enabled and enhanced by currently available Web-based
software. The outcome of this collaboration is a new sensor that has the supply chain already
designed and in place. The time to introduction and ramp up can be greatly shortened, while
the value built into the product can be maximized.29 The box Microsoft Integrates XBox
Supply demonstrates another example of the dangers of outsourcing parts of an offering that
are critical to success.
Microsoft Integrates XBox Supply
When Microsoft (MS) introduced the original Xbox, United States simultaneously, MS has added two
business analysts declared a battle royal between contract manufacturers, Wistron and Celestica in
the PlayStation 2 from Sony and the new Microsoft addition to Flextronics, to manufacture the Xbox
product. 360 at three different factories in China. Additional
It didn’t happen that way. contract manufacturing alone doesn’t completely
Late to market outside the United States by solve the problem.
almost two years, notably because of component MS recognized that certain components of
supply problems, by the time MS had sold 1.5 million the Xbox 360 were unique and, should supply
Xboxes, Sony had already sold 20 million PS2s world- problems develop, there would be no alternative
wide. (One strategic view is that the first company to sources. Notably, Microsoft was completely depen-
sell 10 million units will lead the market.) Nvidia, the dent on chip designs from Intel and Nvidia. To lower
graphics chip supplier for the Xbox ran late finishing costs as well as insure supply of volumes of compo-
the custom design for the Xbox, and contract manu- nents, MS wanted greater control of the chip
facturer Flextronics initially had difficulty assembling designs. Neither Intel nor Nvidia was willing to give
the console. MS ownership of the designs and greater control
Peter Moore, Corporate VP for the Xbox divi- over the chip sourcing and thus withdrew as sup-
sion says this won’t happen again. Microsoft has pliers to the new program. This opened the door for
taken steps to get to market significantly ahead of new partners.
the new Sony PlayStation 3—particularly in foreign IBM and ATI Technologies agreed to give
markets. To introduce in Europe, Japan, and the MS ownership of the new unique designs. MS,
working with these new partners, now had of the new chip designs allows simultaneous devel-
extensive expertise as well as control of the final opment of games.
product. Essentially, MS eliminated a bottleneck Microsoft recognized that to insure the
in the supply chain by now being able to source “destiny” of the Xbox it would need greater inte-
manufacturing of the chips directly. They had gration into key parts of the product. The entire
greater control, or, to put it another way, they supply chain for all parts of the total offering must
had greater control of price, margins, and design place the same priorities on the supply of com-
of the components. ponents. The alternative, as Microsoft learned, is to
Microsoft “integration” into the chips for the “make” rather than “buy.”
new Xbox solves another problem that plagued the
original Xbox, the availability of an adequate assort- Source: Dean Takahashi, The San Joe Mercury News
ment of compatible games. The earlier completion (August 16, 2005), p. B1.

In this chapter we have looked at the PLC as a tool to better understand the pressures placed on
offerings by different aspects of the market environment and the methods by which the market-
ing mix can be used to respond. While the PLC is a generalized case, it provides a framework
around which to build product management theory. The PLC may be used as a representation of
sales revenue over time for individual products or product lines but is most often applicable to
product or market categories. Through this view, an analogy to product categories as strategic
business units in portfolio management is possible. Buying behavior, profitability, and competi-
tive threats as well as perceived value vary over the life cycle.
The NPD process has been discussed in what we hope is not a bureaucratic context.
Marketing is the defining force in NPD and thus bears significant attention in the review of why
new products fail. New ideas must be considered from the view of the market and not be just a
good idea for the offering firm. The failure to apply adequate marketing practice in new product
planning is the single largest factor in new offering failures. The value of the offering as
perceived by the customer cannot be overemphasized.
In the next chapter, we examine entrepreneurial orientation and the innovation process and
their impact on the competitiveness of the firm. The pace of innovation contributes to the trend
away from vertical integration and toward the application of the value network concept in offer-
ing development. The “make-or-buy” decision is crucial to the long range planning of innovative
organizations and requires marketing’s insight and knowledge of customer perceptions of value.
In Chapter 9, the management of innovation and the importance of business-to-business brands
in the creation of industry standards are discussed.
Key Terms
collaborators 192 introduction stage 177 proprietary information 193
decline stage 181 maturity stage 181 stage gates 187
development stage 176 opportunity costs 188 unique or first time value
economies of scale 181 proprietary disclosure network 177
growth stage 178 agreements 184

1. Review the generalized product life cycle as shown 6. What are the implications of vertically integrating
in Exhibit 8-1. How well does the PLC model work to provide most all of the elements of value for a
for rapidly changing technologies? Markets? Why? product category that competes in a highly com-
2. At what point in the PLC are the following product petitive technology market?
categories? 7. What role does marketing play in the NPD
Railroads Gasoline Commercial aircraft process? What are marketing’s responsibilities?
Desktop computers Genetic engineering 8. How are the attitude and culture of the NPD team
3. How can executive attachment to a technology lead related to the number of successful developments?
to product failure? 9. Is it better to invest heavily in the early stages of
4. How does the fast pace of markets impact make or NPD or toward the end of the process? Why?
buy decisions? 10. If misunderstood or misapplied, what are potential
5. What are the implications of outsourcing signifi- pitfalls of the stage gate method of managing NPD?
cant parts of an offering that will have a very long 11. Using Exhibit 8-3, explain how effective marketing
maturity stage in its PLC? can overcome each listed reason for product failures.
Endnotes
1. Robert Lacey, Ford, The Men and the Machine systems—MEMS. Without belaboring the
(Ballantine Books, 1986), p. 513. technology or the jargon, these products are
2. Ibid., p. 516. arguably at the chasm. This example is a com-
3. Isadore Barmash, Great American Business pilation of the experiences of more than one
Disasters (Playboy Press, 1972), p. 241. company in this market. Simplifications have
4. Robert G. Cooper, Winning at New Products been made for academic clarity, and care has
(Reading, Mass.: Addison-Wesley, 1993). been taken to prevent any direct relationship
5. Recognizing the customer’s view cannot be with any single market participant.
overemphasized. Chapter 1 discusses viewpoint 11. Kotler, Marketing Management, p. 335.
as a major contributor to misunderstanding and 12. Cooper, Winning at New Products.
misapplication of the value chain concept. 13. The BCG Matrix is discussed in Chapter 5.
6. Phillip Kotler, Marketing Management, The 14. Catherine Kitcho, From Idea to Launch at
Millennium Edition, 10th ed. (Upper Saddle Internet Speed: How to Identify and Develop
River, N.J.: Prentice Hall, 2000), pp. 301–304. Profitable Opportunities (Mountain View, Calif.:
7. Recall that “the offering” consists of many ele- Pele Publications, 2001).
ments of product, service, installation, finance, 15. V. Kasdturi Rangan and Kevin Bartus, “New
and so on. Product Commercialization: Common Mistakes,”
8. The strategic implications of market ownership Harvard Business School (Note 594–127, 1994,
are discussed in Chapter 5. 63–75).
9. Geoffrey Moore, Crossing the Chasm (New York: 16. Cooper, Winning at New Products, p. 24.
Harper Collins, 1991). 17. Paul Sherlock, Rethinking Business-to-Business
10. We believe some explanation is necessary Marketing (New York: The Free Press, 1991),
here. Silicon pressure sensors are produced p. 84.
through a process called micromachining, sim- 18. Kotler, Marketing Management, p. 25.
ilar to the process that makes integrated circuits. 19. Cooper, Winning at New Products, p. 25.
This process is used to manufacture many 20. Ibid., p. 26.
types of microstructures, referred to in the 21. Ibid., p. 27.
industry as micromachined electromechanical 22. Ibid., p. 28.
23. Eric Berggren and Thomas Nacher, “Introducing 27. Theodore Levitt, “Marketing Myopia,” Harvard
New Products Can Be Hazardous to Your Business Review (July–August 1960).
Company: Use the Right New-Solutions Delivery 28. Regis McKenna, “Marketing Is Everything,”
Tools,” Academy of Management Executive, Harvard Business Review (January–February
15(3) (August, 2001), pp. 94–95. 1991).
24. Cooper, Winning at New Products, p. 28. 29. Michael E. McGrath, Next Generation Product
25. Rangan and Bartus, “New Product Development: How to Increase Productivity, Cut
Commercialization.” Costs, and Reduce Cycle Times (New York:
26. Sherlock, Rethinking Business-to-Business McGraw-Hill, 2004).
Marketing.
Chapter 9
Innovation and Competitiveness
OVERVIEW
In this chapter we address two methods by which marketing creates competitive
advantage for the business-to-business firm: entrepreneurial orientation and
innovation. We separate these out from other chapters because too often they are
thought to be part of a single element of the marketing mix—product, particularly
through new product development and product management. We wish to emphasize
that innovation and brand building need to extend across all elements of marketing.
Indeed, new product development is extremely important in getting a key portion
of value right for customers. In new product development, marketing can and should
add its own innovative contribution to the structuring of the product and service portions
of the offering. However, recent studies that have examined the successes and failures
in business—many of which are companies engaged in business-to-business
marketing—show that broad-based innovativeness is a key to high performance.
Maintaining or increasing a degree of differentiation from competitors can be
accomplished through innovating in the channel structure, the pricing structure, or even
the communication strategy, as well as in the product. As we saw in the last chapter, the
opportunity for product innovation becomes reduced during the mature portion of the
product life cycle. If the company is not careful, it resorts to shaving margins to maintain
competitiveness. Finding a way to innovate elsewhere in the offering, away from
“product,” may be the only way to maintain margins. Indeed, adopting world-class
supply management practices can be viewed as a form of non-product innovativeness.
Innovativeness can be viewed as the key element of an entrepreneurial
orientation; so, in this chapter we discuss innovation in the context of marketing
entrepreneurially. Entrepreneurial orientation includes proactiveness, controlled risk
taking, and opportunity seeking, as well as innovation. In this chapter, we discuss
how the marketing function of the firm can approach all elements of marketing with
an entrepreneurial orientation.
The methods discussed in this chapter build sustainable competitive
advantage deep within the company’s inner workings. Competitive advantage in the
company’s offerings comes as the result of attention paid to building these links in
the company’s value chain.
200
Chapter 9 • Innovation and Competitiveness 201
In the opening example, we show how Sun Microsystems created a platform

for generating new initiatives that address emerging needs in new markets. The innovative
effort actually has two stages: the building of the partner community framework and the
formation of new marketing programs. Innovation at both levels involves much more than
product innovation; the whole effort is very entrepreneurial in character.
Example: Sun Creates an Innovative Partner Network1

In March 2000, Sun Microsystems launched iForce, a networked community of Sun partners, including
software developers, VARs, systems integrators, and peripheral equipment suppliers. The idea was to
provide business customers with a single entity to go to for e-business or other network systems. iForce
is a good illustration of a non-product innovation.
While Sun had its share of problems in the early 2000s, the iForce initiative survived and evolved.
The principal benefit provided by iForce was a one-stop shop for enterprise or service provider
customers. Because all the elements of the offering are “under one roof,” and are marketed together as
a bundled offering, the customer saves time and some expense in acquiring and using a customized
solution. Sun provides services and facilities that make it attractive for partners and customers to partic-
ipate. For Sun’s business partners, Sun provides financing, operations services, and global marketing. It
provides discounts and consulting services for start-up Internet companies. Sun has also built test and
proving facilities, called iForce Ready Centers, where partners, customers, and Sun technicians can
experiment with and build customized systems for customers that can then be scaled and translated to
the customer’s own facilities. Customer problems are addressed by all parties concerned using Sun
methods or development approaches created by other Sun integrator partners, if more applicable.
Much of the revenue and margin produced in sales generated by iForce goes to the partners. Sun
makes money on sales of equipment, operating systems software, some consulting, and eventually on
returns from venture capital activity associated with the initiative.
By not overspecifying the nature of the partnership program at the outset, Sun facilitated other
sorts of innovations. In the first six months after launch, the partnership framework produced a specific
initiative focused on wireless systems called, appropriately enough, iForce Wireless. This initiative
targeted telecommunications companies and wireless service providers, offering combined packages of
hardware, software, applications, and integration services.
Over the first five years of the 2000s, Sun suffered severe sales declines. Competition for the
remaining business was fierce; customers sought low-cost network servers based on Intel microproces-
sors and Linux operating system (Sun offered servers with its own SPARC chips and Solaris operating
system). As sales slid, Sun survived in part by moving a number of remaining channel accounts
in-house and reducing its support for the channel. Sun’s channel partners remember this treatment. Even
with the attempts to integrate and rationalize the network under the iForce umbrella in 2004 and 2005,
some partners want more in the way of integration of development efforts, sales efforts, and information.
As the economy improves, though, Sun is working to improve partner margins, support their transition
to include a higher level of service, and open the channels of communication. In the spring of 2005, Sun
introduced an iForce program to match channel partners with Sun salespeople to address many larger
accounts. This gave the partners access to Sun business worth several billion dollars in yearly revenue.
LEARNING OBJECTIVES
䊏 Understand the application of entrepreneurial marketing and innovation in order to compete
in business-to-business markets.
䊏 Obtain an understanding of how innovation relates to entrepreneurial marketing.
202 Chapter 9 • Innovation and Competitiveness
䊏 Gain a sense of how innovation can be accomplished in all elements of the offering.
䊏 Understand how to implement innovation and entrepreneurial marketing in
business-to-business marketing.
䊏 Gain a sense of how current trends in business-to-business markets are affecting the
concepts and implementation of innovation and entrepreneurial marketing.
INTRODUCTION
The nature of the business environment in business-to-business markets is constant change.
Customers constantly want new and better products and services from their suppliers.
Competitors are constantly trying new strategies and tactics for winning over customers. As
Dickson notes,2 there is no equilibrium; some competitor will always come along with some-
thing better that changes the relationships in the market.
To cope with this dynamic frenzy, business-to-business marketers must either find mar-
ket niches that they can lock up so tightly that they face no significant threat of competition or
they must compete just as hard as the other businesses in the market. The first alternative is at
least limited in scope, if it exists at all. This means that marketers must compete by
continually trying to create more value for both existing and new customers. In this chapter, we
discuss a way to do this by acting entrepreneurially.
An entrepreneurial approach to competing involves four key elements: seeking opportu-
nities, innovating, acting proactively, and taking controlled risks. In the discussion in the sec-
ond part of this chapter, we go into some depth on the why and the how of innovating.
In the opening example, Sun Microsystems noticed that its customers were becoming
overwhelmed with the intricacies, choices, and uncertainties involved in building
e-commerce 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 assis-
tance. Over time, Sun continued to build this network and found innovative ways to support
it. This example illustrates some of the key ideas in this chapter. Sun acted entrepreneurial-
ly through nonproduct marketing innovation. It controlled the risks involved by innovating
in steps, obtaining feedback, and revising the innovation. It continued to incrementally inno-
vate to improve the value for its partners and for customers. The innovations built on each
other and enabled further innovations, by Sun and its partners. Finally, they gave it a brand
name and continued 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 or Sun in its competitive efforts.
Entrepreneurial MARKETING ENTREPRENEURIALLY

marketing is the
undertaking of a The methods of the entrepreneur add more to organizational performance than
marketing strategy that just energizing it through an entrepreneurial vision. Company executives can
actively pursues a new enhance performance by fostering an environment in which the organization
opportunity and has does entrepreneurial marketing.3 Even if the company’s upper-level man-
relatively high levels of
innovation, proactivity,
agement does not create such an environment, the individual business mar-
and controlled risk keter can still improve performance by incorporating entrepreneurial methods
taking. into his approach (within the constraints imposed by the organization).
What does it mean to market entrepreneurially? People generally think of entrepre-

neurship as the act of starting a new company. However, this is perhaps too simplistic a
view. Managers and employees within a company can act as if their organization is a high-
growth start-up with the result that their organization shows at least some of the flexibility
and boldness of a start-up. Accordingly, we can identify characteristics that indicate that
an act is more or less entrepreneurial. Research done by marketing and management schol-
ars has come to the point of defining entrepreneurial activity as having three or four dimen-
sions. 4 For our purposes, the key dimensions of entrepreneurship can be
thought of as innovation, proactivity, controlled risk taking, and Innovation is the creation
opportunity seeking.5 of something new and
Innovation is creating something new and making it useful. The fact commercially useful or
the improvement of
that somebody uses the new thing for some particular purpose distinguishes something to make it
an innovation from an invention. Innovation can also be taking something more useful. It might
that already exists and making it better, so that it provides more value to cus- involve the application of
tomers than it did before. Proactivity is doing something before others do it. science or technology, but
Innovations, by their nature, are proactive, but entrepreneurs can do things does not have to.
that are not necessarily new. They might do something before their competi- Proactivity is doing
tors do it, and this by definition is also being proactive. Controlled risk tak- something before others
ing is a combination of knowing what the risks really are, taking moderate do it. Taking the lead in
risks in which the worst case is survivable, and finding ways to manage the a market or in a new
development, even when
risks to increase the chances of success and reduce the consequences of fail- the offering that will
ure. Finally, opportunity seeking is largely self-explanatory. Note that peo- become obsolete by your
ple and companies that are more entrepreneurial tend to actively look for action is your own, is a
opportunities and are constantly evaluating how attractive prospective key element in market
ownership.
opportunities are.
With this in mind, we can begin to see what entrepreneurial marketing Controlled risk taking is
is like. For any one entrepreneurial event, there is a cycle of activity. The not “bet-the-farm” risk
cycle begins with opportunity recognition (Exhibit 9-1). Then an initial design taking. Rather,
is produced to address the opportunity. The design is developed and tested on entrepreneurial risk taking
is knowing what the risks
prospective users and customers, and their reactions are evaluated and incor- are and doing something
porated into the design. Meanwhile, the resources for pursuing this opportu- to control the risk.
nity are being gathered. The project grows; choices are made; the capability
to produce and deliver is ramped up; and the product, service, or program is launched. After
launch, feedback is received, analyzed, and acted upon. In the feedback, new opportunities
are sought and can trigger the cycle anew.
For this event to be successful, certain things must be done. First, the opportunity must
be kept firmly in mind. The vision of the opportunity may change as feedback is received, but
realization of the opportunity is the goal. Too often, new ventures lose focus as the team mem-
bers see new opportunities galore and they try to find ways to pursue them. Second, producing
a successful design involves combining established technology with recent technology (we use
a broad definition here: technology is any way of doing something; it is not limited to hard-
ware or software—see the discussion later in this chapter). The new technology may take a
fair amount of creative work. The mind-set here must be a willingness to change or do things
differently in order to pursue the opportunity. “Whatever it takes” must be done to make the
opportunity “happen.”
Obviously, these first two strictures or guidelines connote the “opportunity seeking”
and “innovation” portion of entrepreneurial orientation. Innovation without proactivity,
though, can drag on forever inside the organization without ever seeing the market. The
Opportunity Idea
Recognition Generation
Business Idea Development
Business Experimentation Obtaining

Planning and Exploration Resources
Launch
Feedback
Revise
EXHIBIT 9-1 Entrepreneurial Cycle
entrepreneur or marketer has to get the innovation into the market, first to test it, and then to
pursue the opportunity full bore. Taking too long can kill momentum; the development team
gets comfortable (or bored) with tweaking the product or program to “get it right.” Taking the
new design to the market becomes a psychological hurdle that is too high to get over easily.
Taking too long can also lead to being pre-empted by competition or by the customers them-
selves. The window of opportunity may close for a number of reasons.
Proactivity, then, involves doing things to reduce the time to market. Once in the market,
proactivity involves doing things to rapidly improve the offering before the competition can
improve theirs.
Though risk taking is often seen as the ultimate role or characteristic of the entrepreneur,
most entrepreneurs do not see themselves as taking huge risks. Either they do not know
enough about the chances for failure or they believe that they have enough control over the sit-
uation to manage the probability that their project will fall short of expectations. 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.
One way that marketers reduce the chance of failure is by obtaining as much information
as possible before launching full scale. However, waiting too long can create a risk that an oppor-
tunity will be missed.6 Another way that information can be gathered while being proactive is
to run one or more “experiments.”7 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.
Changing the Rules

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. Recall that Hamel and Prahalad argued for competitive
strategy that changes the relationships among the participants in a market, so that the “rules”
determining competitive advantage are changed.8 However risky, changing the rules is almost
always entrepreneurial on the other three dimensions (proactivity, innovation, and opportunity
seeking), as well, and can have a substantial payoff. It is usually very proactive in that action is
taken before other competitors act. If the new rules come to be adopted by the market, the action
may have the effect of upsetting the current competitive balance, starting the process of being
recognized as the market owner. As for the innovation dimension, changing the rules almost
always involves an innovation of some sort, whether it is innovation in the product or elsewhere
in the offering.
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 con-
trolled 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.
Practical Aspects of Creating an Entrepreneurial Orientation

Over the past decade or so, many companies have said they wanted to “be more entrepreneurial”
but have not gotten beyond paying lip service to the concept. The question arises how an entre-
preneurial orientation should be fostered, particularly in business-to-business marketing. We
discuss four key elements to inducing an entrepreneurial way of doing things within the market-
ing function: hiring the right kinds of people, directing the right kinds of activities, removing
impediments, and providing the right incentives.
HIRING THE RIGHT KINDS OF PEOPLE Hiring people who are comfortable acting entrepre-
neurially means looking for many characteristics that are common for most management or
professional positions in today’s business world. Good communication skills and an ability to
work well with small, diverse teams are valued skills in most career positions. They are
equally important for implementing an entrepreneurial orientation. Three key traits stand out,
though, as likely indicators of someone who will be comfortable in an entrepreneurial envi-
ronment. First is the ability to persistently pursue a passion. The marketer will want to be sur-
rounded with team members who can get excited about business, treat it as a venture, and
work hard to make it succeed. The second trait is a comfort with trying new things, making
mistakes, and learning from them. This does not mean that the person is careless or sloppy.
Complete learning comes in part from a comparison of expectations to actual results and try-
ing to understand why there is a variance. This means that the person will be comfortable
with the detail of setting objectives and then measuring results against those objectives. The
important aspect, though, is that the person will not see mistakes as personally threatening.
The third trait is a bias for action. Proactivity requires taking action in a quick but prepared
way. Unprepared action tends to be reckless; overpreparation, of course, creates delay. The
characteristic required strikes a balance between the two.
DIRECTING APPROPRIATE ACTIVITIES We discuss innovation at length in the next major sec-
tion of this chapter, so here we discuss activities that identify opportunities, create proactivity,
and take controlled risks.
Opportunity recognition comes in part from formal activities to analyze potential markets
and match unmet needs to a company’s existing or expected core competencies. These are simi-
lar to the kinds of activities discussed in Chapters 5 through 7. Specific analytic methods for
opportunity recognition can also be found in trade and research journals.9 An adjunct to analytic
techniques is an opportunity-oriented way of looking at the world. This involves cultivating
a constant sensitivity to unmet customer needs and possible partnership combinations that can
create new kinds of value. Managers can help their less-experienced marketing staff learn how to
build a network of contacts for information collection (see Chapter 6).
Marketers should also develop contact networks aimed at facilitating execution of marketing
activities (see the box, “Contact Network for Execution”). This will help in instituting proactivity
as a way of doing things. Controlling the results of planning activities also enhances proactivity.
Plans should seldom be more than a few pages in length and should have a series of action items
specified.
The key activity for controlling risks is to establish learning mechanisms. This means try-
ing new initiatives on a limited scale and assessing the results. Such assessment should be direct-
ed both at internal operations and at customers’ perceptions of value. The Sun iForce program
illustrates this kind of learning. Sun was able to observe the efforts of its actions in setting up the
community of partners and learned what worked and what did not. Sun also learned what was
valuable both to its partners and to customers, and this led to new initiatives in solutions devel-
oped for customer problems and changed methods of combining VAR sales activities with Sun’s
direct sales force.
REMOVING IMPEDIMENTS Two principal impediments are often imposed by existing

organizations. The first is a requirement for extensive justification. The second is a tendency to
punish failure.
Opportunity seeking and proactivity are obviously hindered by a requirement for over-
analysis. Controlled risk taking—and hence learning—is stifled if the organization demotes, os-
tracizes, or fires individuals who take risks that fail. These impediments need to be addressed
by company executives. A marketing manager can do his best to shield employees from short-
sighted company policies, but these policies would eventually limit the manager’s ability to op-
erate entrepreneurially.
PROVIDING INCENTIVES Over the past decade, companies have gotten used to providing
incentives to employees through profit-sharing bonuses and stock options. The economic slow-
down of the early 2000s demonstrated the downside (literally) of these types of incentives.
Accordingly, a range of incentives needs to be considered, including cash, equity, and non-
monetary rewards. The keys, as always when providing incentives, are to provide appropriate
incentives, to award the incentives for doing the right things, and to provide the rewards soon
enough after the actions to be real reinforcement for the desired activity.
Contact Network for Execution
Just as marketers develop a network of contacts for and document production. These contacts will be
information collection, they will need to form a internal to the firm but may also include outsiders
network of contacts for getting things done. It pays such as consultants, ad agencies, and contacts
to determine ahead of time who within the organi- among distributors. By cultivating these contacts
zation is responsible for such things as graphics during planning, the marketer can make execution
design, support of missionary sales, sales training, go smoothly when the time comes.
COMPETING THROUGH INNOVATION

The entrepreneurial element of innovation is central to the continuing ability of the company to
win customers and reap financial performance benefits. In the last chapter, we discussed product
innovation through the new product development (NPD) process. In this chapter, though, we
want to emphasize that innovation in the non-product elements of the offering can be just as
important—sometimes even more important—than product innovation. Indeed, Christensen and
Raynor assert that most disruptive innovations (explained below) are not product or technology
innovations so much as they are business model innovations, the product innovations that are part
of the new model being rather modest in scope.10 An example is Dell Computers’ choice of a
direct channel—selling personal computers over an 800-number phone line.
Value comes from all elements of the offering. Maintaining or increasing a degree of dif-
ferentiation from competitors can be accomplished through innovating in the channel structure,
the pricing structure, or even the communication strategy surrounding the product. As was
shown in the last chapter, the opportunity for product innovation becomes reduced during the
mature portion of the product life cycle. If the company is not careful, it will resort to shaving
margins to maintain competitiveness. Finding a way to innovate elsewhere in the offering, away
from “product,” may be the only way to maintain margins.
Innovation can be viewed not just as the creation of new things but also as new and better
ways of doing what has been done before. Depending on viewpoint, all the following can be
legitimate innovations:
Designing for more efficient production
Less use of raw materials
Reduced environmental impact
More effective marketing communication or selling
More effective distribution systems.
From this view, innovation is a significant contributor to productivity and, thus, is a signif-
icant contributor to our economic well-being and growth. In fact, at the macro level, innovation
drives a free market economy. New products, services, retailers, other channel intermediaries,
communications methods, and forms—all come from innovation. New ideas are the outcome of
innovative effort. Our society “makes progress” through innovation.
Innovation across the Offering

Managing innovation is an important function of the firm. In the prior chapter, we discussed new
product development and product management at length. New product development is extremely
important in getting a key portion of value right for customers. The last chapter discussed an
NPD process that moved from idea generation through several stages to arrive at a commercially
offered product, managed on an ongoing basis. We can think of this process being extended
to the other aspects of the offering. Our experience tells us though, that For our discussion,
companies rarely spend the same kind of effort—nor do they have the technology is not limited
same kind of process—for innovating in the other elements of the offer- to items that comprise a
manufactured product or
ing and value chain.
those tools used in the
Before getting started, some definitions are in order. First, we want performance of a service.
to be clear on what we mean by technology. As defined earlier, technol- Technology is a way of
ogy is a way of accomplishing something, based on scientific principles accomplishing something.
or knowledge. Scientific principles can be found in all disciplines of inquiry, so this is a very
broad characterization of technology.11 Technology is not limited to the mechanisms that com-
prise a manufactured product or the code that comprises a software program. We can think of the
marketing activities chosen by the firm as a technology to perform marketing. Similarly, innova-
tion is not limited to changes of products or services. Innovation is a change in any technology
and must be useful and potentially commercialized—innovation is invention in commercial use.
With these definitions as background, consider what is required for building a process that
will facilitate and drive innovation across the offering(s) of the company. Recall from Chapter 5
that the firm must have a clear mission and goals, and executive management must recognize the
necessity of change to meet those goals. In other words, executive management and strategy
makers must recognize a need to be innovative and must make a conscious choice to do so.
Innovation is so important for the long-term health of the company that top-level management
must drive it. This strategy decision must cover what technologies to pursue, what kind of inno-
vation will be pursued to address these technologies, and how to pursue this innovation.
If the company is going to pursue innovation—and it is a rare company that would not—the
company must adopt a predisposition for trying new things. The culture and reward structure must
accommodate and assist people who seek to innovate, whether they succeed or fail. Failure in
innovating is positive, as long as (1) something valuable is learned and (2) it does not kill the company.
Most innovations can be tried initially on a small scale without pursuing “bet-the-company”
risks. Without adoption of policies that reward innovation and support “useful” failure, creating a
culture of innovation is an uphill battle. This inclination to innovate must extend beyond the R&D
part of the organization, because R&D only addresses part of the offering.
Once the organization is on its way to instilling an innovation inclination, executive man-
agement and strategy makers must choose where and how to innovate, as already mentioned.
In Chapter 5, we stated that company executives make the strategic decision to pursue major
business opportunities. Given the choice of business, innovation initiatives to pursue these will
probably be obvious; and indeed the expected contributions of innovation were considered in
the choice of opportunities. Given the innovative directions and businesses to pursue, strategy
makers then determine “how innovative” the company needs to be.
Over the past twenty years, researchers and practitioners have observed that “big” innova-
tions differ greatly from “small” innovations.12 The field has come to distinguish two ends of the
spectrum in terms of radical innovation and incremental innovation. Incremental innovations
take the existing product and offering and make small-step improvements to the original design.
Incremental improvements add up to produce a great deal of change in an offering over time.
Radical innovations, on the other hand, can produce large changes in the functions and perfor-
mance of a product or offering. Radical innovations can be so radical that they create an essen-
tially different kind of product or offering with a new combination of types of value produced.
These have come to be called breakthrough innovations,13 although common usage of the term
is inconsistent. Sometimes breakthrough is used to mean any extreme change in performance or
costs, including a large improvement in existing benefits or costs, without changing the product’s
basic architecture or the offering’s principal benefits. At other times, the term is used to strictly
mean that the technology architecture has changed drastically or that benefit structure is essen-
tially different and vastly better. No matter how the terms are defined or used, the implication
is clear: different kinds of innovation behave differently and require different kinds of organiza-
tional treatment.
A way of thinking about innovation with useful implications has emerged over the past
decade or so. Christensen distinguishes between disruptive innovation and sustaining
innovation.14 Sustaining innovation is innovation that improves the existing dominant techno-
logy, products, or offerings. It serves the needs of higher-end customers who already purchase
similar products, but who want more value from these products. Sustaining innovation can be
incremental changes or radical changes—but it is still innovation that stays on the same techno-
logy vector. In comparison, Christensen describes disruptive innovation as introducing a
product or business idea that creates a new kind of value. Customers addressed by the disruptive
innovation can be segments that are overserved by the products previously available. Or they
might be customers whose needs are substantially different from the needs of existing customers.
Initially, the new offering usually offers performance below that of the existing technology. The
newly addressed segments do not represent an attractive business for the established companies
competing with existing products. Hence, the disruptively innovative company gains a foothold
by serving the new customers. Eventually, though, the new type of offering supplants the old as
rapid technology advancement on the newcomer technology outstrips the capabilities of the
established, mature technology.
Christensen argues that existing market leaders find it very difficult to pursue disruptive
technologies. The leaders’ infrastructure and operations are all geared toward pursuit and sup-
port of the existing direction in technology. Even the leaders’ customers are all invested in
receiving benefits from the existing technology; if a supplier produces an offering based on new
technology, the customers will tend to redirect the supplier back to the established technology.
Suppliers of the new technology must target different customer groups than the current leaders in
order to succeed.
Christensen, in his analysis of the disk drive industry, has shown—and later he and Raynor
reiterate15—that disruptive technology is not necessarily radical innovation. Incremental inno-
vation may be the initiator of the disruptive innovation. Similarly, radical innovation does not
have to be disruptive. It may simply improve the performance and benefit package of the existing
architecture and offering but do so in one large leap. Take word processing in the early 1980s, for
example. One might argue that the introduction of electronic, stand-alone word processors was
a radical innovation over the electric typewriter. The word processors offered by Wang, Olivetti,
Xerox, and IBM were far better and more useful than the standard IBM Selectric, but they were
still, after all, typewriters. Meanwhile, word-processing software was offered as a product to be
used on the desktop personal computer, linked by printer cable to a dot matrix or daisy-wheel
printer. It was not as versatile as the trained typist with the stand-alone word processor, but it
worked and gave the amateur typist the ability to create a usable, changeable document without
burdening the administrative assistant or going through the typing pool.
Word-processing software was not a particularly radical innovation. It had been around for
years, making it possible for someone to write documents using his company’s mainframe
or minicomputer. The initial market was not in the office products market; it was the individual
professional (or even the student) who wanted to write her own documents. Over time, the soft-
ware got better through incremental innovation. As professional staff learned that they could
write, edit, and print their own documents faster and better than sending repeated drafts through
a typing pool, the typing pool went away. As the remaining office staff started using the other
mainstay programs of the PC—databases, graphics, and spreadsheets—and as offices invested in
relatively expensive laser printers, administrative staff made the switch to multifunction PCs from
their old, single-function word processors. The heyday of the stand-alone word processor was
over within a few years.
The disruptive technology was the word-processing software; the innovation was
incremental. The effect on the office products market was far-reaching. The radical innovation
was probably going from the electric typewriter to the electronic typewriter. This was a sustaining
innovation in Christensen’s terms.
Accordingly, the firm needs to decide to address disruptive innovation if it is to survive in
the long run. Without doing this, a new entrant will eventually replace the old technology for most
of the market. The decision is not whether to pursue disruptive technology. The decision is how to
pursue it and to what extent.
The company must also determine whether the innovation it will pursue is radical or incre-
mental. Whether disruptive or sustaining, radical innovation requires different kinds of development
and commercialization efforts than incremental innovation does.16
A corporate or business strategy that intends to “change the rules of the industry or market-
place,” as discussed in Chapter 5, almost always needs to pursue breakthrough or disruptive
innovation and to be proactive rather than reactive. The goals of the strategy makers and the
circumstances of the business environment dictate how aggressive the company needs to be in this
pursuit. In any case, the business strategy sets the innovation context within which the marketer
has to operate.
Pursuit of Disruptive Technologies

Christensen and Raynor17 say that disruptive strategies should be pursued when a product technol-
ogy has developed to the point where mainstream customers’ needs are overfulfilled. At this point,
there is likely to be an emerging segment looking for lower performance, but new benefits.
Assuming that the executive management of the firm decides to pursue disruptive technology to
some extent, the question becomes “what does this mean for marketing?” within the firm.
Christensen makes a compelling case that implementation of such a directive involves five things:18
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 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.
These prescriptions suggest that the business-to-business marketer who finds himself in
the pursuit of disruptive innovation (whether in the product, service, or in other elements of the
offering) should be in a small business unit pursuing an uncertain opportunity (if it is not an
uncertain opportunity, the innovation is probably not disruptive). If the marketer observes that
his organization lacks autonomy from a large organization, then he should start looking for
ways to change this situation. The large organization will usually impose its systems, values,
and metrics on the new venture and unwittingly kill it. Even a supposedly enlightened organiza-
tion that gives the new venture its own criteria for support will be tempted to change its mind
later and impose revenue and profit objectives that are impossible to meet.
From Pistons to Fuel Cells
Kolbenschmidt Pierburg AG is the world’s second to the development of clean, efficient fuel cells.
largest supplier of pistons to manufacturers of internal Dr. Dieter Siepler, chairman of the Kolbenschmidt
combustion engines—auto and truck, gasoline and executive board, thinks it makes good business
diesel. Annual sales are $1.8 billion, with revenues sense. Siepler says that Kolbenschmidt is confident
forecast to hit $3 billion in 2005. Because of demand that, by 2010, fuel cell power trains will be a viable
for products in North America, the company will alternative to traditional systems, with annual
build a new U.S. production line, part of a $50 million revenues forecast to start at $140 million.
capital investment. Kolbenschmidt is a stakeholder in the future
How does this company spend R&D dollars? of the internal combustion engine. More impor-
Certainly to maintain the position that its internal tantly, the company’s management recognizes that
combustion engine components command in the that stake is not in the product form but in the sat-
market, but also by anticipating the future needs of isfaction of customer needs.
the market. Kolbenschmidt has established a new Source: Lindsay Brooke, “Piston Supplier Invests in Fuel
business segment within its organization devoted Cells,” Automotive Industries (April 2001).
The box “From Pistons to Fuel Cells” describes the innovative effort of Kolbenschmidt
Pierburg AG. Notice that the kind of innovation pursued will probably involve a changeover in
the infrastructure, that is, the innovation pursued is probably disruptive. Kolbenschmidt
Pierburg AG will have to be careful how it manages its efforts, or it may be tempted to stay
with the old line of business and lose out to the new, even though it has addressed the new
technology directly.
If the marketer is indeed located in an autonomous venture with a cost structure and reason-
able revenue targets of its own, then the question becomes how to accomplish the innovation
required. One key is to take a learning approach. This is very different than an approach to execute
a marketing plan. The premise of the learning plan is that uncertain markets are unknowable at
first. Resources have to be allocated to trial, error, learning, and reconfiguration.
There are two important parts of this learning approach—called discovery-based
planning by Christensen.19 The first is gathering as much market and customer data as possible.
The discussion in Chapter 6 described the establishment of a network of customers and industry
contacts that become the sources for a large part of the customer data that need to be collected.
This needs to be done in this case as well, but it is a network of different kinds of contacts that
must be built. In particular, current customers in an established business are generally poor infor-
mation sources about future direction. They are often focused on the day-to-day effort of main-
taining the existing offering. They tend to not see the innovative uses of new products or the
value of new services or other changes in the offering. For disruptive technologies, most of the
customers emerge in new markets and segments; and the marketer will not have a good idea of
what these segments are. Consequently, the marketer needs to cast widely for new, useful con-
tacts. These contacts should be similar to the kinds of people von Hippel calls “lead users.”20
These are not necessarily the market leaders. Rather, they are users who have vision, who can
anticipate what kinds of needs will arise among potential customers in the future. In this case,
though, the lead user has to be someone who can anticipate what kinds of users will even exist in
the future. Customer organizations that rely on innovation as a driving force in the competi-
tiveness of the firm will have separately managed and rewarded groups in their organizations.
These groups will have a different focus, interested in changing rather than maintaining the status
quo. When presenting innovative offerings, marketers will find these parts of the customer organi-
zations their strongest allies. This mirrors quite well the adoption process defined by the TALC.
The second important part of discovery-based planning is the judicious use of trial and
error. Many users will not be able to give usable information on the nature of their needs and
buying behavior until they become familiar with the offering and have had a chance to see how
their organization would benefit from it. Consequently, the innovating company must run a
sequence of trial offerings. In each one, user feedback is sought on the value provided by all
aspects of the offering. It is important to systematically collect this feedback and learn as much
as possible about what will best provide value to the customers. Firms that recognize the need for
continuous innovation, both as suppliers and customers, will have these relationships as part of
an ongoing effort.
Pursuit of Sustaining Innovation

Most innovation is what Christensen calls sustaining innovation. Such innovations are changes,
radical or incremental, that make somewhat predictable improvements to existing technologies.
Radical sustaining innovation increases performance or costs dramatically but within the same
technology direction. Incremental sustaining innovation makes small changes along predictable
vectors. While most innovation is sustaining innovation, most sustaining innovation is incre-
mental in nature. To compete for any length of time within an industry, a company must pursue
sustaining innovation.
When the marketer is in the situation of competing through sustaining innovations, a rigor-
ous and disciplined process of managing innovation is possible and necessary. The principal
characteristic of this situation is that customers can provide a good idea of what they want, how
it will be used, and how they will acquire it. Through the process of market ownership, value is
provided to customers through a well-established extended value chain.21
With this in mind, the process for preparing the periodic marketing plan can be used as
the framework for instituting innovation throughout the offering. Just as the company has a
process for development of new products, the annual marketing plan (or plan done on some
other periodic basis) can be treated as the process for marketing’s R&D. The purpose of the
planning process should be to evaluate the market, evaluate past marketing efforts, recognize
evolutionary developments, and find new ways to create value for customers.
The periodic nature of the planning process is important. Time pacing of planned organi-
zation 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.22 It has been found to be extremely useful in dic-
tating the rules of engagement in a competitive market, particularly from the point of view of the
market owner. Business-to-business marketers can use time pacing in their attempts to achieve
incremental innovation across all elements of the offering. The rules for doing periodic market-
ing plans should state that each plan will include improved value in all elements of the offering.
Not only will customers come to expect periodic improvements in the value they receive from
such things as service or pricing plans, but the sales force, channels, and partners will learn to
expect new programs and support as well. 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 help them refocus on pursuing multiple avenues to
improved value for customers.
Practical Aspects of Accomplishing Innovation

In this discussion of innovation so far, we have described the need for the company’s strategy
makers to decide what businesses and technologies to pursue and to decide whether they are work-
ing on disruptive innovation or sustaining innovation. Disruptive innovation requires an autonomous
organizational unit with its own mission, processes, and metrics. Sustaining innovation requires
attention to constant customer inputs and time pacing applied through the marketing plan. Just as
was done in the first section of this chapter, we now turn to some practical aspects of implementing
innovation across the offering. Again, we will discuss this in terms of obtaining the right people,
directing the right activities, removing impediments, and providing incentives.
OBTAINING THE RIGHT KINDS OF PEOPLE Innovation occurs in either a project format or
through ongoing management of the marketing function of the company. Projects often result
in special purpose teams assembled for the duration of the project. If upper-level management
assembles the team, then the marketer may have no choice of with whom he must work. If given
the choice of people for the team or when hiring for the ongoing marketing function, it is impor-
tant to match the type of person to the type of innovation being pursued.23 Someone who takes
a visionary, extensive redesign approach to every problem would not be appropriate for incre-
mental innovation. Someone who 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.
Other than this distinction, the marketing manager will want to include (hire, if appropriate)
people who are creative and innovative. Note that innovativeness is focused on usefulness or
value for the customer. This is not “variety seeking” for its own sake. Another trait to try to avoid
in team members is a strong tendency toward being territorial. Because of the fluid nature of
innovation and the tendency to change directions if needed, a strong sense of territory can be
detrimental. A new offering will need a champion to gain adoption within the organization.
However, when the feelings of ownership become too strong, the person will stand in the way of
adapting the innovation or even scrapping it when the need arises.
DIRECTING THE RIGHT ACTIVITIES We have already discussed ways to obtain customer
information when working on disruptive innovation or sustaining innovation. Both involve
establishing networks of relationships with people who can supply information. The biggest
difference is who is included. In a disruptive innovation effort, the network must be broad and
focused on insightful customers and industry watchers. In a sustaining innovation effort, the network
is focused more on customers, partners, and channel members within the markets of interest.
A current trend in innovation efforts is the use of collaborators and partners in innovation
efforts. The opening example describing Sun Microsystems’ efforts to develop the iForce initia-
tive is an example of collaborative development, all under the directive efforts of one company.
It should be noted again that this innovative effort extends across the entire offering; it is not
limited to innovation in product, service, channels, or any other part of the offering.
A key aspect of getting the activities right is matching the activities to the type of innova-
tion. Recall that the distinction between sustaining and disruptive innovation makes a difference
in how the innovation is addressed. Radical innovation needs autonomy and constant updating
of the vision of the future market.24 This is particularly true when the radical innovation is
disruptive. Even when the radical innovation is a sustaining innovation, there is still consider-
able uncertainty in how the configuration of the offering will eventually stabilize. Indeed,
Most common
Radical combinations of
Innovation gy innovation types
olo
chn in shaded boxes
Te
of
R ole
ing
as int
y
re rta
Inc e
Incremental nc
gU
Innovation asin
Incre
Sustaining Innovation Disruptive Innovation
EXHIBIT 9-2 Relationship between Radical/Incremental and Disruptive/Sustaining Innovation
market uncertainty exists as well, although not to the extent of market uncertainty under disrup-
tive innovation. Accordingly, there is probably good reason to address radical sustaining inno-
vation with an autonomous business unit. While the relationship is not perfect, there tends to
be more incremental change associated with sustaining innovations and disruptive change has
more radical innovation (see Exhibit 9-2). Hence, the autonomous units tend to be associated
more with disruptive change than with sustaining change. The applicability of time pacing for
radical innovation, even when the innovation is sustaining, is questionable. There are just too
many uncertainties about how long it will take to configure the new offering.
Rangan and Bartus point out that a large problem in product commercialization is the
match between the company’s beliefs about the innovation and customers’ beliefs.25 They say
that mismatches occur when marketers believe the innovation to be radical while the customers
believe it to be incremental, and vice versa. When the market sees the innovation as radical while
the company sees it as incremental, the company is likely to miss a major opportunity. Rangan
and Bartus call these products “shadow” products because they hide in the shadows of the
products the company feels are more important. When the market sees the innovation as incre-
mental 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. These products Rangan and Bartus call
“delusional.”
While these are useful characterizations, we need to break down these mismatches and
misperceptions further, because the way to address the problem depends on the source(s) of the
misperception. First, the innovating supplier and the marketer working for the supplier can
misread the importance that customers will place on the innovation. The marketer can also
misread the customers’ ease or difficulty in adopting the innovation. The innovating supplier is
not the only party that can misperceive importance or ease of adoption: the customer can have
misperceptions as well. Pragmatist or conservative customers may not believe that an inno-
vation can change their competitive advantage as much as it really can. Also, they may have
misgivings about adoption that are really quite easily handled. Exhibit 9-3 shows these different
sources of misperceptions and some differences in how a company might try to overcome them.
IMPEDIMENTS AND INCENTIVES The impediments to instilling innovation in an organization

are similar to the impediments we discussed for the rest of entrepreneurial marketing. One
Type of Supplier Customer Approach

Innovation Perception/Misperception Perception/Misperception to Solving
Radical Accurate Inaccurate—Not radical Education, demonstration
Accurate Inaccurate—Difficult Education, demonstration,
to adopt target by TALC
Inaccurate—Not radical Accurate Listen to customers &
prospects; reposition
Inaccurate—Easy to adopt Accurate—Hard to adopt Listen to customers and
prospects; create rest of
offering that eases
adoption
Incremental Accurate Inaccurate—Hard to adopt Education, demonstration,
target those with
greatest need
Inaccurate—Not Accurate Listen to customers and
incremental prospects; reposition;
scale back effort
EXHIBIT 9-3 Perceptions and Misperceptions of Innovations
impediment is holding managers accountable for justifying their projects when there are no
results data available or secondary data that are usable. A second is overzealous punishment
of failure. Upper-level management must set the guidelines and the tone for removing these
impediments.
Similarly, incentives need to be provided for being innovative. In the entrepreneurial
marketing section it was mentioned that the incentives need to be set at the right level, using the
right forms, and delivered in time to reinforce the right behavior. These statements are equally
applicable for instilling innovation in the offering.
Note if your company is strictly known as a technology company, technology innovation
is necessary, though not sufficient, for success. The argument that “we are focused on our
high-technology product—that’s why customers buy from us” is a dangerous position. In fact,
the technology-oriented organization will have branding as a more important task, as their
product is expected to make a value statement rather than be a “me-too” product. The “me-too”
organization can focus on manufacturing efficiencies, distribution economies, and alternative
cost (read “lower”) positions with purchasing departments. Ironically, the technology-oriented
company must establish a brand position or become a low-cost producer of maturing products.

Planning and executing the marketing activities that create an offering can be competitively
impotent if the marketer treats it as only a cookbook exercise. To make the offering competitive
on an ongoing basis, the business-to-business marketer needs to attack the competition with
several tools. We have discussed some of the most important concepts and tools in this chapter.
Innovation gives the marketer the opportunity to produce more value for customers and to
continue to do so over time. As markets mature, it becomes more and more important for
marketers to look for non-product ways to innovate. As discussed in this chapter, it is necessary
to have a sense of what kind of innovation is being pursued. This dictates the approach to the
development of innovations in the offering.
Innovation is a key part of marketing entrepreneurially. By marketing with innovation,
proactive efforts, controlled risk taking, and attention to opportunities, marketers should be able
to compete on both value and time. Adopting an entrepreneurial orientation involves setting the
expectations for the marketers that they will need to act entrepreneurially and then setting the
structure and incentives so that marketers will be motivated to be entrepreneurial.
As you go to Chapter 10, and beyond, be thinking about how to innovate and act entre-
preneurially in the particular element of business-to-business marketing addressed in each
chapter.
Key Terms
breakthrough innovation 208 incremental innovation 208 radical innovation 208
controlled risk taking 203 innovation 203 sustaining innovation 209
discovery-based planning 211 lead users 211 technology 207
disruptive innovation 209 opportunity seeking 203 time pacing 212
entrepreneurial marketing 202 proactivity 203

1. Why would taking an entrepreneurial orientation in 6. Why should a marketing manager try to enhance
business-to-business marketing yield better com- and direct incremental, non-product innovation?
petitiveness for a company than would a more Since it is incremental, why not just let it happen on
reactive, risk-averse approach? its own?
2. How does innovation differ from proactivity? 7. Compare the marketing mix and customs of an
3. Why is controlled risk taking more competitively innovation-oriented firm and a market share-driven
attractive than strictly risk-averse behavior? firm. What prevents a share-driven firm from also
4. What is the difference between radical innovation being a leader in innovation?
and disruptive innovation? 8. Referring to Question 7, what suggestions could
5. Why is an autonomous organizational unit the you make to a share-driven firm that also wants
appropriate way to pursue disruptive innovation? to be known as the innovator in the market?
Endnotes
1. Based on H.M. Fattah, “Second Rising?” Marketing 3. Michael H. Morris, Minet Schindehutte, and
Computers 21(3) (March 2001), pp. 34–36; iForce Raymond LaForge, “Entrepreneurial Marketing:
Web site: http://www.iforce.com; Jim Kerstetter and A Construct for Integrating Emerging Entrepre-
Peter Burrows, “Sun: A CEO’s Last Stand,” neurship and Marketing Perspectives,” Journal
Business Week (3893) (July 26, 2004), pp. 64–70; and of Marketing Theory and Practice, 10(4) (2002),
on Elizabeth Montalbano, “Sun Engages Channel,” pp. 1–19.
CRN (1147) (May 16, 2005), p. 6. 4. Danny Miller and Peter H. Friesen, “Innovation
2. Peter R. Dickson, “Toward a General Theory of in Conservative and Entrepreneurial Firms:
Competitive Rationality,” Journal of Marketing Two Models of Strategic Momentum,” Strategic
(January 1992), pp. 69–83. Management Journal, 3 (1982), pp. 1–25;
Michael H. Morris and Gordon W. Paul, “The 13. C.f. Gina Colarelli O’Connor, “Market Learning
Relationship Between Entrepreneurship and and Radical Innovation: A Cross Case Comparison
Marketing in Established Firms,” Journal of of Eight Radical Innovation Projects,” Journal
Business Venturing, 2 (1987), pp. 247–259; of Product Innovation Management 15(2) (1998),
Jeffrey G. Covin and Dennis P. Slevin, “Strategic pp. 151–166.
Management of Small Firms in Hostile and 14. Clayton M. Christensen, The Innovator’s
Benign Environments,” Strategic Management Dilemma (New York: HarperCollins, 1997); and
Journal, 10 (1989), pp. 75–87. Christensen and Raynor, The Innovator’s
5. Morris, Schindehutte, and LaForge, Solution.
“Entrepreneurial Marketing,” add three other 15. Christensen and Raynor, The Innovator’s
dimensions—resource leveraging, value creation, Solution, p. 66.
and customer intensity. In this text, these dimen- 16. V. Kasturi Rangan and Kevin Bartus, “New
sions are included in the other four or are an Product Commercialization: Common Mistakes,”
integral part of the general approach to marketing Harvard Business School (Note 594-127, 1994,
espoused in this text. 63–75).
6. Peter R. Dickson and Joseph J. Giglierano, 17. Christensen and Raynor, The Innovator’s
“Missing the Boat and Sinking the Boat,” Journal Solution.
of Marketing (Summer 1986). 18. Ibid.
7. Thomas J. Peters and Robert H. Waterman, In 19. Ibid.
Search of Excellence (New York: Harper and 20. Eric von Hippel, “Lead Users: A Source of
Row, 1982). Novel Product Concepts,” Management Science
8. Gary Hamel and C.K. Prahalad, Competing for (July 1986), pp. 791–805.
the Future (Boston, Mass.: Harvard Business 21. Christensen calls this a value network. His idea is
School Press, 1994). similar to our notion of a value network but is
9. Thomas C. O’Brien and Terry J. Fadem, more limited. We also see the partners who are
“Identifying New Business Opportunities,” contributing something to the offering, rather than
Research Technology Management (September– just the suppliers who make materials and com-
October 1999), pp. 15–19. ponents that are aggregated into final products.
10. Clayton M. Christensen and Michael E. 22. Kathleen M. Eisenhardt and Shona Brown, “Time
Raynor, The Innovator’s Solution: Creating Pacing: Competing in Markets that Won’t Stand
and Sustaining Successful Growth (Boston, Still,” Harvard Business Review (March–April
Mass.: Harvard Business School Press, 2003), 1998), pp. 59–69; and Connie J.G. Gersick,
Chapter 2. “Pacing Strategic Change: The Case of a New
11. This is consistent with Porter’s view of techno- Venture,” Academy of Management Journal,
logy in the value chain, found in Michael E. 37(1) (1994), pp. 9–45.
Porter, Competitive Advantage: Creating and 23. Rangan and Bartus, “New Product Commerci-
Sustaining Superior Performance (New York: alization,” p. 70.
The Free Press, 1985), Chapter 5. 24. O’Connor, “Market Learning and Radical
12. C.f. James M. Utterback, “Radical Innovation and Innovation.”
Corporate Regeneration,” Research Technology 25. Rangan and Bartus, “New Product Commerci-
Management 37(4) (1994), p. 10. alization,” p. 71.
Chapter 10
Pricing in Business-to-Business
Marketing
OVERVIEW
Price is a key component of value. Customer-oriented pricing involves setting prices
that reflect the customer’s perception of the worth of the offering. This is set by the
customer’s own value chain and cost structure. Prices charged by competitors
influence the perceived maximum that customers will pay.
This chapter first reviews some basic ideas about setting prices in light of
maximum prices that can be obtained for a given offering and costs that must be
covered to make a profit. Basic concepts of demand, supply, and price elasticity of
demand are reviewed in light of their contribution to pricing.
The next sections discuss the management of pricing as part of the marketing
mix. Strategic aspects of pricing include objectives of pricing, price development for
new products or services, and price throughout the product life cycle. Tactical
pricing includes pricing of bundled products (bundles of several products for a
single price), competitive bidding, and changing prices.
The next section concerns negotiated price. In the final section the general
trends in business-to-business markets and how marketers must adapt their pricing
efforts are discussed. We revisit the trends of time compression, hypercompetition,
and the growth in the use of the Internet.
Intel Changes Its Competitive Pricing for Microprocessors1

In the past, Intel Corporation had used a price-skimming approach for microprocessors. New processors
would be introduced and offered at a high price level. The OEM buyer—Hewlett-Packard, Dell, IBM,
for instance—would buy relatively few processors for a relatively few computers that would be
offered to high-end users—corporate specialty users in finance, engineering, network serving, and
Web hosting. After these first needs had been fulfilled, and as software development was catching up
to the capabilities of the new processor technology, Intel would drop prices and the OEMs would
offer computers to users whose need for speed was not so immediate as the first users, but who were
willing to wait for lower prices and more functionality. As prices came down, Intel would drop prices
on its prior processor to the point at which late majority and laggard buyers of low-priced computer
equipment would purchase.
218
Chapter 10 • Pricing in Business-to-Business Marketing 219
Meanwhile, competitors, principally Advanced Micro Devices (AMD) and Cyrix, introduced
compatible processors priced under the Intel price points. Since competitors were playing catch-up,
Intel was able to minimize the competitive influence of these low-cost alternatives by continuing to
enhance the speed and functionality of Intel processors. This market ownership by Intel controlled the
pace of innovation to maximize Intel profitability while squeezing the competition.
At the end of the decade (1990s), AMD processors reached (and in some views, surpassed) the
performance levels of the most capable Intel chips. AMD began an identity program and the Athlon-
brand processor became a viable alternative at the premium end of the market. AMD had solved some
earlier production problems to reach the point where competitive processors could be shipped in
quantity and on time, giving the OEMs a solid second source of microprocessors. The significance of
this should not be minimized; AMD was able to price Athlon processors for the premium market, greatly
improving the company’s overall financial performance.
As Intel introduced the Pentium 4 in late 2000, the U.S. economy and much of the world econo-
my were entering a slowdown. Sales of workstations and personal computers slowed considerably,
causing inventories to escalate and PC makers’, as well as chipmakers’, earnings to fall.
Intel used the downturn as an opportunity to rejuvenate its competitive advantage. It dropped prices
quickly on its high-end processors. Prices on its1.5 GHz Pentium 4 processor dropped from $795 in
December 2000 to $519 in April 2001. Similarly, the 1.4 GHz Pentium 4 was priced at $574 in December
and reduced to $300 in April. AMD, of course, followed suit with similar reductions in its line of processors.
Aggressively lower prices were not Intel’s only strategic move made to improve competitive
position. Intel, like most other technology companies during the period, actively cut costs. A program to
trim the workforce by 5,000 employees through attrition had to be enhanced with a “voluntary separation
program” in which workers were offered incentives to depart (it seems that during a downturn workers
want to keep their jobs and not feed the normal attrition rate). Even while earnings were declining,
though, Intel announced that it would not reduce R&D spending, nor would it slow its capital spending
plans. Because it had the resources, Intel wanted to be ready with new products when the economy
rebounded. Also, during a downturn, capital projects, such as new plants and equipment, can be obtained
for lower cost than during boom times. So, when the economy improved, Intel could produce products
with a cost advantage, which would allow it more price flexibility while maintaining higher profitability.
This is close to what actually happened as recession of the early 2000s played out. Intel was able
to continue its price pressure on AMD. AMD was hurt badly, having to lay off about 2,000 employees in
2001 through 2003. Intel was also able to introduce the Centrino version of the Pentium 4, which was
specially designed to easily enable wireless connection of laptop computers to the Internet, via Wi-Fi
technology. This new product revived PC sales and, since AMD did not have a quick competitive answer
to the Centrino, it revived Intel’s profitability.
AMD, however, did not fade quietly into the night. AMD countered with its own product inno-
vation by beating Intel in offering high-end 64-bit microprocessors—the Opteron and next-generation
Athlon—which were quickly adopted by computer manufacturers in the next generation of servers.
Thus AMD’s share of this market rose to 17.8 percent from 16.6 percent over two years. Intel’s answer
for server processors did not reach the market until 2007. In this way, AMD countered price competition
in some of its aging product lines through successful product innovation. The company was able to
compete in the low-margin product lines because it produces high-margin products needed in another
market segment, thus sustain this business for an extended period of time.
New Intel CEO Paul Otellini has announced a market-driven strategy aimed at the convergence of
computing and entertainment and enabling mobile computing applications. Instead of the Pentium brand,
Intel will transition to three brands, the existing Centrino brand, a brand named Viiv that focuses on home
computing and electronics, and Core, a brand aimed at applications of Intel’s new dual core processors.
Intel and AMD are both trying to avoid the debilitating effects of direct price competition by pur-
suing extensive product innovation. Now Intel has restructured the better part of its business strategy to
compete in the future. How should AMD now respond?
220 Chapter 10 • Pricing in Business-to-Business Marketing
LEARNING OBJECTIVES
䊏 Remember the basics of pricing from your marketing principles course.
䊏 Understand the relationship between perceived value and price.
䊏 Understand the relationship between cost and price.
䊏 Gain a sense of what aspects of business-to-business pricing are strategic and which are
tactical, and how to address these aspects.
䊏 Understand how negotiated pricing works; gain a sense of strategies for maintaining margin
and customer relationships in negotiated pricing.
䊏 Learn how to avoid dropping price as a short-term tactic.
䊏 Gain an appreciation for the effects of current trends on pricing.
INTRODUCTION
Price is an important part of a broader set of strategic initiatives that includes product strategy
and communications. Customers respond to the price changes made by suppliers. Competitors
react as well, provided the changes are recognized as benefiting the entire industry. Price
changes, when followed by competitors, establish a price leader in a market. All competitors
may not have the interests or market position to profit as much from the changes made by a
market leader, but not following the changes would be more costly than “going along” with the
market. As pricing ideas are discussed throughout this chapter, some of the nuances of price as
strategy, not tactic, will come more clearly into focus.
Price makes it possible for transactions to take place. The customer receives benefits from
the product or service offered in exchange for the exchange price. The supplier receives the price
paid by the customer in exchange for the product or service offered. Both parties expect that the
outcome of the transaction will enhance their total value. Neither the customer nor the supplier
will act unless the price makes it worthwhile for both parties.
For the marketer, pricing is situational and depends on strategic purposes and the business
environment. In many cases, the price element of the offering includes such things as providing
financing, setting financing terms, allowing for several methods of payment, establishing
payment terms and schedules, allowing price adjustments for activities performed by the cus-
tomer or services provided by the supplier, or calculating exchange rates to allow for payments
in any of several currencies. All of these elements of price are part of the total offering and a con-
sideration in the customer’s buying process.
Business-to-business pricing differs considerably from pricing in consumer marketing.
When consumers make purchases, price is a deliberate contributing factor to the final decision
and is usually a predetermined suggested list price. The elements that contribute benefits beyond
the core product, such as a convenient retail location, adequate product assortment, and an easy
payment method may be part of the shopping experience but are not usually foremost in the
decision process. Few consumers associate waiting times (either at checkout counters or for
delivery), or quantity (consumers seldom can take advantage of volume discounts, and if they
could, would likely patronize a different seller), as elements of price. Consumer decisions related
to the economic utility (form, time, place, possession) of an offering are viewed as either conve-
nient or not. Consumer markets, characterized as operating under monopolistic competition,
generally have little variation in the offerings in any particular product category. As a result, in
consumer products, price is often used as an attractive feature of the offering and thus is a major
part of the marketing mix.
In business-to-business markets, all costs (indirect and direct) as well as the direct benefits
from the offering are considered in the decision process. Price levels for business-to-business
offerings are evaluated objectively in light of the customer’s value chain, while consumers
evaluate prices and costs in light of their perceptions of acceptable price levels—often deter-
mined by the relative position of competitive offerings. Price strategies in business-to-business
markets must consider that professional purchasing people who are skilled at extracting value
from transactions are part of the customer buying center. Business-to-business pricing involves
competitive bidding and negotiating much more than does pricing in consumer markets. The
psychological aspects of pricing in business-to-business marketing are subdued, though still
present, when compared to consumer marketing.
Pricing is one of the easiest marketing variables to change and one of the most difficult to
do well. Too often, cutting price becomes the “magic word” that allows the marketer or seller2 to
sell a mismatched product or service to an otherwise unwilling customer. While the short-term
consequences of price-cutting may be positive—the company gets the business of a new cus-
tomer or keeps the business of a dissatisfied customer, the long-term results can be bitter. The
lowered price becomes a surrogate for other problems associated with the product or relation-
ship. Recall the discussion of the misuse of the value chain concept from Chapter 1. Recognizing
value from the supplier point of view can lead to a failure to see what customers perceive as
value. Constantly giving price concessions to win over customers undermines margins, which in
turn means few resources for investing in the growth of the business.
Continuously relying on cutting price is habit forming. Sellers start to see it as an easy to
implement first resort. Marketers start basing their marketing programs on elaborate, costly, and
ever-more-frequent promotion plans, built around price reductions, used to support channels or
“incentivize” customers (who, predictably, stockpile enough of the product to see them through
the period during which no promotion is run—a practice that intensifies the bullwhip effect).
Customers become addicted, too. They get to the point where reduced price always becomes a
major concession sought in negotiation; and once the precedent has been established it has
become the benchmark to which future negotiations refer. Recognize also that business won
primarily through price concessions can be lost the same way.
In this chapter we discuss concepts and methods in pricing that, hopefully, can avoid the
kind of pricing that results in prematurely collapsing profits. Note, though, that understanding
customers, their needs, and buying decision processes and preparing good offerings for them go
a long way toward supporting prices that lead to profitability. Profitable pricing is the outcome
and reward of doing a good job in the rest of the areas of marketing.
Setting prices is often caught up with the supplier’s efforts to build a relationship with
customers. Setting prices, then, has to address the competing interests of establishing goodwill
with customers (a pressure to give the customer price breaks—a win for the customer) and
extracting the maximum profit from transactions (a pressure to charge as much as “the market will
bear”—a win for the supplier). Balancing these two competing forces is where creativity comes
into play. This becomes particularly necessary when sellers are negotiating with customers and a
concession on price seems to be the thing that will close the deal. Stability of the relationship
between the two parties is likely only when the outcome of the negotiation is a win–win situation.
Finally, this chapter discusses some of the effects of our three current trends: time com-
pression, hypercompetition, and the Internet. Time compression does not allow companies to
fully understand customers and markets and how they respond to price levels and changes. Time
compression also places a great deal of pressure on marketers, sellers, and business development
people to negotiate and reach closure quickly. Hypercompetition makes it difficult for companies
to maintain differentiated positioning. Without differentiation and with low-price oriented com-
petitors working hard to win customers, business-to-business marketers face increased pressure
to improve the value of their offerings.
PRICING BASICS
Cost-based pricing is the At its most basic, a price is an indicator of the worth of the offering. A customer
determination of price by looks at the price of the offering and asks three general questions: “Are the
figuring costs of offering benefits received worth the price being charged?” “Can we obtain the same
a product or service
and then adding on a
benefits for a better price?” and “Can we obtain the same benefits at a lower cost
standard percentage by producing the item ourselves (vertical integration—see ‘Make-or-Buy
profit. An alternative Decisions’ in Chapter 8)?” If the customer has a budget constraint, which is
method is to determine usually the case, an additional question is this: “Can we pay the price?” In
a price that will yield a simple terms, the marketer’s job in pricing is to set a price that obtains positive
targeted rate of return
on capital invested in
responses to the questions about whether the benefits are worth the price and
the offering. Several whether the customer can afford the price. The marketer must also set the price
problems arise with so that the customer cannot obtain more value from some other supplier’s offering.
either procedure. First, As market conditions change, the marketer may have to change prices for existing
costs per unit usually offerings to maintain or improve the attractiveness of the offering.
depend on volume and
the volume is set
Setting and changing prices, when done well, involves a combination of
arbitrarily. Second, many analysis and creativity. The analysis part must address both customers’ perceptions
cost categories are added of value relative to competition and the supplier’s cost structure. We have observed
based on a “standard that, too often, the analysis is incomplete, focusing solely on internal costs and prof-
rate” that may have no its. To really understand a customer’s perceptions of value, including the perception
relationship to actual
costs required or
of price, marketers often need to understand the customer’s cost structure.
incurred. Third, and The creativity part is often incomplete itself. The marketer must use all the
most important, the price elements of pricing as part of the jigsaw puzzle of the offering (Exhibit 10-1) to
has no relationship to create superior value for customers. Xerox’s pricing in its early days is a classic
customers’ perceptions example of how creative pricing can add to value instead of subtracting from it.
of the worth of the
offering. Customers
To overcome customers’ negative reaction to the purchase price of the first
might be willing to pay photocopy machines, Xerox provided a leasing option for the equipment. The
much more for the reduced cash flow burden at the time of acquisition made the cost more palatable
offering, or much less. and reduced the customer’s risk: If they did not like the new technology, they
Either way, the marketer could return it without having tied up a significant amount of cash. Of course,
loses.
Many of the factors
customers found that they soon relied heavily on photocopying and adopted the
mentioned that contribute technology wholeheartedly.
to cost-based pricing Pricing based on customers’ perceived value—value-based pricing—
are addressed by is not the easiest way to establish prices but creates prices that are consistent
market-savvy firms as with the marketer’s strategy. This stands in contrast to cost-based pricing,
determinants of whether
the firm should be in the
which is often (and mistakenly) used in business-to-business marketing.
business in the first place. Cost-based pricing runs the risk of losing profits or pricing too high for the
(See “ParkerHannifin market.3 Costs are important in determining profit levels from different pric-
Discovers Value Pricing,” ing alternatives, and they matter when downward pressure on prices puts
below.) price level in jeopardy of falling below costs. Beyond these considerations,
Suppliers creatively combine

components of the total offering that Elements of the
contribute to value for specific Offering:
customers. Components will vary
depending on specific customer Product
needs and the customer’s cost
Service
structure.
Image
Availability The customer perceives price as a
cost in its offering. While some
Quantity customers will be able to directly
fund purchases, others will require
Evaluated financing assistance (GE Credit
price Corporation finances customer
Value Activities purchases). Other customers may
Value Value require JIT delivery while others
enabling creating may find value in the brand or
image of a particular supplier,
particularly if that image can add
value to the final product (Intel
Inside).
EXHIBIT 10-1 Components of the Offering
cost has little to do with price.4 When profitability is threatened, marketers need to under-
stand what costs are relevant and what consequences will result from setting prices at levels
near cost levels; but different stakeholders within the supplier organization may have different
perceptions of what those costs levels actually are. Usually, though, costs
The total offering is the
should have nothing to do with setting price levels. When price and cost are offering that provides a
not supportive, the imbalance is usually a symptom of a larger, strategic complete solution to the
problem, not a tactical difficulty. buyer’s needs. This may
include financing,
Pricing to Reflect Customer Value delivery, service, or,
based on the buyer’s
To set prices, the marketer must understand the way customers perceive value. preference, only the core
This is more complex than simply charging what the market will bear. It product. Different
customers may have
involves balancing the concerns of customer value, supplier profitability, customer different views as to what
goodwill, and long-term relationships. At the core of these considerations are the value of the total
the customers’ perceptions that there is a price that is appropriate for the bene- offering is, depending on
fits customers will receive from the offering and that there is a maximum price the value each customer
that they will be willing to pay for that offering. places on items of value
beyond the core product
Recall that customers evaluate the value of an offering by considering (see Chapter 1).
both the benefits they receive and the costs they incur from acquiring some-
thing offered. Part of the cost consideration is the price paid for the total The evaluated price is the
offering. The other part is the cost of acquisition and use of the product or price of the offering, from
the view of the customer,
service that is acquired in the offering. We have combined these two elements after all costs associated
of cost into what we call evaluated price. Evaluated price can be very differ- with the total offering are
ent from the price that is charged or the value exchanged. Exhibit 10-2 evaluated.
• Actual price paid/value exchanged at time of purchase (viewed as cost by customer)

• Cost of locational convenience, that is, shipping and associated costs
• Handling and storage costs incurred by customer, that is, refrigeration and other environmental
requirements, training for special handling, obsolescence, damage, inventory shrinkage, other
logistical costs, etc.
• Inventory financing/holding costs
• Environmental impact/disposal costs or value
• If capital equipment
• Financing
• Customer installation costs
• Installation, maintenance, and facilities costs
• Cost of obsolescence/removal/disposal of old equipment
• Employee/operator retraining
All of these costs are arguably quantifiable. Additional factors, value image, goodwill, reputation, and so
on, are less quantifiable but also significantly contribute to the customer’s view of evaluated price.
EXHIBIT 10-2 Potential Costs Considered in Evaluated Price, as Considered from the Customer’s View
describes some potential costs included in the evaluated price. Note that many of these costs
occur over the life of the product, not at the time of initial purchase. Exhibit 10-3 describes a sit-
uation in which a comparison of the charged prices of two raw materials shows a big advantage
for the first material. However, when the evaluated price of the two materials is compared, the
second material comes out the clear winner.
The customer considers value to be the difference between benefits and evaluated price.
For the customer to continue to consider the offering as a viable alternative, the difference
How do you convince a customer to substitute a higher-priced product for a low-priced product? Value.
Consider the experience of manufacturers that use small motors in their products—in particular, small
appliances and power tools. Historically, these small motors were manufactured with die-cast metal frames.
Simply stated, die-cast metal parts are essentially the result of molten metal poured into a mold, cooled, and
then removed from the mold. The metal raw materials used often cost very little, say $.50 per pound.
Suppose you are the field marketer for a company that makes engineering plastics. (Engineering
plastics are not like the disposable “picnic” plastics. Engineering plastics have physical properties that
make them a viable substitute for metals in many applications.) Your next development effort is to work
with a major manufacturer of small appliances to convince the manufacturer to switch from metal, at
$.50/pound, to engineering plastic, at $2.50/pound. How are you going to pull this off? The place to start
is by knowing your customer’s business and having a credible relationship with stakeholders in the buy-
ing center. You see, when the total offering is examined, the plastic is cheaper than the metal. How?
When die-cast metal parts come out of the mold, they have a very rough surface. Motor frames
require smooth bearing-like surfaces at many points. This means the metal part must be put through a
machining step to make each critical surface smooth. Motor frames also must have ways to attach other
parts to them—casting cannot produce the necessary holes with screw threads; another machining step
is required for each hole or screw thread. The metal part still is not ready to be a motor frame. Many
metals rust. (Even if a zinc alloy, corrosion may be a problem in some applications.) A surface treatment
may be necessary to prevent rust or corrosion. If the design is such that the motor frame is part of the
EXHIBIT 10-3 Evaluated Price—Where Does Value Come from?

appliance housing, it will require an aesthetic coating or paint to match the design of the appliance.
Several steps are necessary to create a usable motor frame.
Plastic parts are made by melting the plastic and injecting it, under pressure, into a mold. The
nature of the engineering plastic is that it will flow into tiny details in the mold. Intricate designs are
possible, reducing the number of other parts that must be attached; they get molded as part of
the motor frame. What screw holes are still required are molded in at the same time. Engineering
plastics will not rust and can be colored before molding; no painting of finished parts is required. The
motor frame is finished when it comes out of the mold.
The $2.50/pound material creates a less expensive part than the $.50/pound material, though a
view based strictly on material price would have never recognized the possibility. The total offering
approach builds real value for the customer and new business for the supplier.
Today, the majority of all small power tool and appliance motors are made with engineering
plastic frames. That new business was translated to many manufacturers and is now the accepted way
to build small motors.
Note: Apologies to engineers familiar with these manufacturing processes for our simplification to create
academic clarity!
between benefits and evaluated price must be positive; the evaluated price cannot be considered
to be more than the benefits.
Exhibit 10-3 shows the evaluated price compared to the benefits and how customers make
choices from competing alternatives based on value. After the customer determines the value of
each offering, she makes a selection based on which alternative she perceives to offer the most
value. Suppose a company was considering contracting with a computer systems supplier for an
automated ordering system; the company’s employees could order their own systems interactively
through an online catalog. The customer has the option of installing a system in which users can
order from a constrained list of options. Alternatively, the supplier can establish an ordering process
in which users have far more choice in the hardware and software they can order. The benefits of
the second option—the one with more choices for users—make it appear to offer more benefits
than the first. However, the evaluated price of the second option might be high enough to make the
first option more attractive; in the second option, users might order desktop systems with such a
wide array of hardware and software that the customer’s IT department would incur a huge cost in
integrating all the systems into its network. The end result would look very much like the situation
depicted in Exhibit 10-4, in which the option with the lower benefits might have the higher value.
If the marketer understands the customer’s situation, then she can structure the offering so that a
calculation of benefits minus evaluated price works out best for the customer.
So what is the maximum price that a marketer can charge for her product or service?
If there is no competition, it is the price at which benefits are just noticeably more than the
evaluated price, that is, the point at which there is a noticeable value for the offering. If the
marketer wishes to establish or maintain a relationship with customers, then she will probably
charge a price at a level where customers believe they are getting a “fair” price and are willing to
work with this supplier in the future. This “fair price” level may be somewhat nebulous, but, if
the marketer knows well the beneficial value of the offering as well as the customers, she will
have a sense of where this price stands. If there is some sort of competition—and there usually
is—the customer will likely use the price charged by competitors as a reference point. If the
marketer’s offering creates more benefits than the competitors’ offerings, then customers will be
“A” has more value; customer chooses “A”

though “B” has more total benefits
$ Equivalent
Value Total
benefits
Total
benefits
Evaluated Evaluated
price price
Value
Value
Offering A Offering B
EXHIBIT 10-4 Customer’s Perception of Value and Evaluated Price
willing to pay a premium; if not as much as competitors’ offerings, then customers will be only
willing to pay a discounted price. Again, the marketer must have a good understanding of
customers’ perceptions to know how much premium or discount is appropriate.
Most pricing situations involve setting prices below the maximum that can be charged,
but not all situations. Whenever a supplier is engaged in a single transaction in which future
relationship is not an issue, or when the supplier is expected to extract maximum revenue from
Parker Hannifin Discovers Value Pricing
Parker Hannifin was founded in 1918 as a manu- price. If a product development led to an improved
facturer of hydraulic brakes for trucks. Today, version, the same standard markup applied. This
Parker is a leading producer of over 800,000 indus- scenario was true throughout Parker Hannifin, which
trial components used in everything from space had revenues near $10 billion.
shuttles to ocean-going vessels. In 2001, Donald Mr. Washkewicz ordered a complete cor-
Washkewicz became CEO, having risen through porate review of every price. He established a new
the ranks from his first employment with Parker as senior position for pricing and employed many
a college graduate. Like many U.S. manufacturers, outside consultants. There was, of course, push-
Parker faced increased global price competition as back from managers accustomed to the traditional
well as price pressure from customers. process, so much so that Mr. Washkewicz created
Parker Hannifin pricing policy was straightfor- a list of the fifty most common reasons why his
ward—determine cost and add a standard markup— strategy wouldn’t work. He told company man-
usually about 35 percent. Managers with price agers that if they could come up with an original
authority loved it—it was easy and it gave them a reason, he would listen; otherwise get on board.
degree of price autonomy. Unfortunately, the stra- The result: since 2002, operating income increased
tegy was completely unrelated to customer value. If by $200 million, helping net income to soar from
Parker developed a way to lower the production cost $130 million in 2002 to $673 million in 2007. In
of a part, the lower cost translated directly to a lower the same period, Parker shares rose 88 percent.
(continued )
How? increases of 10–20 percent on fifty different items

Price to value. All items were placed in one of five and rebid the parts from Hannifin competitors. Of
categories. “A” items were high-volume commodity- the fifty parts, the customer ended up switching
like products where there was at least one large direct only three items to competitors. Parker had been
competitor influencing market prices; “B” items were under-market on forty-seven of the items. In another
partially differentiable products where differentiation instance, Ingersoll-Rand Co., maker of the compact
added value for customers, and so on, through “E” “Bobcat” line of loaders and excavators, objected
items that were special custom-designed or “legacy” when the Parker price for its new hydraulic fan
products only available from Parker Hannifin. Services motors was higher than expected—enough that
such as customization of products, customer education, there was a “CEO to CEO” conversation. However,
special delivery factors such as location and timing were in the end, Parker showed that the new item,
considered as value-added elements for the customer. designed for the application, replaced eleven sepa-
Parker discovered that about a third of its products fell rate parts, fit in a smaller area, was easier to install, and
into niches where there was limited or no competition. eliminated several hydraulic connections, reducing
Customers whose purchase price went up the risk of leaks. The customer’s evaluated price
were not happy, though many understood the new significantly favored Parker. (See Exhibit 10-3, Where
approach. (Customers of generic items appreciated Does Value Come From?)
the new lower prices, such as a 15 percent decrease
in hydraulic replacement filters.) In one example, a Source: Timothy Aeppel, “Seeking Perfect Prices, CEO Tears
manufacturer of auto engine components balked at Up the Rules,” The Wall Street Journal (March 27, 2007).
a transaction, the supplier can maximize profit by charging at the point where value to the
customer, minus the price, is zero. The electric power market of the early 2000s illustrated both
the situation and the limits of this practice. The United States’ power-generating capacity had
reached a point where spot shortages occurred. Distribution systems had to buy power on the
wholesale spot market and prices for this power can be extremely high. Accordingly, high costs
of power were passed on to ratepayers. Suppliers, however, faced regulatory and judicial review
of these pricing practices. The end users’ representatives pursued investigations into price
“gouging”—unfairly taking advantage of the shortage—that might have been done by some
suppliers. In several of these cases, end users won judgments against these suppliers.
A VALUE-COST MODEL OF THE CUSTOMER Business customers purchase products and services
to aid in the creation of value for their own customers. A marketer working for a supplier can bet-
ter understand the price the customer will be willing to pay by understanding her customer’s own
value chain in a value-cost model. The value-cost model is a diagram of the customer’s value chain
showing the key elements that contribute to value for the customer’s customer and the key elements
that contribute to the customer’s costs. The supplier’s marketer might want to diagram the way that
the customer creates value, that is, to map the value chain used by this customer. When several cus-
tomers in the same market have a similar value chain, a value map can be used as typical for that
segment. If the customers in the market vary considerably in their value chain configurations, the
marketer may want to map out typical configurations for the market segments that are identifiable
and, to whatever extent is possible, understand why participants in the same market have dissimilar
value maps. The main idea is to understand what activities are done by her customers that are
linked together to create value.
Once the marketer has a sense of her customers’ typical value chain, the marketer needs to
overlay the costs that her customers incur in performing these activities. Working backward from
$ Equivalent Customer view—

Value Maximum
worth of A
Competitor’s
Price for B
Maximum
Acceptable Price per
Price Range Unit for A
Cost
Minimum
Price per
Unit for A
Attributable Competitor’s Offering A

Cost Per Unit Offering B
Offering A
EXHIBIT 10-5 Maximum and Minimum Price
Revenues are simply the the revenues obtained by customers, the marketer can see what activities subtract
actual price received for the most from her customers’ profitability. By paying particular attention to the
the product multiplied
by the number of items
point in the value chain at which the marketer’s product or service enters into the
sold. customer’s value chain, the marketer can approximate how important the product
or service is to the customer’s creation of value. The level of importance in the
overall customer value map will be an indication of what the customer can afford and how sensi-
tive the customer is likely to be to changes in the supplier’s price. (See box “Parker Hannifin
Discovers Value Pricing.”)
Customers’ perceived value, relative to competitors’ offerings, establishes the appropriate
price to be charged. Customer-oriented pricing, then, is based on an understanding of these
perceptions held by the customer. The lower the price charged, the greater the value as perceived
by the customer. However, there is a minimum price that can be charged. In the long run, the
minimum price is a price that covers the supplier’s relevant costs (see Exhibit 10-5). Contribution
to profitability comes from setting a price higher than the level at which relevant costs are just
covered. The question becomes, then, what costs are relevant?
RELEVANT COSTS
Think of ongoing costs To understand which costs are relevant in the calculation of profitability, the
and ongoing revenue as marketer must think in terms of paying for ongoing costs out of ongoing revenue.
the cash flow associated
It also helps to think of the act of setting price as a strategic decision. In thinking
with the incremental
activities required about costs, we are only concerned with the costs that are consequences of that
specifically to offer the decision. Thus the timing of when pricing decisions are made has much to do with
product or service in what costs are relevant. Relevant costs are those that meet the following criteria:5
question. Revenues from
the product are reduced Resultant
by only those costs Realized
directly attributable
to the product. Forward-looking incremental
Avoidable
Resultant costs are those costs that result from the in-process decision. Pricing is often
part of a decision that affects two or more of the four Ps. For instance, pricing may be part of
the launch of a new product, so a pricing decision is part of a decision to pursue development
and launch of a new product. In this case, the relevant costs are those associated with the devel-
opment, manufacture, marketing, operations, and partnerships done or formed because of the
new product. If the marketer is only going to change price, the relevant costs of this decision are
the costs of continuing to offer the product. The de facto decision is whether to continue or not
and thus the resultant costs are those involved with going forward.
Realized costs are actual costs incurred. Not included are costs that are allocated for
accounting reasons but are not directly traceable to the decision being made. Thus overhead costs
allocated based on accounting averages are not “real” costs and are not relevant. However, actual
increased costs that are attributable, such as the number of staff, production equipment, office space,
and utilities, are relevant as long as they are attributable to the decision being made at that time.
Forward-looking incremental costs are the costs that will be incurred (forward looking)
for the next unit or units of product or service that will be sold when the decision is implemented
(the costs of the incremental units); that is, they are the next costs to be incurred. For instance,
suppose a new product has been on the market for six months when the competition drops its
prices significantly. If we dropped our price to match the competitor’s, the price would drop
below the level where it is recovering each new unit’s share of the R&D previously expended on
the product. This R&D cost would not be relevant for decision making because it is not forward
looking. Consideration of incremental costs defined in this way ensures, again, that the actual
costs resulting from the decision will be considered.
Avoidable costs are those costs that would not be incurred—that is, costs that would be
avoided—if the decision were not made, for example, if the product or program were not
launched. Avoidability becomes a concern when the marketing manager is considering a price
reduction. The manager must determine at what point the price does not cover costs. Suppose
that a product manager is considering matching a competitor’s price reduction on certain product
models. In calculating the price at which the revenue is too low to cover cost, the manager’s
salary is unavoidable (assuming he remains employed). Accordingly, the product manager could
drop the price below the point where the product manager’s salary would be fully recovered.
This may seem counterintuitive, because any manager wants to cover all costs. Think
about the example shown in Exhibit 10-6. Suppose the product manager, Bill, gets paid a
salary of $100,000. Suppose also that Bill will not be fired, even if his product, Product A, is
discontinued—the cost of paying Bill is unavoidable (he is employed notwithstanding the
success or failure of Product A). Now suppose Bill expects that he will sell 100 units of Product
A, that is, if you spread the cost of Bill’s salary across the 100 units, each unit will cover $1,000
of Bill’s salary. Suppose also that the other costs (incremental, attributable, and avoidable)
are $6,000 per unit. And suppose that the original price of Product A and its competitor is
$10,000 per unit.
Now the competitor comes along and drops the price on his product to $6,500, which is
$500 below the price at which Bill’s salary is fully covered. Assume that if Bill matches the price
cut, he will still sell 100 units (but if he does not fully match the price cut, he will sell no units).
The profit calculation would go as follows:
Revenue = 100 units ⫻ $6,500/unit = $650,000.

Total cost = [100 units * ($6,000 per unit)] + $100,000 [Bill’s salary] = $700,000
Total profit (loss) = $650,000 - $700,000 = ($50,000)
Original
$10,000 Price
Original Minimum Price—

Profit New Price $6,000
$7,000 $6,500
Allocated Below $6,000, you lose
$6,000 Cost of Manager’s more $ with each
Salary— Contribution to additional unit sold
“unavoidable” Cover Manager’s
Salary
Attributable
Costs
Price Cut “A”—this is still OK Price Cut “B”

EXHIBIT 10-6 Price Cut Example—How Low Can You Go?
This is still a smaller loss by $50,000 than the company would have lost if it discontinued the
product or did not change the price (in either case, the company’s revenue would have been $0,
since no units would have been sold) and thus lost the whole $100,000 it will pay to Bill. Following
this logic, Bill could cut his price on Product A down to $6,001 and still contribute something to
cover part of his salary, reducing the loss. If he prices below $6,000, the loss goes higher than
$100,000 and the company would have been better off just discontinuing the product. In other
words, as long as Bill’s salary is unavoidable (covered as a result of other profitable products man-
aged by Bill), it is irrelevant to the incremental pricing decision. Any cost that will be paid anyway,
regardless of the decision made, is similarly unavoidable and irrelevant to the decision.
Contribution Analysis
Contribution margin From the supplier’s point of view, price needs to be set in such a way that con-
can be viewed as the tribution margin is positive. Contribution margin for a product (this could also
difference between be for an offering, for a new marketing program, or for a customer) is the
ongoing attributable
costs and ongoing
revenue less the avoidable costs that are directly attributable to the product in
attributable revenue. question. It is called contribution margin because it represents the portion of
revenue that “contributes” to coverage of fixed costs, indirect costs, and profit,
that is, value in excess of variable and directly attributable costs. Contribution margin is calculat-
ed as shown in the following equation:
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)
Marketers need to be careful in deciding which costs are relevant and which are not. If, for
instance, the accounting department has given you a standard percentage that is “your share” of
overhead costs or indirect costs, it is not a relevant cost for contribution margin calculations.
Demand Functions and Pricing

All of the preceding discussion has dealt with pricing on a “per unit” basis. The marketer is inter-
ested, though, in the effect of the offering and marketing program on total sales and profits in the
market. The concepts of demand, equilibrium prices, and elasticity—often presented as the foun-
dations of pricing management—are conceptually useful but largely impossible to quantify and
use in real-life situations. In practice, marketers generally do not have enough time or data to
fully analyze demand-price effects and so must use assumptions and quick approximations to
make informed decisions. The theory does generally help understand market behavior, even if
exact forecasts cannot be made.
Recall from your economic principles course that a demand curve shows what quantity
of products or services will be sold in a market at different price levels. An industry supply
curve shows how much product will be produced in an industry at different levels of price (see
Exhibit 10-7).
In theory, the intersection of a demand curve and a supply curve (the sum of individual supply
curves for firms in a given market) gives the equilibrium price and quantity of products in that
market.6 This equilibrium point is a theoretical state or condition that markets will tend to move
toward. When a marketer is looking to set prices for the first time for a new product or for a product
entering a new market, an estimated demand curve could, in theory, help assess what sales to expect.
The problem with this approach is that demand curves and supply curves are abstractions
that often defy estimation. Because demand is derived in business-to-business markets, fore-
casting demand at different market prices is a herculean task. Supply curves are difficult to
forecast as well, due to the complex interplay of input costs and the uncertainty about what
competitors will actually participate in a market. Instead of estimating a demand curve, it is prob-
ably best to get a sense of what a majority of the customers project they will buy in the foreseeable
future as well as attempt to get a sense of how sensitive to price they are. This provides a “limited
version” of a demand schedule over a narrow range; this is about the best that a more rigorously
estimated demand schedule could do in contributing to decisions on pricing in any case.
Demand Supply
Price
P1
Elasticity at P1Q1
(Slope of demand
curve)
Q1 Quantity
EXHIBIT 10-7 Demand and Supply Curves
The concept of elasticity is useful when thinking about the effects of a price change; how-
ever, the context of business-to-business markets must be kept in mind. Elasticity refers to the
tendency of demand to react to changes in price; generally higher prices yield lower demand, and
vice versa. In business markets, there is likely to be a significant difference between short-term
and long-term demand. In the short run, a customer may have little choice but to stay with its
initial order because products and services purchased, often incorporated by design into the cus-
tomer’s offering to its customers, are so dependent on one another. Thus, when a marketer raises
prices, the customers are not likely to change their demand level much in the short term.
Choosing instead to maintain the relationships they have built in their markets, they suffer lower
profits for the time being. However, in time, a customer’s product and production plans can be
changed to revise its input combinations. This, then, results in lower demand (or no demand) for
the marketer’s offering. In the short term, business-to-business demand is inelastic; in the long
term, it can be very elastic.
Another difference between short-term and long-term elasticity occurs because of
switching costs and derived demand. Think back to the example in Exhibit 10-3. Suppose the
manufacturer of small motors was faced with a sharp price increase in metals. In the short run, to
continue to meet its commitments to its customers, it might be very difficult for the
manufacturer to switch from zinc to plastic as the material for the motor frames. The manufac-
turer would pay the increased cost of the zinc. The manufacturer would probably not reduce its
quantity purchased either, since that amount depends on the demand for small motors. In the
short run, the manufacturer absorbs most of the increased cost of the materials but begins seri-
ously looking for alternatives. The price of the metal has approached the maximum price that the
manufacturer is willing to pay. After an investigation of the price and costs of alternatives—in
this case, the evaluated price of the plastic alternative, the manufacturer undertakes the switch.
So, while the short-term reaction to price is inelastic, in this case, the long-term elasticity reflects
“on-off” demand. Once the evaluated price has exceeded the relevant maximum, the buyer sim-
ply, through replacement of the product, “turns the buying switch to off,” ceasing her demand for
the product. (Note that in this instance, the zinc metal is replaced by plastic—not another metal.)
A short-term reaction to a price decrease followed by a long-term reaction may be just the
opposite effect. Suppose an office supply dealer reduces prices on printer paper (passing through a
reduced cost from paper suppliers). The dealer’s customers may react quite noticeably, buying large
quantities of paper, particularly if they believe the price will increase again in the near future. They
are simply stockpiling extra paper when it can be purchased at a low price, pulling future demand
into the present. The primary impact has been to temporarily move product through the channel at
a faster pace The customers still use the paper at the same rate, or nearly so, even if the price
remains low. Just because the price of paper is lower does not mean customers will write more or
longer documents.
In addition to concepts of demand and elasticity, it is important for the marketer to
consider competitive reactions to price changes. Just as it may be easy for a company to change
its prices, it is probably equally easy for competitors to do so. A price cut to take away business
from competitors may simply be matched or exceeded by the competitor, resulting in lost margin
for all with little shift in market share. Firms are particularly susceptible to this trap when a
product has passed through the maturity stage of the PLC and market sales volumes decline. Cuts
in price may have little effect on overall number of units sold. Any increase in sales will come at
the expense of a competitor, which can be expected to vigorously defend its market share.
To anticipate competitors’ price reactions requires an understanding of their cost structures
and their tendencies to participate in industry price changes. In the Intel example, Intel was
anticipating that competitors might not be willing to fully match price cuts.7 If the competitors
do match the price cuts, Intel is counting on them to suffer more than Intel from the lost
profitability.
In summary, there are several lessons that the marketer can take away from the economic
fundamentals of price:
1. Demand levels will be different at different levels of price; different market segments will
have different price sensitivity based on segment members’ perceptions of the benefits from
the product or service in question: in most markets, one price does not fit all segments.
2. Changes in price yield reactions from customers, which are different in the short term from
their long-term reactions: short-term reactions are usually constrained by customers’
situations; longer-range reactions allow greater flexibility. In other circumstances,
customers may shift the timing of their expenditures in response to short-term price
changes; their longer-term reactions may show less elasticity.
3. Changes in price will yield reactions from competitors: It is important to pay attention to
their communications as well, since these may give clues to how they are viewing the
market, prices, and other pressures that may influence future actions.
MANAGING PRICE AS PART OF MARKETING STRATEGY

These ideas form a framework for thinking about pricing, but at some point the marketer must
take what is known and what is assumed about customers and competitors and she must make
price decisions. Again, the principal price decisions are what prices to set, how to change
prices when necessary, and what the other elements of pricing should be—payment terms,
financing, and so on. Pricing is situational, depending on strategic purposes and market
circumstances.
Internally, price is a part of positioning, so the marketer must set prices to be consistent
with the other elements of the offering for positioning purposes. Beyond its role in positioning,
there are several strategic purposes for which pricing is a crucial element. The marketer will want
to use price to obtain specific reactions from customers, competitors, distribution channels, or
from the direct sales force. The instances we discuss are pricing to introduce a new product,
pricing to use the experience curve or learning curve to achieve advantage, and pricing when
engaged in translation segmentation. Before getting into the discussions of these circumstances,
though, it is necessary to discuss the strategic context for pricing decisions.
When the marketer makes price decisions to address a change in competition, to win over
certain customers, or to achieve some other short-term objectives, pricing is being used as a
tactical tool. Price is a marvelous (and dangerous) incentive for motivating customers to take
action. As a tactical decision, marketers will need to decide what discounts will be given, to
whom, and how. Other price conventions also need to be observed. In many markets, customers
choose suppliers based on competitive bidding. Another tactical issue is how to approach changing
prices to reflect market conditions. All these tactical issues in pricing are discussed in the section
of this chapter that follows managing price as part of marketing strategy.
Strategic Context of Pricing

Setting prices to achieve strategic purposes takes place within the context of the business envi-
ronment and the strategy chosen to address that environment. As shown in prior chapters, pricing
is examined through the PLC and the TALC. The environment, however, does not fully define
the strategy to be taken. Companies have choices of what sorts of strategies they will follow.
Accordingly, how pricing contributes to different kinds of purposes or objectives is examined.
PRICING OBJECTIVES As previously discussed, the strategic management process sets out
objectives and strategic purposes for the firm to address. In setting objectives for marketing
strategies and programs, the marketer will realize that some objectives are addressed directly
with pricing strategies. These objectives have come to be called pricing objectives, but are
really broader objectives in which price plays a key role; other marketing elements are usually
key components as well. Exhibit 10-8 shows several objectives whose achievement depends
on pricing.
The marketer must address the first two strategic purposes—achieving a target level of
profitability and building goodwill in a market—no matter what. Price levels must obtain enough
revenue volume and margin to satisfy the company’s strategic concerns. The marketer also needs
to determine pricing that is consistent with a desired level of goodwill or relationship building.
As noted earlier, there is a maximum price that customers will accept for an offering. Generally,
even though customers agree to pay this price, they will not subsequently enter into a close rela-
tionship with the supplier that charges such prices because they believe the supplier is exploiting
their need. If the marketer wishes to develop relationships with customers, price levels must fall
within ranges that are acceptable or attractive to the customers.
For each of the purposes listed in Exhibit 10-8, it is obvious that there are other elements
of the marketing mix involved. For instance, in encouraging the sale of complementary prod-
ucts, the supplier must communicate so that the customer will know that the complementary
products are available and why, together, the products provide more value. Also, the com-
plementary products must work well together, implying that product design and execution are
also necessary. Availability implies some sort of channel support. In fact, for most of these
objectives, addressing them with price alone is usually inadequate, leading to lost sales and lost
profitability. Accordingly, the role of pricing in accomplishing those objectives, then, needs to
be understood. The following sections examine situations where price plays a key role in
achieving a strategic purpose.
Strategic Purposes
• 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
• 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
EXHIBIT 10-8 Several Marketing Objectives Addressed by Pricing

Pricing throughout the Product Life Cycle

and the Technology Adoption Life Cycle
Pricing is situational, depending on strategic purposes and market circumstances. Both of these
parts of the situation are heavily influenced by market evolution as the PLC and TALC progress.
Customers’ perceptions of needs and value change during this market evolution. Concurrently,
the competitive environment changes as well. Strategies—and the role of pricing in those
strategies—should evolve as the markets evolve.
As previously noted, life cycles for a product category, not for individual models or
incremental innovations within that category, are the context of PLC discussion. When a new
product category is introduced into a market, only the innovators—customers who accept
offerings early in the PLC—will be interested in adopting so early. When offering a new
product, the marketer is trying to obtain adoption from innovators (technophiles, if it is a tech-
nology product), who usually do not have big budgets and who do not really need the product
anyway; they just want to try it to see what it will do. At this early stage, few if any competitors
exist, so pricing can be set commensurate with perceived value. However, value may not yet be
readily apparent. (Recall the discussion of shadow and delusional products in Chapter 9; value
must be understood from the customer’s viewpoint.) At this early stage, pricing is constrained
more by customer perceptions than by competitive pressures and the objectives pursued by
marketers may focus more on learning about needs and building early references than on
creating cash flow.
In the next stage of adoption, the offering is usually custom-built and is still undergoing
rapid improvement in design and performance. Pricing has to accommodate several competing
purposes. To some extent, the supplier may try to obtain trial and will want to price for penetration.
In these circumstances, customer organizations usually provide a forecast of usage that the
supplier can use in financial and capacity planning efforts. The supplier is also trying to pay for
ongoing R&D costs, plus customization costs and training costs. If the design and development
process has not been part of a collaboration or partnership between the supplier and the
customer, then R&D, customization, and customer training will tend to push the price up.
Unfortunately, if this occurs, the development may have occurred in isolation, away from the
continuous feedback process described in Chapter 8 as necessary for successful new product
development. Visionaries will also see the new product as something that can provide a com-
petitive advantage in their business and so will tend to place a high value on it, justifying relatively
high prices. Still, there is often a desire to learn something about the technology and the market,
so the marketer may be asked to reduce price in exchange for learning (see Pricing in Translation
Mode, below). In general, whether the product is a system, a component part, a material, or a
service, volumes will be low and development costs will still be high. Pricing at this early stage
will tend to be relatively high.
In getting across the chasm, or the market development gap, the first pragmatist buyers
may need additional incentive to spur adoption of the product. Beyond these initial pragmatist
buyers, though, the dynamic interaction of market segmentation, price sensitivity, innovation,
competition, and marketing strategies can send pricing in many different directions. In some
markets, rapid growth may be spurred by reductions in pricing. In segments where the marketer
encounters competition, price will have to be set to reflect the competitive pressures, pushing
price levels down. In technology markets during the growth phase, as standards emerge, the
dominant players will be able to price their products at a premium, since their products will
have more value. In other market segments, growth may be so rapid that even with several
competitors, there is no great pressure downward on prices, at least until growth slows. At the
end of the growth period, but before maturity, competition will generally become more intense
and will tend to drive prices down. During this period, product differentiation opportunities
begin to disappear. Bloomberg is a company offering a service that may be reaching this stage of
the life cycle. See the description of their situation in the box, “Bloomberg’s One Size Fits All,”
and consider whether they will have to change their strategy, including their pricing.
Two key drivers are at work: the drive to integrate features to improve performance and the
drive to reduce costs. Intel is a good example of a company that has pursued both improvement
directions simultaneously. They have built communications, graphics, and memory cache
capabilities into their chip sets. Meanwhile, they have pursued production efficiency impro-
vements and labor cost savings to drive costs down. This approach worked very well for the
market segment of customers who were not likely to upgrade their computers but were more
likely to purchase a complete replacement. This segment consisted of those who wanted comput-
ers of high volume, low cost, but with limited upgrade capability and flexibility.
As the market evolves into maturity, there is often a consolidation among participants. The
structure of the supply base begins to appear oligopolistic. A few dominant players begin to
exercise the ability to control (or, at least, strongly influence) the market. The dominant suppliers
control pricing and often they do so by investing in productivity enhancements that enable cost
reductions so that they can drive prices lower. A current trend in business markets to accomplish
this is the outsourcing of technology development. Companies will find low cost sources of
undifferentiated product or service modules. While cost leadership is important, there is a danger
of losing control here, perhaps outsourcing a process or technology that should be incorporated as
a distinctive competency of the firm. Performance improvement through technology integration is
Bloomberg’s One Size Fits All
Bloomberg LP is a private company that provides became evident. Reuters and some of the weaker
financial information to the investment community. start-ups took the brunt of the lost sales. It turns out
Money managers, corporate financial managers, that Reuters’ customer service was lacking to the
investment advisors, and Wall Street brokerages all extent that when a customer could no longer sub-
obtain detailed analysis from Michael Bloomberg’s scribe to both Reuters and Bloomberg, they generally
empire. Bloomberg started the business in 1981 chose to eliminate their subscription to Reuters.
and has built it into the leader in the industry. During this period, Bloomberg’s sales actually
Bloomberg’s clients have a private con- increased while Reuters lost sales. Bloomberg was
nection to the financial network. The data and actually able to increase its price by $100 per month.
analyses are displayed in real time on a personal
computer at the end of the network wire coming Sources: Based on Tom Lowry, “The Bloomberg Machine,”
into the business. The price was a flat $1,285 per Business Week (23 April 2001), pp. 76–84; Charles
month fee per terminal during the late 1990s. Goldsmith, “Reuters Banks on Messaging—Company
Competition from net start-ups and from Reuters Hopes Service Will Help It Regain Edge Lost to Rival
arose in the late 1990s. Prices for these compe- Bloomberg,” Asian Wall Street Journal (October 15, 2002),
p. A10; Charles Goldsmith and Kay Larsen, “Reuters
titors were generally lower than Bloomberg’s, but
Group Faces Up to Its Own Bad News and Financial Data—
the quality of the information still made Bloomberg Squeezed by Rivals, U.K. Company Tries to Revamp Culture
the preferred alternative. and Content—Yankee Boss on London’s Fleet Street,” Wall
As the economy entered recession in 2001– Street Journal (Europe) (February 18, 2003), p. A1; David
2002, the financial services industry took a serious Litterick, “Cost-Cutting Puts Reuters into Black,” The Daily
downturn and the real value of Bloomberg’s service Telegraph (London) (February 18, 2004), p. 32.
an important source of competitive advantage at this point in the PLC. When a company
outsources a portion of the technology, even if it is not core technology, it runs the risk of losing
its ability to fully integrate the technology with other parts of its products and, hence, it loses a
portion of its unique value.
Pricing during maturity depends upon how much the supplier can differentiate its offering.
Since product features offer little chance for differentiation, much of the possible differentiation
arises in the relationship between the supplier and the customer. If the supplier can create this
non-product differentiation, it can charge a price that earns something of a premium. If its rela-
tionships are not strong or cannot be strengthened, the supplier needs to be able to drive costs
down to stay competitive and profitable.
As the market moves into decline, pricing depends upon the market segments still served
and the number of suppliers still competing for a piece of the pie. Because of unique switching
costs, some users may continue to use old equipment or supplies from an earlier era. A premium
price may be possible for such customers, but there is an upper limit set by the switching costs.
Other customers will stay with older products as long as they can get a low price. Depending on
the supplier’s cost structure, it may still be profitable to serve these customers.
Price Models
Different price models are often traditional in some businesses—consider the “standard”
markups used by many wholesaling and retailing organizations, called “cost plus” pricing.
Penetration pricing, discussed below, is often the price model used by a firm that has a business
strategy of maintaining a “low-cost producer” position in its markets. Which came first—the
penetration scenario or the low-cost producer strategy? With the range of pricing options so
wide, it is important for the marketer to understand what circumstances favor the differing
approaches.
Setting price is sometimes considered science and at other times, an art form. Software
programs aid in price determination through business and market modeling—all that is necessary
is that the correct data be input to the selected business model. Prices, arrived at through a num-
ber of factors, generally are either cost based or market based. Cost-based pricing, discussed
earlier, assumes that the costs associated with the creation of the offering, plus whatever margin
goals apply, will yield a final price that will be acceptable to the market and profitable for the
firm. Cost-based pricing, analogous to product or production-oriented views of markets, sees the
important elements of the value chain as those that benefit the firm. Cost-based pricing ignores
what level of value the customer perceives. (See the box, “Parker Hannifin Discovers Value
Pricing.”) Potential competitive activity in the market is easily overlooked, contributing to a
myopic view of the business. Market-based pricing is “standard” to the marketing concept and
market-driven, market–ownership oriented firms. As part of the product development, the value
of the offering as perceived by the customer is understood. The price is a major part of the
positioning strategy.
Penetration Pricing and Price Skimming

The PLC and the TALC will define the business environment the marketer faces and will influ-
ence the purposes the marketer pursues. When a supplier is introducing a new product ahead of
the competition, the introduction may be aimed at maximizing profit in the short run until com-
petitors overcome the supplier (which would be a purpose pursued by a nondominant competitor
in the earlier stages of the PLC); or it may be aimed at maximizing profit segment by segment as
the product achieves wider adoption (a purpose pursued by a dominant competitor in the late
growth or maturity stages of the PLC). Alternatively, the marketer may want to achieve a rapid
adoption by customers in which the supplier obtains a large, defensible market share (a purpose
pursued by a company in the growth stage hoping to become a dominant competitor).
Price skimming is charging relatively high prices that take advantage of early customers’
strong need for the new product. Since the benefits of the product are so attractive and/or important
to them, customers are willing to pay higher prices. Without competitors offering similar products,
the supplier can charge a skimming price and these first customers will pay the premium.
Penetration pricing, on the other hand, is charging relatively low prices to entice as many buyers
into the early market as possible.
Suppose a marketer is about to launch a new offering that provides superior value to com-
petitors’ current offering and believes that competitors will not be able to match the new offering
for several months at least. Penetration pricing would make sense if the marketer further believes
the following:
1. The market can be dominated by gaining early customer commitments.
2. Key large customers will commit early rather than waiting for a competitor if they believe
that they are getting the best price now.
3. A learning curve effect will result from early adoptions all coming to the marketer’s
company, allowing cost or quality improvements that give the marketer’s offering a com-
petitive advantage over forthcoming entrants.
Penetration pricing requires that a large group of customers are sensitive to low prices.
This is most prevalent in markets that have evolved enough for customers to understand the value
of an offering. In early markets, this may not be the case (see the earlier section on pricing
throughout the PLC).
If the marketer already dominates the market and serious competition is not likely to
materialize—either because of a dominant lead in technology or airtight patent protection—then
the marketer can set skimming prices that obtain purchases from the early price-insensitive
customers. After this segment has been largely sold, the next highest price-insensitive segment
may be addressed with a lower price; then the next, and so on, as if peeling the layers of an onion.
This is a profit maximization approach followed by many market leaders in the past. It has an
element of risk, though, if the market leader does not realize that some unforeseen competitor is
going to undermine this strategy. AMD was able to take advantage of Intel in the market for low-
end microprocessors in this way. Intel did not realize that the market would be so strong and
allowed AMD to undercut its pricing on the Pentium II and Pentium III with powerful but
inexpensive Athlon processors. Intel countered with newer Celeron processors, but only after
AMD was able to establish entry into the market.
Another circumstance calling for skimming prices is when the company wants to maxi-
mize short-term profits. It has a temporary lead in the market but does not expect to be able to
compete over the long term. This would be the case with a small company entering a market
ahead of the market leader, who is likely to be in the market within, say, six months. The small
company could make as much profit as possible by charging a skimming price for the most price-
insensitive customers. In the meantime, it is looking for the next market opportunity because it
knows the current situation will not last once the leader enters the market. In many circum-
stances, this company may end up selling the product technology or even the company to
the market leader. The generalized market conditions for the success of either skimming or
penetration pricing are summarized in Exhibit 10-9.
Price-skimming strategy
• 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.
• A low existing price level acts as a barrier against competition.
• Economies of scale in manufacturing as well as distribution are necessary.
EXHIBIT 10-9 Market Conditions Necessary for the Success of Skimming or Penetration Pricing
LEARNING CURVE EFFECT A special case of penetration pricing occurs Repetition leads to
when management in a company believes that competitive advantage can be learning more efficient
ways to complete the
achieved through running down a learning curve. The learning curve concept
same task. This is the
says that as more product units (or service units) are produced and sold, unit principle behind the
costs can be reduced through the learning that has occurred. As they obtain learning curve. Just as
experience, companies learn how to produce products with more quality; they with individual tasks, the
learn how to handle inputs more efficiently; they learn how to distribute more you do something,
the better you get at it
products more efficiently; and they learn how to provide service more effi-
(if not, why practice?);
ciently and effectively. organizations (teams)
The conditions for effective use of this strategy are fairly restrictive and will improve performance
relatively rare. through learning.
• There must be enough prospective customers, with high enough quantity demand, who
are price sensitive and who will adopt if the price is right. This suggests that prag-
matists must be ready to buy; any earlier in the PLC or the TALC, there may not be
enough buyers.
• There must be ample opportunity for learning to occur, and enough future demand for the
product that the learning can be of benefit.
• There must be sufficient time to learn. Learning is a function of both volume and time for
assimilation of new knowledge.
• There must be a sufficient lead over the competition to avoid direct price competition. If a
competitor can match price, then learning will not occur as fast and the competitor will
learn just as quickly.
• There must not be a competitor who will come along in the near future with a process
innovation that will start a new learning curve. If this occurs, the cost savings may not
be enough to match the unit costs for the competitor, no matter how much learning has
occurred. Meanwhile, the supplier on the original learning curve may have built up switching
costs to the point that it cannot easily adopt the technological innovation of the competitor
to pursue the new learning curve.
• If conditions are ripe for a learning curve strategy, the marketer must ensure that the
learning takes place. It is not enough just to set the low price and then sit back and wait for
nature to take its course. The marketer must meet with the relevant managers in the
areas of the firm where learning is to occur and obtain their cooperation in pursuing the
necessary process improvements.
CHOICES ARE NOT ALWAYS AVAILABLE Not every firm will have the plethora of pricing options
discussed. A small firm operating before the chasm will have neither the ability to manufacture in
large quantities—economies of scale—nor a market large enough to absorb the volume.
Technophiles and visionaries comprise most of the market for firms before the chasm. In these
circumstances, the company will likely view skimming as the only pricing scenario that can work.
As the firm approaches the chasm, new facilities and organizational development must be
concurrent with the development of expanded markets. As pragmatists become interested in the
offering, volume demands will increase, requiring new product designs capable of high-volume
production, larger sales and marketing team to educate and train potential customers, and an
expanded organization to support these needs—all typical of a firm about to cross the chasm.
These circumstances, combined with the entrance of competition in the new market, force a
reconsideration of penetration pricing.
Conversely, consider the large established (but still innovative) firm. If the new product fits
with existing manufacturing capabilities, the large firm likely will introduce the product with
penetration pricing. This assumes a product and corporate infrastructure that is immediately
across the chasm and an available pragmatist market. If the new product is significantly different
from current products—a disruptive innovation as perceived by the firm, the product may be
introduced using price skimming to technophiles or visionaries.
The second alternative above, a disruptive innovation using price skimming, is not a
natural capability of established firms with existing infrastructure and markets, particularly if
they are product driven. While the firm may, with ongoing R&D, have the new product mostly
developed and “on the shelf” it is unlikely that it will be introduced if it obsoletes the existing
offerings and manufacturing facilities. This situation often leads to what is called the “second in,
low cost producer” (or just “low-cost producer”). The large, established, market-oriented firm
will be aware of new developments in its market. The new, small “before the chasm” competitor
may enter the market with an innovative product using skim pricing. There is no motivation for
the larger organization to enter the market until the demand is proven—as the product crosses the
chasm. When this occurs, the large firm jumps in with penetration pricing and the facilities and
organization to support it. Thus, the large firm is not the first in the market, but upon entry is the
volume leader, without having risked the initial market introduction. A spin-off of this concept
occurs when the large company acquires the smaller company as the smaller company nears the
chasm. R&D costs are translated to acquisition costs.
Pricing in Translation Mode

One of the key ideas discussed in earlier chapters is that business-to-business marketers learn about
new segments through the process of translation—developing new markets for new business suc-
cesses. The supplier and customer will embark on a mutual development effort to see whether the
needs of the customer can be met reasonably and profitably. The marketer will need to negotiate a
price for the product and for the service of developing it. The customer will want to be credited for
the assistance it provides to the supplier in specifying the product, trying it and testing it under
varying conditions, and generally in providing the platform for launching a successful new busi-
ness. Successful translation efforts lead to established “list” prices for core offerings.
An alternative to pricing in this type of activity, particularly if there are many unknowns
and the parties are interested in quantifying risks, is to separate the components. First, the devel-
opment activity should be treated as a consulting service. However, the service cannot be
charged at a full consulting rate since the customer is, in effect, consulting back to the supplier
developing the product. The product itself can still be priced on a value basis. The price could be
set initially at a preliminary rate when the contract is first signed and then adjusted based on
value at some specified future date. Some part of the deal might be structured in a way that pays
the customer a royalty on future sales of the product to new customers.
Pricing for International Marketing Efforts

A key trend over the past twenty years has been the move to marketing of products across nation-
al boundaries. International or global reach raises some interesting pricing challenges including
how to set prices in different currencies and whether to charge global prices or prices that differ
by region or country.
The problem faced by companies operating internationally is that customers, competition,
and channel structures differ greatly from country to country. Market conditions may call for
lower prices outside the company’s home country, or the competitive situation may be such that
the company can charge higher prices and make more profit. Often the costs incurred in opening
foreign markets reduce contribution margins to the point where prices must be raised to make
any contribution at all; and, of course, these higher prices may or may not reflect the value
perceived by customers in the new market.
As a company does more and more business in foreign markets, it will face increasing
pressure to regularize its prices from country to country. The global customer will look to min-
imize its costs by buying products wherever the price and shipping costs are the least in com-
bination. They may negotiate to conduct a transaction for products or services in one country
and receive delivery at the location of usage. Smaller companies may also take advantage of
this cross-border arbitrage by buying through global distributors who accomplish much the
same purpose.
The problem faced by the marketer is similar to the problem of addressing multiple market
segments. Maximizing profit by addressing the segments separately only works when segments can
be separated from each other. If they cannot, at least relative to price, then the marketer must decide
how to address the combined segments as one market. To do so, the marketer needs to address the
portion of the market that is most important, given the company’s competitive position and its
goals. If this makes the price too high for other segments (geographic segments, in this case), then
the company must live with the meager earnings from these other segments. When conditions
change and the company can address the segments differentially, then the pricing strategy can
change accordingly.
MANAGING PRICING TACTICS

Companies face changing business environments that require fast reactions. Often, pricing is
the first thing that can be changed to fend off a competitive threat or take advantage of an oppor-
tunity. Business-to-business marketers need to keep in mind that the tactics employed must be
consistent with overall positioning and must still reach a balance between value for customers
and profitability for the company. The issues discussed here usually arise in business-to-business
marketing as a way to implement some strategic direction or to obtain a short-term reaction from
customers, competitors, channels, or the company’s own sales personnel and, thus, are tactical
in nature.
BUNDLING In business-to-business marketing, bundling is principally a tactical pricing move,

rather than a strategic one. Price bundling is when several products or services are sold together
as a package for one price. The reasoning behind bundling in consumer marketing is to create the
impression that the bundle has value and is a good bargain. It induces consumers to buy products,
services, or features that they would not buy when sold separately. In business-to-business
buying, the customer usually has information and professional purchasing personnel who know
what the bundled products are worth individually and who will attempt to bundle or unbundle
purchases as fits their need. Bundling is a way to sweeten a deal to close a sale or to move some
old inventory while minimizing transaction costs. In other circumstances, bundling of materials,
parts, or components can lead to serious price discrimination issues. Suppliers who consider
bundling to close a deal may find that, in the long term, they have compromised the price
structure integrity of one or more product lines.
Discounts and Allowances

Discounts and allowances are reductions in price for some special reason. Discounts are usually
given as a reward incentive for some action taken by the buyer during the transaction. Thus,
a discount may be given for paying promptly in cash or buying in quantity. An allowance is a
credit against price given to channel members in exchange for some logistical or marketing
activity that they perform. For instance, an allowance may be given for prospecting new
accounts, for providing after-sale service, or for advertising. The key is determining what needs
to be done to influence the final customer’s buying decision and then providing sufficient incen-
tive for the channel intermediary to perform the necessary activities.
The problem with discounts and allowances is that customers and resellers get used to
them and expect them. Communication that accompanies such reductions in price must be clear
that the reductions are offered only for specific purposes. Even so, powerful customers and
resellers may insist that the reduced pricing should be the norm.
Competitive Bidding
In many markets, the method of choosing suppliers is through competitive bidding. Participation
in markets that buy through bidding is a strategic decision for the supplier.
Suppliers are likely to face competitive bidding situations when the core product is indis-
tinguishable from the offering of direct competition. Many agricultural products (commodities)
and products that are in the mature stage of the PLC, when purchased in quantity, are sought
through competitive bidding. Competitive bidding may also be the format when a customer is
selecting a supplier for general use items such as office supplies. The contract that is awarded
may not be for specific items but rather for a defined set of terms for a specified period of time.
As different parts of the organization require those items, they are authorized to make direct
purchases as needed, often through a predetermined Web page.
Government agencies have perhaps the most convoluted bidding processes. Government
purchasing has an agenda beyond obtaining the lowest price. The bidding process is designed to
avoid favoritism to any potential supplier, creating a level playing field for all potential
candidates. Other requirements related to social agenda, such as location where the work will be
performed, the number and type of subcontractors, whether workers are unionized, and so on, are
often parts of the process.
Bidding can be arranged in a number of different ways, but two main types of competitive
bidding are common: sealed bid and open bid.8 Sealed bid, or closed bid, pricing involves
placement of private bids by prospective suppliers. Usually, the lowest bid wins the contract, but
not always. In many cases, the customer evaluates the total offering and chooses the supplier it
considers to offer the best package. In some cases, the customer provides feedback to bidders and
accepts revised bids. This begins to look a lot like open bidding; however, the customer may allow
significant time for revisions between bidding rounds. In open bidding, competing suppliers see
each others’ bids. The idea, of course, is to let competition drive the offered price to its lowest
possible level (or to drive the package of product and service benefits to its highest possible level
for a relatively low cost). If the bidding is limited to price offers and little time is allowed for
revised bids, the process begins to look like an auction. In a real-time auction, the customer also
benefits from the competitive emotions that build as the bidding progresses. The customer may
actually get a sizable discount that results from a supplier’s desire to beat a major competitor in a
public forum.
In sealed bid pricing, the marketing manager needs to do significant analysis in preparing a
bid. Since the customer usually specifies the amount of business it wishes to acquire, the sales
volume is usually a given. The supplier’s costs are usually a straightforward calculation based on
this volume. However, the marketer needs to be careful to consider ancillary costs, such as the
impact on production schedules or special training costs for service people. The creative part of
preparing the bid comes in determining the price level. This requires understanding the customer’s
perceptions of value to ensure that a reasonable price is bid. More important is having a sense of
how the competitors will bid. Past experience in bidding against competitors will provide some
sense of their proclivities in bidding relative to costs and perceived value. From this information
the marketer can construct a table of probabilities of the likelihood of winning the bid at certain
prices. Exhibit 10-10 shows a table of possible bids, probabilities for winning, and expected
profits in a hypothetical proposal and bid situation in which a bid is being prepared for, say, a
market research project.
Probability of
Cost Bid Profit Winning Bid Expected Profit
$20,000 $20,000 $0 .2 $0
$20,000 $22,000 $2,000 .5 $1,000
$20,000 $24,000 $4,000 .7 $2,800
$20,000 $26,000 $6,000 .5 $3,000
$20,000 $28,000 $8,000 .4 $3,200
$20,000 $30,000 $10,000 .3 $3,000
$20,000 $32,000 $12,000 .2 $2,400
EXHIBIT 10-10 Hypothetical Example of Profit Expectations in

a Competitive Bidding Situation Source: Based on table construction
shown in Michel H. Morris and Gene Morris, Market-Oriented Pricing:
Strategies for Management (New York: Quorum Books, 1990), p. 120.
The basic idea in determining a bid price is to find the price at which the expected
profitability is maximized. Expected profit at a given price is calculated as:
E(PF) = PW(Pr) ⫻ PF(Pr)
where
PF(Pr) = Profit at price Pr

PW(Pr) = Probability of winning the bid at price Pr
E(PF) = Expected profit
In the example in Exhibit 10-10, the probabilities of winning the bidding are shown as low
at very low bids, since the credibility of the project being successfully completed is likely to
be questioned by the customer at these low levels. In this hypothetical situation, the highest
expected profit is at a price of $28,000. This would be the bid price to use. Managerial judgment,
of course, may adjust this up or down for any of several reasons. The marketer may believe that
this particular instance is unique and that the competitor will bid higher (or lower) than usual.
Perhaps the marketer believes that this particular request for bid will draw entrants into the
market that do not usually participate, requiring a higher (or lower) bid to win. In any case, the
determination of a best bid based on the calculation of a highest expected profit at least provides
a place to start.
Competitive bidding purchase processes vary considerably from situation to situation. It
should be noted, though, that the work of the sales team, and including missionary sellers, might
be able to favorably influence the request for bids. If a relationship between supplier and seller
is effective, the supplier’s team may help the buying center to specify a solution that closely
resembles the offering of the supplier. The request for bid, then, would ask for bids on a project
that the supplier is well prepared to provide; other competitors will probably be less able to meet
the requirements sought. Thus, even though the project goes out for bid, the customer has largely
already made the decision of which supplier will be chosen.
INITIATING PRICE CHANGES Once the marketing plan has been finalized, the company will
implement the plan and price levels will be set. As events unfold, the business-to-business
marketer will need to react and change the marketing activities to match changes in the market
and to take advantage of opportunities that arise. Price levels will need to be reviewed, and, at
Defending Supplier Advantage
In many industries, it is common practice that when a packaging methods of shipments will have to be
new supplier has bid below a current supplier for a re-established with the new supplier. Recall the “make
piece of existing business, the current supplier—the the transaction routine” portion of the buying decision
defending source—gets a “second look.” This is an process; the more comfortable a customer is dealing
acknowledgment of the costs involved for the cus- with the friendly routine of a competent supplier, the
tomer in switching suppliers for an existing piece of less likely that supplier will be faced with a price threat.
business. Many of the initial start-up concerns If the current supplier has not put a “friendly routine”
related to logistics, invoicing, JIT services, and even the in place, things could be much different.
times, prices will need to be changed. The key thing to keep in mind is that changes in prices
induce reactions from customers and competitors.
Events that would change the structure of demand or the nature of competition, and
that might cause a marketer to re-evaluate prices, include competitors’ changes in prices;
changes in customers’ perceptions of the value of an offering, either positive or negative;
entrance of a new competitor into the market; introduction of the next generation of
products, making the current generation less valuable to customers; and exit of a competitor
from the market, which in turn changes customers’ perceptions of the relative value of the
remaining offerings in the market. Events that would change cost structures in such a way
that prices might be affected include the introduction of new process technology that
reduces the supplier’s costs, allowing reduction of prices; and increases in costs for all
competitors such that the industry’s supply curve shifts (see Exhibit 10-11 in which an
across-the-board increase in costs shifts the industry supply curve to the left). Notice that an
increase in costs that affects only the marketer’s company will generally not have an effect
on prices because the industry supply curve is not affected. No other competitors see the
increase, and so they will continue to compete at what was a competitively set price. In time,
there may even be a price shift downward as market shares redistribute and some com-
petitors realize cost reductions from higher volumes. In a competitive market, these cost
savings may be passed on to customers. However, the effect is not likely to last long. As
other factors in the dynamic market shift, the effect of the unique cost increase will likely be
superseded by other changes.
Summary of Managing Price

Pricing needs to be consistent with both business unit strategy and marketing strategy. In certain
circumstances, pricing is a key component of strategy in that it builds and uses competitive
advantage. General price levels are set when business unit strategy is designed; specific price
levels and price schedules are set in the design of marketing strategy and tactics. As the marketing
strategy is managed, the marketer must monitor competitive prices and the reactions from
customers. Price changes will usually need to be considered as the business environment changes.
One of the key purposes of pricing is the creation of profitability. Prices are set to achieve
profits, but the implementation of those prices needs to be done so that desired profit levels will
S2 S1
Price
P2
P1
Q2 Q1 Quantity
EXHIBIT 10-11 Effect of an Industry Increase in Costs
indeed result. In many business-to-business markets, prices are negotiated at least to some
degree. The next section discusses the negotiation process and how it can be managed to
maintain profitable prices.
PRICING IMPLEMENTATION: THE CASE OF NEGOTIATED PRICING

In many instances, the development of a price list, along with a set of consistently applied price
discounts and allowances, represents the whole of the implementation phase in the management
of pricing. This is especially the case when prices are implemented through an established
network of distributors. Very often, though, for large purchases, customized offerings, and for
new products or services, the final price of an offering will be negotiated between the two
(or more) parties. This, of course, happens much more frequently in business-to-business
marketing than it does in consumer marketing. Another large difference between consumer and
business-to-business situations is that most business-to-business negotiations occur within the
context of a relationship between buyer and supplier, or at least they have the potential of
becoming a relationship. As already stated, the difficulty in dynamic pricing, that is, pricing
through negotiation, is that it must address both the goals of building relationships and building
profits simultaneously.
This takes a great deal of skill and usually falls to the seller to implement, at least in part.
Some companies give their sellers complete authority to negotiate and agree on prices. Other
companies give their sellers limited authority, requiring price approval from a sales manager for
larger deals. Still other companies require sellers to obtain approval on all prices. In a market
sensitive company, pricing authority often rest exclusively with marketing management. In
certain other situations, higher-level executives for both the supplier and the customer complete
the negotiations.
A problem that can arise is that sellers think of negotiation as part of “closing the sale.”
The temptation for the seller is to cut price to close the deal.9 This may significantly improve the
value provided to the customer but can play havoc with meeting profitability targets and has
future implications that may not be seen by those very close to the situation. With attention to
some basic ideas in negotiation, the marketer can implement pricing such that both a price asso-
ciated with the customer’s perceived value and the supplier’s margin can be maintained.
Two Types of Situations

Sellers and marketers face two general types of negotiating situations, based on the extent to
which a relationship with the customer is involved. As seen in Exhibit 10-12, when there is no
relationship, nor even a slim chance of one developing, the situation can be treated as a stand-
alone transaction. When the supplier has a relationship with the customer or has a reasonable
Situation
Stand-alone Transaction Balanced between Transaction
and Relationship
Effective bargaining styles Competitive; problem solving Problem solving; compromising
Effective approach Use of leverage Seek common interests
EXHIBIT 10-12 Two Types of Negotiating Situations in Business-to-Business Sales

hope of building a relationship, then negotiation must be done while balancing the concerns of
profitability and enhancing the relationship.10
The first situation, the stand-alone transaction, occurs when a company is making a one-time
unique offering, such as selling off excess inventory of discontinued product. Another common
stand-alone transaction occurs when a supplier attempts to get the business of a company whose pri-
mary objective is always price.11 To be chosen by the customer, the supplier must meet minimum
quality and delivery requirements and then is expected to offer as low a price as possible. The buyer
generally is in a position of leverage, usually as a high-volume purchaser with multiple sources of
supply. This would typically occur when the offering is in the mature phase of the PLC. The cus-
tomer uses professional buying expertise and often “hard-ball” negotiating tactics to push the price
as low as possible.
In the stand-alone transaction, a negotiator with a competitive style or one with a problem-
solving style would best represent the prospective supplier. The negotiator with a competitive
style will tend to extract as much profit out of the deal as possible and will be able to match any
hardball tactics used by the customer. There is always the risk that a clash of competitive styles
will kill a potential deal; upper-level management of the supplier company will have to decide
whether it can tolerate this risk and any potential adverse outcomes. Even if the deal is signed,
there may be little goodwill left between the parties. Since this is a single transaction, though,
this should not matter.
A problem-solving approach may also work well in this situation, particularly if the
customer’s negotiator also takes a problem-solving approach. Problem solvers tend to think
beyond the surface issues of the negotiation and look for unique solutions that improve the
benefits received by both parties. Even though the situation is a single transaction, the result can
be unexpectedly positive for both the buyer and the seller.12
The other kind of situation involves a transaction with long-term consequences. In the best
of circumstances, it involves a customer with a different attitude than the price-oriented customer
just described. In general, this is a customer that wants to receive the best value package possible
but that also sees the potential benefit from establishing a lasting relationship with suppliers, so
that the suppliers know the customer’s business and can be proactive in providing value. This
situation can occur in any stage of the PLC, including maturity.
A problem-solving approach works best in the second situation, where transaction concerns
are balanced with relationship concerns. Good creative problem solvers will find ways to enhance the
relationship with each successive negotiation session. A compromising style and approach will also
tend to produce positive outcomes but may not produce the unique outcomes of the problem solver.
The marketer must be cautious to correctly identify the situation. Customers may appear to
seek value and seem to want to pursue long-term relationships. However, as negotiations
develop, it becomes clear that lowest price is an overriding concern. Such customers really want
the benefits of both high value from a relationship and low price. This is a dangerous sort of
relationship in which to become involved. The switching costs for the supplier become too great
to easily leave the relationship, while the profit from a long-term relationship never materializes.
Preparation for Negotiation

Obviously, to do a good job of negotiating, the company should prepare as much as possible. It
helps to think in terms of the stages involved in a negotiation and to do what is necessary in each
stage to make a favorable transition into each subsequent stage. Negotiation involves teamwork
in most instances. At a minimum, the negotiating team includes a marketing role and a seller
role. Exhibit 10-13 shows the stages and substages of the negotiation process.
Preparation
Data collection and analysis
Determination of negotiation strategy
Information Exchange
Elicit information not yet obtained
Test hypotheses about nature of situation
Engage in Negotiation
Opening
Discussing positions
Concessions
Closing
Obtain Commitment
EXHIBIT 10-13 Stages in the Negotiation Process

in Business-to-Business Sales
Most companies do a reasonably good job of preparing their sales teams to present the
offering and show its benefits. This requires understanding of the customers’ needs, buying
center interactions, and the buying decision process. Some of this preparation serves the price
negotiation process as well. Knowing customers’ needs and their relative importance gives the
sales team an idea of what issues the customer will bargain hardest on and the ones on which
they will be most likely to make concessions. Other kinds of preparation questions to address
include the following:13
• 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?
Data about the customer can be obtained using typical market research and market operation
forecasting methods. Whatever is not known can be obtained through contact with customers
during the prenegotiation period. In addition, the marketing analyst’s cost and value model of the
customer’s business will have been used already to set price levels for the product and offering.
This same model can give the sales team an idea of what the customer’s acceptable price range will
be. The newer the market or the newer the customer, the more general will be the cost or value
model. In any case, though, it can give the sales team a starting point from which to negotiate.
The second part of the preparation phase involves determining the negotiation strategy.
The first part of the strategy-making stage is framing of the negotiating situation, estimating the
objectives of the other side, and determining the likely negotiation style to be employed by the
other side. Once the nature of the transaction has been recognized, the negotiating team’s goal
should be to bring the most appropriate bargaining style to bear.
Determining goals is the next step. If the marketing analyst has done the homework, an
acceptable price range should be laid out—from the supplier’s viewpoint as well as from the
customer’s. Also, the homework should indicate what issues are likely to be key for the customer
and on which issues the customer is likely to be willing to compromise or make concessions.
With this in mind, the supplier’s negotiating team needs to determine what issues—including
price—are most important and how these issues are prioritized.
The team then needs to determine where it has leverage and where the customer has lever-
age. A party in the negotiation has leverage when it has the power to get the other side to accede to
its position. Leverage comes from an unequal distribution of importance or need—one side needs
the deal more than the other side. For instance, if the customer has alternative suppliers available,
the customer tends to have leverage. If the customer needs immediate delivery so that it can meet a
tight production deadline, the supplier tends to have leverage. Even if the negotiating team decides
that it has some leverage, it may choose not to use it for reasons of enhancing a relationship.
The bargaining strategy may even extend to anticipation of the kinds of concessions that
will be attempted. Concessions work best in an “if . . . then” format, such as “if you are willing
to wait an extra month for delivery, then we can come down in price per unit by 5 percent.” This
is called integrative bargaining, an approach in which multiple dimensions are considered
simultaneously.14 The negotiation team may want to identify important issues for the customer
that can be easily accommodated. They can then offer concessions on these issues to obtain
reciprocal concessions from the customer in areas that are important to the supplier.
In preparing for the closing stage, the supplier’s negotiator avoids the temptation to give
in on price to complete the contract. The negotiation team may prepare one or more final “pot
sweeteners” that can be reserved for deployment to close a deal. These are based on the
customer’s important non-price needs that the negotiating team has discovered. Ideally, these
are high value for the customer and low cost for the supplier. If the deal closes before these
concessions are reached, the negotiator can add in one or more of them as a special bonus
(especially if they are low cost). This could help cement a relationship with the customer.
The outcome of all this preparation is a game plan for undertaking the bargaining. All of the
participants on the negotiation team now have an idea of what they are trying to accomplish and
what their roles are. The plan helps the team to concentrate on reaching their goals rather than on
simply achieving the minimum deal they will accept. Lastly, it sets out information areas that
need to be filled in with information from the customer. After the negotiation team goes through
an information-exchange stage, the negotiation plan is updated to reflect new information.
Last Thoughts on Negotiation

Note one last piece of preparation: when involved in a stand-alone transaction—particularly with
a large, leverage-holding, price-oriented customer, the negotiator needs to know when to walk
away from a deal. With the price-oriented customer, the negotiator should not fool herself into
thinking that a contract taken now at minimal profit or even a loss could build into a relationship
in the future. The purchasing department will always push for price concessions, even if the
supplier has a relationship with other members of the buying center. When dealing with a price-
oriented customer who has leverage, the supplier should have a cost structure that creates profit;
this is the only way to consistently win in this situation.
PRICING AND THE CHANGING BUSINESS ENVIRONMENT

Throughout this text, we have explored how the trends occurring in the business environment
require business-to-business marketers to change and adapt. In particular, we have examined the
effects of time compression, hypercompetition, and the growth in use of the Internet. In this
concluding section of this chapter, this examination continues.
Pricing, Time Compression, Hypercompetition, and the Internet

Time compression affects the time that marketers have for analyzing industry conditions and
customer reactions. It also puts pressure on marketers, salespeople, and customers to negotiate
quickly so products and services become available before market conditions change. Obviously,
pricing is not done as well as it could be when time compression prevails. When time com-
pression interacts with the ease that prices can be changed, the effect is insidious.
Under time pressures, marketers are forced to try to react to quickly changing customer
needs or rapidly developing competitor actions. Product features and channel programs take time
to develop, so a quick reaction is difficult. Changes in sales force methods take time to disse-
minate within the organization, but these can probably be done more quickly than product
changes. Promotional messages delivered over the Web can be changed fairly quickly, but
messages going out through other media take time to develop. Price changes can be implemented
very rapidly, though. If a marketer believes that a response to a competitive move must be
immediate, the quickest way to respond is to drop prices.
Related to time compression are the trends of hypercompetition and increased use of the
Internet. Hypercompetition increases the number of competitors vying for the same customer. It
also means having to compare the marketer’s value against some very different value packages
involving substitute products or services offered. A marketer can address time compression and
hypercompetition through more attention to constant preparation. This means, in part, constantly
collecting information about customers’ value-cost models and paying constant attention to the
customers’ customers and their perceptions of value. As much as possible, the analyses we have
discussed need to be done on an ongoing basis rather than as ad hoc analyses. This allows setting
of prices more quickly and gives negotiators more information when they begin the negotiation
process. This may seem to the marketer like overattention to tactical information. However, time
compression is so prevalent and pricing is so crucial to profitability that constant preparation is
truly a strategic activity. Also, both quicker price quotes and better presentation of value for cus-
tomers relative to competitors help address the problems of hypercompetition.
Increased use of the Internet has both beneficial effects on pricing and some drawbacks.
Internet communication through e-mail and shared Web sites can increase communication and
preparation. In collaborative circumstances, in which both the transaction and the relationship
are important to both parties, increased sharing of information facilitates more creative solutions.
In the situation in which three or more parties are involved and relationships are important, such
communication facilitates better coordination.
A trend facilitated by the Internet is the use of auctions, particularly in supply chain
transactions. Auctions are a two-edged sword, having both benefits and drawbacks. The key
to maximizing benefits for all parties and minimizing the drawbacks is to use auctions in appro-
priate circumstances. Auctions are good for transactions involving undifferentiated commodities.
Used outside this context, the benefits of relationships become minimized or circumvented.
Marketers in offering their products or services can use auctions. Marketers may also
encounter auctions used by buyers to obtain products or services. When a buyer–seller relation-
ship already exists and one party or the other begins using an auction, the trust in the relationship
is called into question. The buyer or seller using an auction is saying, “We think we can get a
better price; you’ve been holding out on us.” An auction is better used for one-time transactions
or for obtaining a first supplier (buyer) in a new line of business that may develop into a relation-
ship. An example of a one-time transaction might be the case of a supplier with excess or
obsolete inventory. Rather than contacting individual resellers or customers, the marketer may
announce an auction and direct the inventory to the customer or reseller who values it most.

In this chapter we have focused on price as part of a total offering—the value statement to the
customer. The key idea is to set price level in such a way that superior value is created for cus-
tomers. Recall that value is composed of benefits received by customers less the customers’
costs. These costs include the price of the product or service. The marketer tries to set the price
and structure the customers’ costs so that customers receive more value than they would receive
from the marketer’s competitors. On the other side of the transaction, though, price must be set
so that the supplier establishes profitability. Price must be set to cover the relevant costs and
contribute to profit. To accomplish value-based pricing, then, the marketer needs to understand
both the customers’ perceptions of value and the marketer’s own costs.
We have discussed the ways for managing prices in a competitive environment that
changes as the supplier’s market evolves and how the marketer’s pricing must be consistent with
business and marketing strategies pursued by the marketer’s company. In some instances, as
with penetration pricing and price skimming, price plays a key role in accomplishing strategic
purposes. Pricing tactics also play an important role in implementing marketing strategies.
In business-to-business markets, marketers must often face the prospect of implementing
their pricing through price negotiations with customers. We have discussed the importance of
preparation for such negotiations as the core means of ensuring that negotiation is successful in
creating customer value and supplier profitability.
As you move into future chapters concerning selling and relationships, keep in mind the
seller’s role in the negotiation process. In many cases, the seller is the primary person for
maintaining profitable pricing in the presence of the customer. Think about how the marketer, the
missionary seller, and the sales representative can work together to build relationships with
customers and still manage to create a strong negotiating position.
Key Terms
avoidable costs 229 integrative bargaining 249 resultant costs 229
bundling 242 learning curve 239 revenues 228
contribution margin 230 leverage 249 sealed bid 243
cost-based pricing 222 ongoing costs 228 supply curve 231
demand curve 231 ongoing revenues 228 total offering 223
elasticity 232 open bid 243 value-based pricing 222
evaluated price 223 penetration pricing 238 value-cost model 227
forward-looking incremental price skimming 238
costs 229 realized costs 229

1. In general, what is the maximum price that can 3. Under what kinds of circumstances would a
be charged for a product or service? marketer want to charge a price less than the
2. What is the maximum price that can be charged maximum price possible for the offering?
for your product when you have direct com- 4. In general, what is the minimum price that can be
petitors but your product is differentiated, that charged for a product or service?
is, it provides more benefits than competitors 5. When would R&D costs be a relevant cost to con-
provide? sider in pricing decisions?
6. Suppose you were considering a price increase. chasm. From question 9, above, of the two strate-
What kind of difference would you expect between gies discussed, which would be the most appropri-
short-term elasticity and long-term elasticity in ate in today’s marketplace?
response to your price increase? 11. Suppose your company is the market leader in a
7. Under what general conditions would you want to fast-growing market. Your product is differentiated
use a price-skimming strategy? A penetration price in that it provides more and better benefits than
strategy? your competitors’. How would you price your
8. Under what conditions would you switch from a product?
skimming strategy to a penetration strategy? What 12. In competitive bidding, what factors would enter
elements of the marketing mix other than price into your determination of a bid to offer?
would be involved? 13. Why is preparation for negotiation so important to
9. The chapter relates the “second in, low-cost effective pricing?
producer” to the acquisition of small technology 14. Explain the major differences between negotiation
companies by large firms as two strategies that have in a single-transaction situation and negotiation in
potentially similar strategic outcomes. In a fast- a balanced-concern situation.
paced market, which strategy would be most effec- 15. Explain why time compression causes problems
tive for (a) an established, large manufacturer of for price negotiations even when both parties have
consumer products, and (b) a large high-technology an interest in enhancing a relationship.
network equipment manufacturer? 16. Explain “evaluated price.”
10. Discuss the organizational and marketing-mix
changes required when a small company hits the
Endnotes
1. Based in part on Cliff Edwards, “Intel Inside the 6. See, for instance, Jack Hirshleifer and Amihai
War Room,” Business Week (April 30, 2001), Glazer, Price Theory and Applications (Engle-
p. 40; Maija Pesola, “Chip Growth ‘Best Since wood Cliffs, N.J.: Prentice Hall, 1992).
2000,’ ” National Post (September 30, 2003), 7. Indeed, AMD tried to unilaterally increase its
p. FP10; Edward F. Moltzen, “AMD, Intel prices on memory chips, only to see a net loss of
Rev Their Engines as Race Heats Up,” CRN revenue and profits.
(1103) (July 5–12, 2004), p. 41; Cliff Edwards, 8. Morris and Morris, Market-Oriented Pricing,
“Inside Intel,” Business Week (January 9, 2006), p. 119.
pp. 47–54. 9. Nagle and Holden, The Strategy and Tactics of
2. We use the term seller for efficiency’s sake Pricing, pp. 190–191.
instead of using the generic, and more awkward, 10. G. Richard Shell, Bargaining for Advantage:
“salesperson.” Negotiation Strategies for Reasonable People
3. Michel H. Morris and Gene Morris, Market- (New York: Penguin Putnam, 1999).
Oriented Pricing: Strategies for Management 11. Nagle and Holden, The Strategy and Tactics of
(New York: Quorum Books, 1990), pp. 87–93. Pricing, p. 193.
4. Paul Sherlock, Rethinking Business to Business 12. Roger Fisher and William Ury, Getting to
Marketing (New York: The Free Press, 1991). Yes: Negotiating Agreement Without Giving In
5. Based on Thomas T. Nagle and Reed K. Holden, (New York: Viking Penguin, 1981); and Shell,
The Strategy and Tactics of Pricing: A Guide to Bargaining for Advantage.
Profitable Decision Making, 2nd ed. (Upper 13. Shell, Bargaining for Advantage.
Saddle River; N.J.: Prentice Hall, 1995), Chapter 2. 14. Ibid., p. 169.
Chapter 11
Business Development
and Planning
OVERVIEW
The practices of innovation, product development, and pricing often combine to
make it possible for companies to seek increased business beyond their current
market segments and customers. This effort can be the result of an innovation the
organization has not previously offered, the recognition that a current company
offering is in maturity and its market is still innovating, or any combination of these
factors. In these circumstances, depending on the degree of difference or innovation
of the new offering, the firm seeks to replace older products in target markets
(sustaining innovation), enter market segments where the firm may have a presence
but not with this type of offering (incremental innovation), or enter new markets
where the firm is not known and the offered technology has not yet been accepted
(disruptive innovation, from the viewpoint of one or all of the stakeholders).
This chapter focuses on the organizational changes necessary to achieve these
goals, the market knowledge and planning that are required for success, and the
strategy that reinforces the delivery of goals.
Sensacon—Continuation of a Hypothetical Example

Consider the situation faced by Sensacon, the company developed and referenced in previous chapters.
Recall that Sensacon, a major innovator and developer of micromachined devices, successfully devel-
oped a small growing market for its innovative pressure sensor design. Initially, the market was
comprised primarily of visionaries; typical applications were in SCUBA (self-contained under water
breathing apparatus) equipment and health-care devices. Both market segments were ideal targets for
Sensacon as market demand and Sensacon manufacturing capabilities (high variable costs, no
economies of scale) were well matched.
In the product development stage and the introductory stage of the product life cycle, the
Sensacon staff of technology-savvy “customer engineers” had worked closely with customers. The
creation of the pressure sensor was dominated by the specific customer needs of the visionary market.
Product changes were mostly incremental, as the customers in this market segment were interested in
the performance of the sensor and were willing to design their products to accommodate the Sensacon
253
254 Chapter 11 • Business Development and Planning
product. The customers’ low-volume products provided an excellent proving ground for the Sensacon
technology. Customers acquiesced to time delays and initial delivery problems; investors anxious to see
positive cash flow at Sensacon expressed the only sense of urgency.
The size of Sensacon markets skyrocketed when they were selected, as one of four companies, to
supply tire pressure sensors for SUVs.1 The volume demands on Sensacon manufacturing and customer
support would now reach two million units annually, up from five thousand units. As previously dis-
cussed, Sensacon was faced with the typical factors faced by a small company moving into “the big
time.” Sensacon—and the technology it was developing—was crossing the chasm.
Manufacturing development, significant product redesign for volume manufacturing, and support
for significantly larger and more complex customer buying centers became necessities of the transition.
The small staff that had been successful in creating value for technophiles and visionaries—moving
R&D invention to market innovation—was overwhelmed by the volume of new customer inquiries and
application requirements. Additional marketing resources were added to interface with customer
demands in all phases—supply chain organization and development, customer education in the proper
application of the sensor, and so on—all required development and coordination. Sensacon learned a
new way of doing business.
While Sensacon made the transition to the growth stage of the PLC, senior marketing man-
agement recognized that steps must be taken to avoid the trap of Sensacon being a one-product one-
market company. Sensacon developed a field market development team and approached the SUV
manufacturers with application designs for all vehicles, not just SUVs, and also approached other
vehicle manufacturers. The process began of translating this new business success to additional oppor-
tunities. Customers were soon found that were interested in the development of handheld tire pressure
sensors for car owners and heavy-duty models for tire shops. Soon, Sensacon found it necessary to
develop a new marketing channel for the product as dealers and tire repair shops needed service and
replacement parts—and the training to use them. An additional channel to reach vehicle owners that
wanted to upgrade older vehicles was also developed.
As the sensor moved through the PLC, the nature of support changed. In introduction, close
collaboration and mutual design efforts were required to bring the innovation to market. As Sensacon
crossed the chasm, field market development (FMD) teams were deployed to translate the success to
additional customers. Supporting the original equipment manufacturer (OEM) effort was not enough.
The Sensacon total offering included the training and deployment of service personnel at the consumer
level. And as, eventually, competition entered the market, a consumer positioning effort was deployed to
attract aftermarket customers. Though the core product did not change (other than those changes that
made it possible to mass-produce it), the marketing organization, at each transition through the adopter
categories, evolved to meet different customer needs and opportunities.
LEARNING OBJECTIVES
䊏 Understand the distinctions between “line” functions and “development” functions in an
organization.
䊏 Recognize how the level of innovation of an offering can determine the part of an
organization that is responsible for its success.

䊏 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.
䊏 Understand the different efforts involved with launching new products and managing mature
business both at the organizational and customer level.

Chapter 11 • Business Development and Planning 255
䊏 Understand the different types of forecasts and the integration of market information into the
organization.
䊏 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.
䊏 Recognize the changing roles played by marketing professionals as an offering evolves in the
market.
INTRODUCTION
As discussed in both the strategy chapter and the innovation chapter, businesses with different
goals, that is, managing a cash cow versus developing a question mark into a star, require differ-
ent approaches to marketing and different performance measurements. Also, within organiza-
tions, different departments and sections will have different business responsibilities related to
the role the department or section plays in the creation of the total offering.
Offerings that are early in the PLC will interest different market segments than offerings in
later stages. Customer education and service needs change as the product evolves. Notwithstanding
the changing market, marketing has three primary goals at every stage of the life cycle.
• Obtain new customers.
• Continue to meet the needs of existing customers.
• Coordinate offerings that are in different stages of the PLC and manage them such that the
business’ prospects are not tied to the PLC for a single product or for a cluster of related
products.
At each PLC stage, marketing must be concerned with acquiring new customers and
obtaining sales from existing customers. New customers can be further segmented into new
adopters and customers that have previously adopted another company’s offering. As described
by the TALC concept, the market segments most interested in adopting the offering change over
time. These different new adopter segments are not always served best by the same design
of marketing operation that addressed the previously targeted segment. Existing customers’
needs are also evolving as they adapt to their own changing customer markets. The levels of
codevelopment, service, and education required to satisfy the customer need for a total offering
evolves, as the product becomes known in the market. The marketing and market support
organization that is appropriate in the rapid growth stage may be overly elaborate, or possibly
not margin supportable, in later stages. As the business targets more and more segments with
offerings in different stages of the PLC, the management of multiple forms of marketing
operations becomes increasingly complex.
This chapter focuses on the management of individual products and services in a dynamic
environment, the role that business development plays through the PLC, and the organizational
structures most appropriate to these changing market efforts. Because business environments are
dynamic, few products live forever. Most successful products have observable life cycles—they
are developed, introduced to the market, their sales grow, the product-market matures, and eventually
their sales decline as customers’ preferences change and new offerings supplant the existing ones.
Most business-to-business marketers must change their marketing strategies, programs, and tactics
to accommodate this life cycle.
Important in creating marketing strategy for evolving products is the concept of business
development. Marketing professionals often apply the concept of business development, but it has
Business Development not obtained universal agreement among professionals as to what “business devel-
is the search for opment” really is. Consequently, “business development” means different things
opportunities and the
to different people. This chapter establishes the following definition: Business
structuring of business
entities to exploit those development entails the search for opportunities and the structuring of business
opportunities with entities to exploit those opportunities with current or near-term organizational
current or near term capabilities. Business development involves analysis of markets and market seg-
organizational ments, including discussions with potential partners to understand their direction
capabilities.
and the needs of their markets. Business development then extends to creation and
maintenance of relationships with partners that could include customers, channel
members, or suppliers of complementary products and services.
As previously discussed, 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, business development, and
customer service for an offering in a “cradle to grave” approach. The definition of success for
products at different points in the PLC changes: market introduction and customer awareness
early in the PLC, then followed by market penetration and market ownership, and, eventually,
the profitable management of a product in decline. A “specialist” approach is not only more
likely to be successful because of the type of resources committed to it, but by the ability to
measure its results.
FORECASTING MARKETS
The first step in the development effort is gaining as much knowledge as possible about the
marketplace. Knowledge of “what’s out there” is a primary tool in effective business develop-
ment efforts.
The question “what’s out there?” and the processes of market research and competitive
analysis have been previously discussed. All of the information gathered is of little use if it is
merely a snapshot of today. Markets change. Predictions of the future or, as business organi-
zations prefer to describe the practice, forecasts are created more often than they are believed.
(How often do you listen to a weather forecast with the idea in mind that it will influence what
you will do the next day, then completely forget it and do what you want without consideration
for the forecast?) The same could be said for market forecasts. The credibility and reliability of
forecasts are directly dependent on the quality of the information used to create the forecast
(naturally) and whether or not the creator is invested in the forecast being “good” (as opposed
to useful).
What Makes a “Good Forecast” Different from a “Useful” Forecast?
Under the best of circumstances, a forecast can be this is a somewhat bureaucratic approach, focused
in the ballpark—close enough to be an aid in mak- on process rather than results.
ing business decisions. A good forecast is one that A useful forecast is a forecast that con-
was created through generally accepted methods. tributes data to decision making. There is a temp-
Procedures were followed. Good forecasts can be tation here to use the term accurate in place of
wrong, but are defended as good because they useful. Experienced forecasters know that fore-
were done the right way. Good forecasts can be casts are, at best, useful and, by their very nature,
good and still be inaccurate. A cynic might say that not exact.
Notwithstanding the lighthearted (but usually accurate) view of forecasts and fore-
casters presented in the box “What Can Be Said about Forecasts and Forecasters?” the use-
fulness of forecasts depends on recognizing many factors that contribute to the qualitative
rather than the quantitative nature of the forecast. The marketer must recognize the value of
applying managerial judgment that comes out of experience and familiarity with the market.
When the person charged with doing the forecast has little experience in the market being
forecast, she would do well to seek the opinion of those who do have such experience.
Experienced forecasters try to account for the following factors that will cause markets to change
direction.
• Technological change: Can technological change be accurately forecast? In high technology,
Moore’s Law is often used as a tool to demonstrate the positive growth potential of the
silicon electronics business. Most forecasts of technology incorporate growth, often based
on the philosophy of Moore’s Law. But, Moore’s Law is a forecast of growth, not change.
Did prognostications about the vacuum tube industry forecast the demise of that technology
as the mainstay of electronic signal processing or was the growth of solid-state electronics
as a replacement technology myopically ignored?
• Time horizons: The longer the time frame of the forecast, the less accurate and less use-
ful the forecast is likely to be. How far into the future should a forecast look? What is the
nature of change in customers’ markets? Does the market embrace new methods and
technologies, or is it resistant to change? How quickly can customers react to changes in
the market? If an offering is part of an enabling technology, what delivery time frame is
required to meet the customer’s development and production schedules?
• Barriers to entry or exit: Never assume that the barriers to entry in an existing business
will prevent another competitor from showing up in the market. Breakthroughs happen
(how did the current organizations get in the market?) Also, never minimize the staying
power of a competitor, particularly one who has a significant investment (financially,
culturally, image, etc.) in serving the market need.
• Elasticity of demand: Directly associated with technology replacement, demand in
business-to-business markets is somewhat volatile. As previously discussed, this volatility
can defy conventional wisdom. Changing technology forces offerings through the adopter
stages more rapidly as
• early adopters embrace newer technologies
• suppliers elect to abandon “late cash cows and dogs” faster, preferring to commit resources
to new products or markets, in search of higher growth rates.
Demand for offerings is influenced by changes in target markets, as technology prod-
ucts move from early adopters to markets whose participants are more closely
associated with “proven” rather than “new” technology. This can be viewed as the dramatic
increase in demand, as demonstrated by increased growth rate in the PLC and the shift
from visionaries to pragmatists in the TALC.
• Forecast expenditures: What level of resources (how much time/money/energy) do you
want to spend to improve forecast accuracy? Conditions in developing markets demand
rapid decision making. Committing greater financial resources to obtain more accurate
information also often creates an additional expenditure of time. The market oppor-
tunity may slip away before enough data is accumulated to enable a comfortable
decision. It pays to recognize when wanting more data is just another way to avoid mak-
ing a decision.
What Can Be Said about Forecasts and Forecasters?
Many marketers do not enjoy developing forecasts. 3. State all forecasts to the third decimal place
The very act of forecasting asks the forecaster to to prove you have a sense of humor.
make claims about things that cannot possibly, 4. When presenting data, provide either vol-
without the capability of time travel, be known. ume or timing, never both.
Forecasting, then, sets the forecaster up to be 5. Compensating errors can make your day.
wrong. In the context of forecasting, however, 6. The best defense is a good offense, so, if you
wrong can be acceptable. Consider the following have to forecast, do it often.
“rules” of forecasts: 7. If you get it right, never let your manager
forget it.
1. Forecasting is difficult, especially if it’s about
Source: Adapted from Paul Dickson, The Official Rules
the future. (New York: Dell, 1978), pp. 53–55. Dickson credits Edgar
2. When completed, all forecasts are wrong, R. Fiedler with Fiedler’s 25 Forecasting Rules, appearing in
you just cannot know by how much and in the June, 1977, issue of Across the Board, the magazine
which direction. of The Conference Board.
Forecast Types and Techniques

Ways of performing forecasts differ according to the type of forecast. Some different types of
forecasts as well as some forecast techniques often encountered in organizations follow:
• Strategic forecast: Generally, a long-range business forecast associated with macroplanning
efforts. Strategic forecasts usually have a stronger element of “top-down” input, with a
major effort to reconcile reality with the strategic direction. These forecasts usually involve
three- to five- (maybe ten-) year periods, reviewed and revised annually.
• Marketing planning forecasts: Usually associated with a particular product or market, these
forecasts are the ones with which many marketers are most familiar. Marketing planning (a
plan to determine needs and satisfy wants generated from those needs) often has significant
data inputs from market research and competitive analysis, while attempting to project
what customers will do. These plans usually involve one- to three-year periods, with annual
review and revision, though quarterly and semiannual reviews are not uncommon.
• Marketing operation forecasts (MOFs): The least formalized but often the most widely used,
the marketing operation forecast is usually the responsibility of the field operation, some-
times in conjunction with brand/product/market specialists from headquarters. Under many
themes and designations, operational forecasts, tactical in nature, are an ingredient in sales
forecasts for territories, the tool used to judge performance for missionary sellers or field
marketing operatives, and a major source of market information in business development efforts.
These forecasts usually involve one- to three-year periods, reviewed and revised at least
monthly, and include major elements of market research and intuition (based on knowing the
market) in their development. The actual length of the one- to-three-year period is influenced
by the product or technology life cycle and the rate of new product adoption. The marketing
operation forecast is presented as a tool to gather timely data related to the logistics of current
and future business and technology as well as the competitive environment. This kind of
forecasting is essential to effective marketing management throughout the PLC.
• Sales forecasts: Shorter range than MOFs, sales forecasts are valuable for logistics, man-
ufacturing, and material resource planning. While marketing operation forecasts and
sales forecasts may at first glance seem very similar, major distinctions include the way
data are collected and the techniques used in analysis. Sales forecasts include a stronger
element of history; they more often are used to track existing sales patterns and apply
those patterns to the future. As a result, statistical data manipulation plays a major role
in development of useful information, and there is an assumption that future market
activities will follow the pattern of the current market. Predictive models (e.g., rolling
average, econometric models)2 are used to develop data of value not just for sales man-
agement but for logistics, manufacturing, and materials requirement planning (MRP)
managers as well. Herein lays a major difference between MOFs and sales forecasts.
Very little history or statistical manipulation is used in MOF development. While “no
statistician should ever undertake analysis of a market without drawing fully and contin-
uously on the knowledge of the marketing management,”3 marketers must realize that
sales forecasts are not good substitutes for MOFs. A brief summary of a few predictive
models,4 used for sales forecasting, appears in Exhibit 11-1. Note the quantitative rather
than qualitative nature of several models.
Marketing Operation Forecasts in Depth

What are the data that make up a good marketing-based operational forecast? First, create the
ideal list of the types of information a marketer wants to see when she picks up a forecast devel-
oped by the field marketing operation and obtained at the customer level.5
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 share 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 mar-
kets, ability to acquire informed respondents
EXHIBIT 11-1 Predictive Models

Marketers would like to know answers to the question “how much” about current business—
much the same as a sales report:
• How much will customers buy of what they are now already buying? What customers
currently buy is part of the suppliers’ internal sales data. How the volume of customers’
purchases will vary, based on factors in their market, is information usually available from
customers. This business volume is usually referred to as the core business at a particular
customer.
• How much will customers pay for it? If selling price for the current business is not fixed by
contract, list price, or other agreement, marketing will be interested in any changes in the
customers’ value perception of the offering.
Timing of purchases will be important to marketing, not because a particular sales
quota must be reached, but because marketing and support resources have to be allocated
to obtain the purchase and enable delivery. The ideal MOF answers the “when will . . .?”
questions:
• When will customers buy the noted (forecasted) volume?
• When will customers’ purchases peak? Declining purchases could be a sign of a change in
the customers’ market, leading to new product introductions by customers. The customers’
new products may or may not utilize the same materials or components. Business volume
that was previously considered core may begin to erode.
• When will customers consider new technology? If the marketing organization has a new
product or offering, when are customers likely to entertain a change in the current offer-
ing? What is the life cycle of the customers’ existing offering, when will they be in the next
design cycle to replace the offering, and will they consider a new technology for inclusion
in the new offering? Customer culture in regards to the risks of new technology adoption
will influence the likelihood that new technology will be considered.
• When will customers start buying from a competitor (or from the marketer’s organiza-
tion)? Have the customers, in a search for lower-cost supply, rebid the business? If an orga-
nization is the existing source, will the customer purchase from an additional supplier to
avoid dependence on one source or has the current supplier been able to capitalize on
another defending supplier’s difficulties and will now be a second source for the pur-
chases? An effective and well-informed sales force, by the way, usually answers these
questions, but the answers should be independently confirmed by marketing.
• When will customers buy new technology? Incorporating new technology into the next-
generation design is only part of the process; when will customers actually require delivery of
production volumes of the new technology? New products may have a period of slow growth
when market segments move to the next-generation product. Rapid growth follows the short-
term decline in sales. Can the supplier organization sustain both the slow sales period and then
the rapid growth? In terms of the MOF, purchases of new technology offerings are often
referred to as “new business.” The net business to customers is not entirely new, as the
customer reduces purchases of what the supplier (assuming the selected supplier continues as
the selected supplier for the replacement technology) previously considered “core.”
• When will customers stop buying the existing stuff? If customers are introducing a new
offering to their market, how long will the existing offering be continued? As noted, there is
likely to be an overlap as volume of the new product ramps up and the old product winds
down. Replacing the old core business with new business is often referred to as core churn.
Many customer organizations are spread around the globe. It is not unusual for design
and development operations to be in one location while manufacturing is at remote sites
where costs are lower. If the customer organization uses contractors for manufacturing, new
products may be outsourced from different contract manufacturers. Changes made to accom-
modate decreasing volumes of older products and increasing volumes of the new offering
will not always take place at the same physical location. Separate or unique supply chains
and logistical systems may be required during the transition period. Marketers will want
to know:
• Where will the existing stuff be shipped (stored, consigned, etc.) if a change occurs as a
result of the new manufacturing plan.
This leaves a set of “who” questions that marketing must address. The customer contacts
that provide most other pieces of the MOF can also provide these answers:
• Who will actually manufacture or incorporate your products? (Do they use contract
providers? Will the contract providers have favorite sources other than yours?)
• Who are the primary specifying and buying influences, and where are they?
• Who are the customers’ competitors?
Additional “what” questions that need to be answered for the MOF include:
• What are the customers going to use the product for or in?
• What is the customers’ market like—does your organization understand it?
• What R&D is necessary on your part to satisfy needs?
• What kind of new business is this to the supplier? Is this business a translation of an
existing success, a new market, a new product, or both a new market and product? Can
other opportunities be located that this application success can be translated to?
(Exhibit 11-2 and the box “New Business, Translation, and Core Churn” further define
these terms.) These translation efforts are a particular function of the field marketing
specialist or missionary seller.
• What else might be unusual about this business?
Products
New Existing
New
New Translation
business
Markets
Existing Core churn Core
EXHIBIT 11-2 Business Development Tracking Grid

New Business, Translation, and Core Churn
Real New business is the result of a major R&D, Core Churn occurs when the translation
product development, and/or marketing effort, if business at a customer replaces an application of
done from a marketing viewpoint, in conjunction your older technology. This “new” business cer-
with the customer. This partnership with the cus- tainly required an effort by the team to get the
tomer results in first-time applications or adoptions business; however, it shouldn’t require as large an
of technologies. effort—assuming the translation tools were ade-
Translation business occurs when the cus- quate. Unfortunately, the organization does not
tomer specification is not a first of a kind applica- experience an increase in business equal to the
tion. Though it may be new in the view of that sales of the replacement. The organization realizes
customer, it is not “new” to your organization; it’s the net of the old and new volumes.
merely a translation of a previous success. (See also Exhibit 11-2.)
Consider the power of this level of information. Remember, this is a tactical forecast. This
forecast should be accessible throughout the organization.
With this level of tactical information, bottoms-up forecasting for strategic purposes becomes
not only less cumbersome but more accurate. The real power of this information, though, lies in the
planning that it facilitates. Once the marketing manager knows what, when, and how customers will
be considering, buying, ordering, and using the manager’s products and services, the manager can
direct the marketing effort. If more resources are needed, the manager can begin the process of
obtaining the authority and funding to hire new employees, hire consultants or agencies, and schedule
customer visits or whatever is required. If the nature of the support changes, the manager can adopt
the organization style or model that will best serve the needs of both customers and the supplier.
Several groups within the organization will find this information useful: manufacturing,
R&D, scheduling, logistical support, customer service, and so on. If the supplying organization
is engaged in a business that markets products to companies that use contract manufacturers or
have several geographically dispersed manufacturing locations, they are likely to have such a
logistical tracking system already. To clarify and perhaps simplify the nature of the MOF, con-
sider the scenario in the box “Back to Pacific Drives . . .”
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.
If there is an existing missionary sales structure, they will need to be motivated to contribute to the
MOF, probably through compensation based on their participation. (A review of the philosophy of
compensation—you get what you reward—is included in Chapter 12.) For offerings in the high
growth part of the cycle, a field marketing team is in the best position to gather and organize this
information. A field marketing team may be a burden to late-maturity or decline offerings where the
customer base is knowledgeable and innovation of the offering is not likely. (The next generation of
offering that will replace this mature product is in the translation or high growth stage of the cycle.)
Exhibit 11-3 is an example of a concise way to handle all of this market information so that
it is useful to many company entities. Enterprise software now exists to do “automatically” what
was a once-a-month computerized report. With the advent of corporate Intranets, this data can be
readily updated and available. Market factors that impact forecasts, such as regional economies,
world economic conditions, interest rates, and other factors that can impact business levels, can
be added to the report, but these factors are beyond the scope of this analysis.
First Ship to/ Threat
Customer Our Annual Year Close New/ Competitive Manufacturer Assessment
Name Application Product Volume Volume Date Run Translation Competition Product Location (%)
Ajax Printer MX272 35,000 4,000 July 2007 24 months Trans Zigma Z-44 Ajax/Mexico 70
Computer
Pressure August Sensacon/
Sensacon PX400 200,000 50,000 36 months New Amron AM27 80
sensor 2007 Vermont
Sensor August Sensacon/
Sensacon PX410 200,000 50,000 36 months New Amron AM30 80
retainer 2007 Vermont
Luggage February To be
CarryAll CL2 10,000 8,000 24 Months Trans Klincon Zip2 50
closure 2008 determined
Stepping April To be
Widget Inc. PX401 100,000 45,000 48 months New UniMem UM503 60
motor 2008 determined
Palo Alto Desktop April Palo Alto/
PD1000 60,000 30,000 18 months Trans UniMem UM300 60
Computer computer 2008 Texas
NBM Notebook April NBM/
PDN1005 75,000 20,000 24 months New Coastal drives CDX 20
Computer computer 2008 Singapore
Game July Precision
FunLine PD1000 200,000 70,000 24 months Trans UniMem UM300 60
console 2008 Mfg/Taiwan
Spartan Internet January To be To be
PD1000 6000 5000 24 months Trans UniMem 50
Computer appliance 2009 determined determined
EXHIBIT 11-3 Data Chart for Marketing Operations Forecast

263
First-of-a-Kind Application, Translation of a Previous Success,

or Replacement for Existing Business?
All new business is good—right? But what kind of new business is it? Different types of “new busi-
ness” will require different resources of the organization. Note the eighth column of Exhibit 11-3:
“New/Translation.” This indicates the category of new business the application falls into from the
marketer’s perspective. Is the application new business, a translation from a previous success, or
incremental business as the application is a replacement for an existing piece of core business? In
other words, beyond the actual sales volume, what qualitative value does the application have to the
selling organization and how should the marketing effort be managed?
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 or adoptions of technologies. Many parts of the
organization are involved. Can it be manufactured? Can we support the volume? The missionary
seller gets a lot of help. The supplier is going to want to brag about this piece of business after
the customer introduces its product to the market, hoping to attract additional customers
interested in the same value and function. These are the applications and efforts that everyone in
the organization finds the most exciting. Most “new business,” however, is not real new business.
What if the new customer specification is not a first-of-a-kind application? This is true for
the majority of new business. While a partnership with the customer may have developed a
specification for your company’s product, and it may be new in the view of that customer, it is
not “new” to your organization; that is, it is not a new technology, product, or use of a product.
It is merely a translation of a previous success. As an example, let us say that working with
Hewlett-Packard, you develop a new high-capacity storage device for HP’s personal computers.
Business with HP (in this instance) is real new business. Your headquarters storage device prod-
uct specialist (or whatever title is used) develops a set of marketing tools for the field team to
take this initial success and translate it to other customers. Missionary sellers eagerly take these
Back to Pacific Drives . . .
The missionary seller, working over a period of Ireland six months after initial manufacturing.
eighteen months, develops a major piece of busi- Perhaps your sales team in these sales territories
ness with a Silicon Valley computer company. would like to know what is going on. They may
Pacific Drives brand is specified on the drawings for have some interesting information to contribute to
new models of the computer company’s network a better plan to serve this piece of business.
servers, though the “or equivalent” phrase follows For instance, one of the potential contract
the specification. manufacturers contemplating a bid for the busi-
Over this eighteen-month period, many ness has a cozy relationship with your major com-
company disciplines will want to be notified of petitor, DynaDrives, who has extended special
what is going on. Manufacturing will want to plan credit terms.
resources and schedule manufacturing. Logistical Oh, by the way, two years ago, during a
support will want to plan when and where to ship. shortage, you cut off the contract manufacturer
Your missionary seller (a marketing position) has because of slow payment.
done an exemplary job. Except . . . How does this change the business and,
Like many companies, your customer has hence, the forecast? Can you influence who/
remote manufacturing sites. If the customer’s new what/where/when? You can only if you know
server line is successful, production will start in about it.
translation tools to their other customers in the PC business—Sony, Gateway, Dell, and so on.
With this assistance (training, education, design application, and so forth) these other PC
manufacturers begin to use the new storage device. While new business to the missionary seller
and the customer, these applications are translations of the storage device offering that was
originally successful at HP.
What if the translation business at Gateway replaces an application of your older techno-
logy storage devices? Is this business still considered new? It certainly requires an effort by the
team to get the business; however, it should not require as large an effort as the HP application
because the relationship with the customer is stable and the technology has been previously
developed. The supplier’s technical application specialists, rather than R&D personnel, assist in
the technical support effort for the customer. Unfortunately, the organization does not experience
an increase in business equal to the sales of the new device at Gateway. The organization realizes
the net of the old and new business volumes. This replacement business, core churn, is necessary,
important, and critical to market ownership but not as glamorous to the team as “real new
business.” The organization needs all three types of new business—real, translation, and churn.
Each type has different implications for margins, customer support, and product development—
the entire marketing mix.
MANAGING PRODUCTS THROUGH THE PRODUCT LIFE CYCLE

In prior chapters, it was noted that the product life cycle is a useful tool for thinking about
marketing strategy, but does not provide specific prescriptions for action, nor does it provide
specific predictions of changes in market parameters, such as product sales. Presented here is
a quick summary of the PLC stages and how they relate to the TALC for technology
innovations, followed by more depth on the implications for managing three aspects of
business-to-business marketing—marketing strategy, business development, and marketing
organization.
Interrelating the TALC and the PLC

Exhibit 11-4 (similar to Exhibit 2-7) shows the PLC and TALC superimposed. As previously
noted, the PLC is most usable when viewed from the perspective of a product category, rather
than at the level of an individual product model or version. Customers are best understood for
strategy purposes based on their perceptions, thoughts, and feelings concerning the category of
the product. For instance, in the hypothetical Sensacon example from the opening vignette of this
chapter, the initial customers for the pressure sensor devices were visionaries in the SCUBA and
health-care devices markets. Later customers were pragmatists in the automotive market. These
later customers were pragmatists with respect to pressure sensors—they were nonadopters with
respect to the early versions of the pressure sensors that were too costly and ill-adapted to the
automotive market. Sensacon must first segment the prospective customers in the market based
on their predispositions to adopt the product category.
SUMMARY OF PLC CONCEPT Exhibit 11-5 shows the life cycle of a product being divided into
five stages: development, introduction, growth, maturity, and decline.
In the development stage of the PLC, efforts focus on moving invention to innovation,
often with the encouragement of a specific partner or customer. These development partner-
ships (or contracts or maybe development grants from government agencies) can supply
PLC—Total
Sales
TALC—Sales from
New Adopters/Period
Time
EXHIBIT 11-4 The TALC and PLC Superimposed
funds for development or may take the form of a guaranteed first sale of the outcome.
Usually, development costs exceed development revenue, but not always. The customers at
this stage are the technophiles in the TALC and some early visionaries.
Once the product in its early incarnations has been tested with early customers, the product
will enter the introduction stage. In this stage of the PLC, with feedback from technophiles and
visionaries, development work continues to improve the product. The improvements to the product
can be either radical or incremental innovations; in either case, the product moves closer to broad
commercialization (over time, though, these changes shift toward incremental changes and the
design of the product begins to stabilize in form and function). In terms of the TALC, the customers
in this stage will generally remain visionaries. Sales of these early products start to grow. The prod-
ucts and market growth become more visible to other potential players in this market—potential
customers, potential competitors, potential suppliers, and potential channels.
At the end of the introduction stage, visionary new adopters become scarcer. The com-
panies competing to supply the new products in this market will face the “chasm” of having to
find pragmatist adopters to fuel continued sales growth. Pragmatists have different requirements
from visionaries—a stable, valuable product with full supplier support infrastructure; and solid
assurance that the product and infrastructure will perform and support future evolution of
the product. If the supplier companies can provide this “whole product,” the assurance of
Maturity
Sales Revenue/
Period
Growth
Decline
Introduction
Time
Development
minimal adoption trauma, and the assurance of future support, the product can move beyond the
introduction stage.
In the Sensacon example, the company has introduced the pressure sensor to visionaries in
the SCUBA and blood pressure device markets. As Sensacon becomes comfortable with the
capabilities of its offering, so will potential users. Sensacon searches for opportunities that will
carry the technology—and the company—across the chasm. Shortly afterward, the company
pitched new business in the SUV market and had to go through a series of demonstrations and
trials to prove the effectiveness of the product design. Recall that SUV manufacturers perceived
a high level of need and urgency. The vehicle rollover problems, mostly attributed to Firestone
tires on Ford SUVs, could be lessened with a low tire pressure warning to the vehicle driver.
Sensacon had found its “beachhead” pragmatist segment. Once the manufacturing and quality
problems associated with manufacturing in quantity were addressed, Sensacon could realize
rapid increases in sales, as did the other competing manufacturers. The growth period of the PLC
had started.
In the growth stage, product innovation continues, but the product moves toward a consis-
tent architecture and the type of innovation tends more toward incremental than radical. 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. As the growth stage progresses, new com-
petitors enter the fray, some with innovative products and others with me-too products trying to
profit from getting a “piece of the action.”
There are actually two phases to the growth stage. In the first phase, growth is driven by
new segments of pragmatists adopting the product category for the first time. Later in the growth
stage, a second phase occurs as many of those early adopters buy more of the product. 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.
The reduction in the growth of sales puts pressure on the competitors in the market. The
competitors that will survive and prosper are those who have adapted to the predominant technol-
ogy standards and who have developed their operations to deliver value and manage costs. The
competitors who do not have a competitive advantage will begin to fail. Some will be acquired by
better-positioned companies; some will struggle to find other businesses to enter; others will go
out of business. Even as Sensacon focuses on improving its products and its operations to compete
in the growth stage of the micromachined pressure sensor device market, it must be thinking
ahead to the second phase of growth, in which competitive pressures will increase.
The growth stage transitions to the mature stage when markets begin to become satur-
ated and when the preponderance of buyers have incorporated the product into their “standard
way of doing things.” These repeat buyers make up the core business for Sensacon. The
growth stage may be extended if the transition from pragmatists to conservatives is smooth and
price levels do not erode. In other cases, price erosion may turn into sales decline, which can
be only partly offset by volume growth as conservatives begin to adopt. In either case, the
competitors must adapt their product innovation and marketing tactics once again as the mar-
ket changes.
Eventually, the PLC enters decline. In the decline stage, customers have begun shifting
demand to other products or solving their needs in some other way. For example, the market for
handheld calculators is well past maturity. As more handheld devices have calculators built into
them, such as personal digital assistants and cell phones, there are fewer instances where some-
one wants stand-alone calculating capability at their fingertips. 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 (big button and
display calculators for vision and dexterity impaired individuals, and so on). These niche
markets may sustain a few survivors in the business.
Marketing throughout the Product Life Cycle

The PLC and the TALC provide general guidance on how to market in an evolving environ-
ment. Different customer groups (segmentation via adoption inclination) become prominent
as the PLC or TALC progresses and marketing strategy must change to address these differ-
ent groups as they emerge. At the same time, competition and infrastructure in these markets
are also changing and marketing strategy must adapt to these changes as well. At any point
in the PLC or TALC, there are still major uncertainties about customers, competitors, and
technology. Continued analysis and exploration are required to gain insight into evolving
opportunities.
The conclusion in this situation is that marketing strategy and marketing operations can
be only partly derived from good marketing analysis. Exploration and partnership building are
also necessary to proactively discover opportunities and develop the businesses necessary to
pursue them. Recall from the discussion earlier in the chapter that business development is the
part of marketing that involves finding opportunities and working out methods of exploiting
those opportunities. Business development involves research, experimentation, and analysis.
Business development differs from strategic planning in that it becomes an active exploratory
dialog with potential partners. Those partners can be customers, channel members, external
alliance partners, or subdivisions or departments internal to the company. The next section
delves into the implications of melding the general guidelines of the PLC and TALC with the
proactiveness of business development.
MARKETING STRATEGY AND BUSINESS DEVELOPMENT THROUGH THE PLC
Development Stage In the development stage, the marketing strategy is to “find a market-
ing strategy.” In other words, the company that is working on early-stage products in a new prod-
uct category must learn about customers, find initial target markets, and begin exploring how to
shape the business to pursue the opportunity. Technology development, marketing strategy
development, and business development are thus all the same in this first stage. These efforts
help find development customers who will be the test cases for first products as they move
beyond the prototype phase. This early effort involves much experimentation and perhaps false
starts. Entrepreneurial organizations find that they are in search of a market for a new technology.
At this stage, markets may not know of the possibilities of the technology and technology own-
ers may not know of those markets in need. In business-to-business markets, conventional market
research efforts will not suffice. The entrepreneur must simultaneously approach many potential
markets in a learning process, as visionaries are not concentrated in any one market, but exist
throughout all markets.6
Some revenue may be generated by marketing or business development activities that
get partnerships, contracts, development grants from government, or prelaunch sales
from prospective customers. These activities may indeed generate revenue. However, the goals
of early marketing or business development are to generate information about customers, gen-
erate product and business designs, and begin to build trust with important partners. Too much
of an emphasis on early revenue and profit can distract the organization from these goals.
In the development stage, the value proposition and positioning evolve. 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. Visionaries will see this value; pragmatists
will take a wait and see approach. Pricing will not be a major factor in the marketing mix until
the new product is considered for a large market. Through the development period, the nature of
discussions is to anticipate price after the chasm is crossed.
Introduction Stage When the product has been developed enough that it demonstrates
initial value to customers, the product enters the introduction stage. In most business-to-
business markets, the early stage launch of a product is somewhat informal. The purposes of
marketing strategy or business development efforts will be to get exposure and begin to educate
potential customers about the technology, its near-term products, and potential benefits. In
the process, marketing or business development will make it easy for prospective visionary
customers to self-select and come forward voluntarily. Good activities for accomplishing
education and early discussions are participation in trade shows, information-rich Web sites,
and “Webinars”—online multimedia seminars. Business development efforts should also
include direct contact with companies that the marketer feels have a high likelihood of being
good visionary customers.
This business development effort in the introduction stage illustrates the difference
between personal selling and business development. If the early-stage company were to focus on
personal selling in the introduction period, the classical sales management approach would be to
screen prospective customers, focusing on those that showed immediate sales potential. Once the
salesperson determines that a potential customer is a pragmatist who wants to wait for more
evidence of performance before adopting, the salesperson would note the prospect’s future
interest, mark the account for later follow-up, and move on to another prospect. This approach is
short-sighted in the early stages of the PLC. The uncertainty of customer adoption and revenue
requires a missionary or “evangelist” approach to the market. These individuals ideally will be
part of a business development organization that will hand off the offering to FMDs for translation
after the initial beachhead is established.
If there are potentially many customers for the company’s early product, the company may
go through a formal launch process later in the introduction stage. The activities for this formal
launch will involve marketing that goes beyond business development. The target market will
still be visionaries and may be confined to a limited number of industries. Sensacon did this in
the introduction stage of the pressure sensor PLC: They addressed markets in SCUBA and
medical devices, launching early versions of their products at trade shows in these industries,
accompanied by appropriate marketing communications and selling efforts.
As noted above, a key element of marketing strategy and business development is the
search for the first pragmatist market segments that can serve as a beachhead for crossing the
chasm. This effort during the introduction period involves analysis of potential market segments
and talking with prospective customers to find pragmatists with a crying need. In this early stage,
the offering will usually involve a fair amount of customization.
Business development has identified the first customers to be targeted and probably the
potential follow-on segments. In products for which few customers exist, business potential
beyond the first launch customer is not automatic. A handful of targeted customers, in some
cases only one, may be the extent of the market. The transition between the launch customer and
the next customer can be traumatic. The level of collaboration that exists with the launch
customer is not always present with follow-on customers.
Several factors impact the success of the organization as the chasm is approached.
• Is manufacturing ready to take on additional demand? In a large company with economies

of scale, this may not be an issue, but a smaller company will need a plan to scale up with
the increased demand.
• What level of design support will be necessary to both scale up the manufacturing effort
and satisfy customization demands from new customers?
• Is the support staff capable of meeting the needs of an increased volume of customers?
• What pricing strategy will support the manufacturing volume or service needs of the
new customers? (Review Chapter 10, the basic parameters of pricing an innovative
product.)
In the Sensacon case, their discussions with SUV manufacturers identified the pragmatist’s
requirements and the urgent need. It should be noted that this represented new business for
Sensacon, not a translation from its existing products. In some cases, crossing the chasm may
involve a translation of a product application from a visionary customer to a larger pragmatist
customer group. Such a translation would involve validating the application and making the
adjustments in the offering to address the pragmatist market segment. This was not the case in
Sensacon. The new pragmatist segment required a re-engineering of the product and creation of
new manufacturing and logistics operations.
Growth Stage When the suppliers have a successful beachhead with pragmatist
adopters, marketing strategy and the business development portion of marketing strategy
must recognize the advantages of market ownership and work to create a “defacto” standard
in the market. Success brings competitive imitation and the emergence of complementary
products to serve peripheral customer needs, solidifying the offerings’ ownership position.
As products become standardized, business development efforts will start shifting more
toward translation efforts. Missionary sellers or FMDs will tend to perform a lot of the
business development effort. However, there will also be a fair amount of effort aimed at
developing new business. For instance, Sensacon may look to translate the SUV pressure
sensor success to another market, such as the aircraft market. The first effort to enter this
market might focus on large commercial aircraft, requiring a major engineering effort of the
product and new specifications for manufacturing and delivery logistics. This would repre-
sent new business for Sensacon. If then, Sensacon translated this new aircraft pressure sensor
product to executive jets and small private aircraft, this business might represent translation
business. Large account business development specialists might pioneer the original entry
into the commercial aircraft market. Field marketing teams might accomplish the translation
to the other aircraft markets.
Marketing strategy during the translation period would tend to focus on making it easier
to find and approach new pragmatist market segments. Marketing communications would be
aimed at generating awareness and understanding of the advantages of Sensacon sensors—
building brand identity in order to compete against the new entrants that are in the market or
who will soon enter. Pricing will take into account competitive dynamics as well as customer
perceptions of value. A fair amount of effort may go into developing channel relationships,
particularly if the large-volume adopters have ancillary needs in the aftermarket. In the
Sensacon example, aftermarket channels become an important source of new business
(translation business) requiring careful selection, development, and support of these channel
partnerships.
Market Ownership and Field Market Development
Market ownership doesn’t just happen. The mar- has a specific need and concern related to the
keter must develop an organization that will serve adoption. This complexity can be unwieldy without
the diverse needs of different adopters, including a marketing organization design to accommodate
design assistance, application education, and offer- it. At this stage, marketing and customer service
ing customization to specific requirements of become more prominent as the means to compete.
differing customers. In a pragmatic customer orga- A strong missionary sales effort, for example,
nization that values proven technology and incre- FMD personnel, is essential for successful market
mental change, the supplier mentors the new ownership. (See “Operations and Organizational
application of the offering through the customer Structures to Manage Simultaneous Product Life
organization. Each stakeholder in the buying center Cycles,” below.)
The second phase of the growth stage arrives when core business maintenance is a major
field marketing responsibility. This does not mean that business development goes away as an
important activity, though. As new versions of the product are developed and new applications
emerge, sizable market development efforts are required to create growth though core churn. For
instance, tire pressure sensors may move from OEM applications to aftermarket installations.
This will require customer research, education, and development of new value propositions to
gain new business within the custom auto and auto service markets.
At this point, some of the business development staff will shift their focus to work on
other technologies or innovations in other PLC or TALCs. Meanwhile, field market develop-
ment has full responsibility for continued translation efforts. Since products have tended toward
standardization by this time, this new business will tend to be translation and/or core mainte-
nance business, although some opportunities may require new channel, product, or service sup-
plier partnerships that are so different as to constitute real new business. Marketing strategy
during the second phase of the growth stage focuses on caring for existing customers and winning
customers away from other suppliers.
Market Ownership Market ownership comes from a three-pronged attack. First, the
company must stay close to the front in product development. Second, the company needs to be
recognized as the owner of the market. This comes from taking good care of customers, advancing
the value provided, and good branding communications (see the box “Market Ownership and
Field Market Development”). Third, the product must be the defacto standard in the market.
Third-party companies adopting the owner’s operating standards, connectivity, and methodo-
logy demonstrate market ownership. The owner’s standard becomes dominant as all market
participants adopt it.
Maturity Stage When the slow-down occurs in growth as pragmatist customers become
saturated, the company must be positioned to survive the inevitable shakeout of competitors.
After the shakeout of competitors and considerable decline in the rate of sales growth, the
PLC has reached the maturity stage. New customers are conservatives. Conservatives repre-
sent a relatively sizable portion of sales only if the pragmatists do not engage heavily in
repeat sales. Some product categories have little in repeat sales, such as the enterprise
resource planning market. Other markets are sustained through periodic repeat purchasing by
almost all buyers in the market, such as the business markets for laptop computers, cell
phones, and PDAs.
Marketing during maturity focuses on reselling products to existing customers.

Competitive efforts focus on taking or defending market share from other competitors. If a sup-
plier is relatively small, a reasonable strategy is to find a niche that it can dominate and defend.
This may be a market niche that is comprised of conservatives entering the market. An example
of a conservative-driven niche might be the market for software to run medical offices. This is
essentially a specialized application that runs on existing software and equipment—the market
would not likely tolerate the risks and reliability difficulties associated with new or emerging
technologies. While the opportunity is not huge, it is large enough to support several decent-sized
software companies.
In maturity, 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. Remaining business development
efforts, at this stage of the PLC, have two aspects. First, business development must contribute to
the company’s strategy for competing in the maturity stage of the PLC. A typical strategy is to
seek development of ancillary business opportunities, in service and support, associated with the
primary business. The effort noted in the box “Caterpillar Grows through Services” is typical of
this type of effort. Second, business development must look ahead, as noted above, to the next
generation new business.
In the maturity stage, core business and core churn take on increased importance. Whether
a company is large and addresses several mainstream market segments or whether the company is
small and addresses a defensible market niche, the company must expend selling effort to protect
core business from its competitors as well as get existing customers to seek additional or
replacement products and services (core churn) for aging products. Much of it is accomplished
through the established sales force. This “caretaker” function is an important part of the marketing
effort, focusing on building and maintaining relationships with customers and partners.
Business development activity has now come full circle. It is focused on finding opportu-
nities for new technology development. Eventually, the old PLC will die out. A market owner
will have proactively designed this demise to be coincident with newer products entering the
growth stage. An important role for business development is to develop the transition from
current offering to next-generation offering with large-volume pragmatists. In some cases, new
markets emerge that are related to the company’s mainstream PLCs. In the past ten to fifteen
years, many companies facing maturing or mature lines of business have found new growth in
services. Lou Gerstner’s key contribution as CEO of IBM in the mid-1990s was the shift of
Caterpillar Grows through Services
In 1973, Ford Motor Company requested that markets. In overseas markets, such as China, new
Caterpillar provide rebuilt engines for Ford’s truck equipment was still too pricey, but lower cost
division. Caterpillar accommodated its customer refurbished equipment was affordable. Caterpillar
and by early 1980s found that this service had had invested in operations to the point where it
potential as a continual income producer. Over the was positioned to take advantage of these new
years, Caterpillar treated remanufacturing as an opportunities.
ancillary business, but continued to slowly invest. Today, Caterpillar is actively pursuing reman-
By 2000, remanufacturing opportunities were ufacturing and other services as key elements of its
beginning to emerge in cost-squeezed industrial growth strategy.
emphasis from computer systems to IT services. Similarly, as discussed in the box, Caterpillar
has seen a new growth opportunity in its remanufacturing services. When such opportunities are
not available, the company must look for other lines of business and it must start this effort in the
maturity stage of the current PLC, if not sooner.
Decline Stage Eventually, the PLC enters decline. By this time, the offering should no
longer be the focus of a field market team since the customers know the product. 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). Their numbers are relatively few, but not insignifi-
cant. For a marketer who wants to address a niche market, finding skeptics who will adopt an old
technology (usually one hidden in some other product, e.g., microprocessors imbedded in the
power train control systems of automobiles) may be a viable market with few competitors.
Ultimately, from the consumer viewpoint, these innovations are invisible—merely an improvement
in the final product in which they serve.
Marketing at this stage depends on keeping existing customers satisfied and managing
costs. Often, a company decides that it is not cost effective to pursue a line of business that is in
decline and thus sell it to another company. The companies that stay in the business, or that enter
it as the result of an acquisition, will use very tightly targeted communications so that money is
not wasted communicating with noncustomers. The price is set at a level low enough to discourage
the customers from looking to switch to new technologies.
For late maturity and declining products, FMD will be nonexistent, with sales efforts
rewarded through short-term reward systems (i.e., commission selling). Since the support needs
for offerings at this stage are primarily logistical in nature, the most effective marketing effort
will not be provided by an organization focused on translation efforts. The company that stays in
the late-cycle business uses a sales-oriented suborganization or separate department entirely.
Many of these products have achieved commodity status, thus marketers tend to sell and distrib-
ute 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, business development is concerned about finding the most efficient channels that
reach the skeptics. Such channels are needed because very often the skeptics are small businesses
that are addressing small niches that they can easily defend. Hence, they do not have the need or
the budget to buy more up-to-date equipment or services. A second direction of business
development is to find the other companies that might be interested in buying the line of business
in the declining stage of the life cycle.
ORGANIZING TO MANAGE SIMULTANEOUS PRODUCT LIFE CYCLES

Up until now the discussion has followed a single product life cycle. However, most companies
attempt to manage a series of products that are in various stages of their own PLCs. To maintain
the viability of the company, it needs to take a “pipeline” approach to the collection of businesses
and products pursued. Ideally a company would simultaneously have a balance of products in
early stages of the PLC, in middle stages of the PLC, and in maturity and decline. This ensures
that 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.
The company can take one of two general alternatives to the organization of its marketing
based on this pipeline analogy. On the one hand, the company can assign a marketing team to a
product or product line and carry out the product’s marketing from cradle to grave. The second
alternative is to organize by customer adopter type within the PLC. Thus, when a product is in the
introduction stage, the marketing team that does product introductions takes control. When the
product moves into the growth stage, the team that grows product lines takes over, and so forth.
As shown in the above section, a product-centric organization must begin marketing in
the early part of the life cycle by using an approach that focuses on finding early development
customers and partnerships. This moves to marketing based on finding visionaries and a first
pragmatist niche. Once the chasm is crossed, the same marketing organization must focus on
finding and developing new segments. When growth takes off, the marketing focus is on stuff-
ing the channel and selling upgrades to first customers. At the change to maturity, the market-
ing effort requires routinization and fine-grained product differentiation. Changing to decline
requires product line trimming, cost savings, and selling off of products or whole product lines.
Using Specialists
A product-centric organization requires the marketers to wear many hats and learn new tech-
niques as the product passes through the different stages of the PLC. Suppose the range
of marketing activities is divided into research or analysis, product development, new busi-
ness development, translation business development, core churn business development,
selling and sales support, channel development or management, market communication,
and customer care. Exhibit 11-6 shows how the emphasis of activities might change as a
Development Intro Chasm and Early Tornado—Later Maturity Decline

Activity Stage Stage Growth Growth Stage Stage
Research and
Analysis 䉱䉱䉱䉱䉱䉱
Product Development 䉱䉱䉱䉱䉱
New Business
Development 䉱䉱䉱
Translation Business
Core Churn Business
Selling and Sales
Support 䉱䉱䉱
Channel Development
and Management 䉱䉱䉱䉱
Market
Communication 䉱䉱䉱
Customer Service 䉱
EXHIBIT 11-6 Activities Emphasized at Stages of the PLC for a Hypothetical Product
company’s product progresses through the PLC. It becomes obvious that a marketing team
assigned to this hypothetical product will have to learn to be proficient in new sets of activi-
ties every time the PLC hits a transition, rather than specialists in the activities and customers
suited for each stage.
This still does not capture the level of complexity involved in marketing through the PLC.
The nature of activities that continue to be emphasized from stage to stage also changes. For
instance, marketing’s role in product development early in the PLC is focused on finding and
specifying the elements of the core product. Later, this effort shifts to finding features that are
desired by various market segments, which will result in product versions in the product line
aimed at those particular segments. If the marketing team continues to focus on finding
the breakthrough features later in the life cycle, effort and time will be wasted and opportunities
will be missed.
The tendency for the product-centric marketing organization will be to (1) keep doing what
it knows best, which will be ill-suited to the next batch of customers, and (2) not learn the new
activities that are better suited to next adopters. Either tendency—especially the combination
of the two—is a recipe for acrimony, sleepless nights, pink slips, and reason to review Levitt’s
“Marketing Myopia” again.
The alternative is to have a set of marketing organizations—specialists—for each adop-
tion stage. As a product (remember, this is a class of products, not individual versions or
models) moves from stage to stage, the product is handed off to a new team, who is good at
handling this stage of the PLC and dealing with these kinds of customers. This approach
has the advantage of bringing marketers with appropriate expertise into the fray. Generally,
it will not take these marketers long to get acclimated to the new product. They must be care-
ful, though, to look for the right prospective customers. For instance, pragmatists for
one product may not be the same pragmatists who adopted the last product. However, the
principles of addressing pragmatist markets will tend to be very similar from one situation
to the next.
Business Development Bands through the PLC

To summarize so far, the marketing organization should be configured around the different
kinds of adopters. This will bring specialized knowledge to bear for each type of adopter.
Different pieces of the marketing organization will have different goals and objectives to
achieve and will address these goals with different sets of activities. It follows, then, that the
motivation and compensation should be structured to reward the performance of specified
activities and the achievement of particular objectives.
Exhibit 11-7 shows the PLC with three horizontal bands, each indicating an area of different
marketing focus.
The first band, the Range of Initial Business Development for Each Offering, employs
business development teams focused on the innovators or visionaries in potential customer
organizations. This focus is not limited to existing customers and relationships—the
team will be prospecting for the first successful partner for the new product. The new offer-
ing is generating little revenue and little, if any, profit. The team is interested in initiating
that first piece of new business that may be the beachhead of a new product line, market
segment, or even a new star SBU for the company. The individuals most likely to be
successful in this band are team players with a sense of market ownership. These teams will
Range of Major Sales-Driven Effort

Revenue
Time
Range of Initial Business Range of Major

Development for Each Offering Translation Effort
EXHIBIT 11-7 Business Development Bands over the Product Life Cycle
be motivated through compensation that rewards business development activities rather

than selling activities. Rather than commission, compensation will tend toward salary with
bonus potential.
The second band in Exhibit 11-7, the “range of major translation effort,” is the period
when FMD specialists or 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 market-
ing operation forecast discussed extensively in the first half of this chapter. The FMD focus is
market development within a specialized area (territory, product line, etc.). Successful trans-
lation of the proven-once new business leads to the establishment of new market segments—
segmentation through translation. (Individual compensation, roles, and the continuum from
sales to marketing functions are further detailed in Chapter 12, “The Business-to-Business
Sales Force.”)
Exhibit 11-7 shows the “range of major sales-driven effort” as the third and final band. At
first 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 sales-driven 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 or 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.
At this point it may seem like there is a redundant field team in this scenario—the FMDs
and the field sales team. However, when the functions and responsibilities of the two teams are
understood, there is little overlap, but a strong need for an integrated effort. 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.

This chapter has focused on market forecasts and business development. The focus has been on
the practical aspects of forecasting, particularly the construction of a marketing operations fore-
cast. The MOF starts with customers and what they are likely to do in the near future: how much
they will buy of what kinds of products, when they will buy, when they will need delivery, and
when they will need support. This provides information sufficient for planning the execution of
marketing programs and tactics. Information provided by forecasts and the MOF about market
segments and competitors leads to decisions on choice of target segments, positioning, and cus-
tomer needs and buying behavior. The marketing information obtained in the analysis helps in
forming the marketing strategy, programs, and tactics.
“Business development” is a function that is not always clearly defined and, when defined,
changes at the same pace as the market. Different organizations, processes, and techniques
prove most successful at different stages in the life of an offering. Changing markets and cus-
tomer needs drive the concept of continuous organizational change. The most successful organi-
zations recognize that one structure and reward system cannot perform at “ownership” level
throughout the PLC. Utilizing the principles of division of labor, the marketing organization is
subdivided into specialized groups most competent at working with customers at specific points
in a PLC. Customer relationships are more stable, as adopter categories for specific innovations
tend to be stable and the productivity of customer as well as supplier resources are maximized.
Key Terms
business development 255 goals 255 missionary seller 258
core business 260 marketing operation forecast translation 264
core churn 260 (MOF) 258 translation tools 265

1. List the uses for forecasts in business-to-business 9. As an offering moves across the chasm, what strate-
marketing. gies will be necessary to insure market ownership?
2. What are the different kinds of forecasts used in 10. How do the goals of market “ownership” and mar-
business-to-business marketing? ket “share leadership” differ?
3. Who has primary responsibility for developing the 11. Describe how “real new business” is analogous to
marketing operations forecast? Why? diversification.
4. How is a marketing operations forecast used differ- 12. When is core churn also new business?
ently than a sales forecast? 13. How does business development change as the
5. What is business development? How does it differ PLC progresses through its stages?
from personal selling? 14. Why should a marketing organization be oriented
6. Describe the role of the field market development toward different types of adopters rather than spe-
person in an organization whose focus is technophiles cializing in different products?
and visionaries. 15. How should compensation be used to motivate and
7. Describe the role of the field market development reward business development activities, such as
person in an organization whose focus is pragmatists. field market development? Why?
8. Why is the role of the FMD diminished for prod- 16. List the roles and responsibilities of the three different
ucts in maturity and decline? bands in the management of simultaneous life cycles.
Endnotes
1. Additional details of the Sensacon market and market development specialists, customer and
the company’s development are included in product evangelists, customer engineers, and so
Chapters 8 and 10. The entire “Sensacon Story” on. What is important to recognize is that this
is repeated as a discussion case in the case study individual is delivering value to the customer, is
portion of this book. compensated by a relatively stable salary (with
2. E.J. Davis, Practical Sales Forecasting (London: some bonus potential), and is part of the market-
McGraw Hill, UK Ltd., 1988), p. 203. ing organization.
3. Ibid., p. 128. 6. Shu-Yuan Wu, The Learning-by-Experimentation
4. Ibid., pp. 203–222. Process for Market Creation, 19th Annual UIC
5. “Field Marketing Operation” personnel titles vary Research Symposium on Marketing and Entrepre-
by industry. We have seen missionary sellers, neurship, August 2005, San Francisco.
Chapter 12
Business-to-Business Selling
Developing and Managing
the Customer Relationship
OVERVIEW
Previous chapters stressed the importance of relationships and the value they add to
business-to-business offerings. This chapter’s focus is on the seller, who performs
the sales function of the firm and makes that relationship a reality. The discussion
concentrates on the different roles that sellers can play, depending on the culture of
both supplier and customer and the level of involvement of the buying center. The
term seller is used often in this text to simplify “salesperson” nomenclature. While not
used in this text as an exclusive replacement, seller is interchangeable with
saleswoman, salesman, and salesperson.
The business-to-business selling process is more time consuming and, ulti-
mately, more personal than the consumer process. In business-to-business selling,
the complexities of successful selling require the buyer and seller to develop mutual
respect and trust, a luxury that sellers in consumer markets seldom have the
opportunity to achieve.
The role of the business-to-business seller changes with the expectations of
different customers and the nature of the offering. This chapter reinforces the notion
that there is not necessarily a “way to sell,” but there is certainly a way that customers
want to buy. Ultimately, the most successful way to develop a sales organization is to
match the way the customers want to buy.
The opening example tells the story of how Hewlett-Packard lost one of its
strengths—selling to corporations—and began rebuilding that competency to regain
a competitive edge in the computer industry.
HP Returns to Its Original Selling Competency1

In 2005, Mark Hurd became the new CEO of computer giant Hewlett-Packard (HP), replacing Carly
Fiorina, who was removed by HP’s board of directors after five lackluster years. One of the things that
Mr. Hurd observed was the ineffectiveness of the sales force targeted at corporate customers.
Customers complained that they had too many points of contact with HP and were not sure who to
279
280 Chapter 12 • Business-to-Business Selling
go to when they were interested in particular products or services. Furthermore, they felt that HP’s
response time to requests for service or information was too long.
Mr. Hurd learned that several factors appeared to contribute to the sales force’s problems. First,
the sales force was organized as a stand-alone entity. Salespeople represented several product lines at
once. The combination of these two organizational design features made the sales force accountable
mostly to the sales management infrastructure, with little responsiveness to the product divisions. In
addition, sales teams selling to corporations were larger than their counterparts selling for competitors.
The bureaucracy within the sales organization was another factor stifling sales team effectiveness. Ten
layers of management slowed decision making. The red tape faced by the individual salespeople
constrained the amount of time they could spend with customers. HP estimated that its salespeople spent
about 30 percent of their work time in front of customers.
After reviewing the situation, Mr. Hurd and HP’s senior sales executives began restructuring the
sales force in five key ways:
• A large portion of corporate sales was relocated to within the product line divisions (accountability
to product marketing).
• A single sales rep became responsible for most of the largest accounts and sales teams were
reduced in size from an average of four people to three (one-stop focus for customers).
• Sales meetings were confined to Mondays, so sales reps could be on the road for more time
during the week (organize to sell rather than manage).
• Information technology used by the sales organization was upgraded and software for tracking sales
leads and the sales process was standardized on a single system (marketing operation forecasting—
Chapter 11).
• The compensation structure was reorganized from commissions based on revenue to better reflect
sales profitability (rewards more aligned with desired outcomes).
The result was more time spent in front of customers, better response time to customer requests, and
more sales wins. The improvements showed promise and represented the start of a restructuring process
to regain HP’s competitive edge in selling.
LEARNING OBJECTIVES
䊏 Understand the roles of sales and the seller in business-to-business organizations.
䊏 Understand the differences between selling in business-to-business markets and selling in
consumer markets.
䊏 Understand the basics of effective business-to-business sales force organization.
䊏 Recognize the different types of sales representation that are most appropriate for offerings
under different customer buying patterns.
䊏 Understand the internal and external relationships necessary for successful sales and market
development personnel.
䊏 Recognize the different levels of selling associated with product types, rewards, and seller
performance.
䊏 Reinforce the necessity of understanding customers’ needs and preferences in the building of
a sustained organizational relationship.
Chapter 12 • Business-to-Business Selling 281
INTRODUCTION
The opening vignette describing HP’s efforts to reorganize and re-energize its enterprise sales force
illustrates the importance of managing sales in business-to-business marketing. The seller in
business-to-business markets plays a much larger role in the sales process than the seller of
consumer products. In consumer markets, relationships between sellers and customers are usually
brief, one-time events, with little personal information exchanged between the participants in the
transaction. While some consumer product sellers may develop a clientele who return for repeat
purchases, the relationship is sporadic. In business-to-business selling, however, the nature of
the purchase and the characteristics of the process require an ongoing relationship between the
seller and all of the stakeholders in the buying center. At HP, the company had shifted from empha-
sis in selling to other businesses to excellence in selling to consumers. The company relied on its
small systems computer sales and printer business to generate most of its profits. However, the
company discovered that this was not enough to sustain the company in the long run. HP would
have to regain its excellence in business-to-business sales to thrive in the future. Excellence in
business-to-business selling begins with an understanding of customers, their needs, and their
decision processes. Mark Hurd began his tenure at HP by talking with 400 of their largest
customers to understand their thinking, their problems, and their concerns about working with HP.
As discussed in Chapter 3, the buying process in business-to-business markets evolves
through more intricate phases than the consumer purchase process. Before getting involved in
the specifics of business-to-business selling, a look at the role of selling in general is in order.
THE NATURE OF SALES AND SELLERS

Everyone has an idea of what sales “is.” When the word salesperson is heard, most people have
an immediate image of a sales stereotype based on individual experiences with salespeople they
have dealt with or have heard about. The car salesperson, the insurance broker, and the real estate
agent—almost every entity the consumer deals with will have a selling role associated with it.
The diversity of these roles and the skills required to be successful make it almost impossible for
any particular stereotype to accurately reflect the reality of the profession. However, most people
will form their impressions from a limited sample and then generalize these into stereotypes.
Unfortunately, this leaves most people with a far too narrow view of selling.2 To fully understand
the nature of the sales function, a broader perspective is necessary.
Selling is a natural function. Everyone sells. In social situations, people find themselves trying
to “sell” to the rest of the group where to go to party that night; children try to “sell” parents on why
they need that new bicycle; and, at work, employees sell their skills and accomplishments to the
boss. At its most elementary level, selling is persuading.3
The form the persuasion takes and the style with which it is applied determine the success
of the effort. Customers resent “pushy” sellers who they believe are attempting to force something
on them that they do not need. Whether the resentment is the result of a seller who does not regard
the needs of the customer as most important (fit the market to the product—a sales era strategy;
see the later discussion on the evolution of sales philosophies) or whether there is a mismatch
in acceptable persuasion techniques, the customer still feels resentment toward the seller. Better
sellers, then, attempt to understand customers’ personality and behavior variables and work to
satisfy the intangible as well as the tangible needs of the buyer.
Selling creates value for both the buyer and the seller. The sales process instigates the
principle of exchange, in which both the buyer and the seller possess greater value after the
transaction. While at first appearing elementary, the review of this concept can be a grounding
force for sellers and their managers who get caught up in the “meet the quota at any costs” short-
term sales approach. In fact, in relationship-based sales organizations that operate with a strong
sense of partnering with customers, the seller’s role is often viewed as that of a value creator.4
Boundary personnel
Sellers are the frontline personnel, the first line of one-on-one commu-
is the term given to nication with the prospective customer. The seller is an important part of the
individuals in the organization’s value image.5 Beyond “first impressions,” the customer makes
organization who operate, many judgments about the selling organization based on the image and
as a significant part of presentation of the seller. In the customer’s eyes, the seller is the selling
their responsibilities,
spanning the boundaries
organization. Conversely, if the seller competes well within his organization
of their own organizations for organizational resources for his customers, the seller is the customer in the
and those of customers. eyes of the selling organization. Sellers, particularly in partnering roles, are
Both buyers and sellers often called upon as the liaison to manage both intrafirm and interfirm
have boundary roles. conflicts.6 Sellers, thus, are often in the role of boundary personnel, the
Actual job titles and levels
in the company can vary,
diplomats of the organization.
but the function of liaison
and/or diplomat can be a Characteristics of Business-to-Business Selling
major asset to the
relationship between As summarized in Exhibit 12-1, business-to-business selling situations are different
buyer and seller and, in from consumer selling in many ways. In business-to-business markets, the seller
some instances, across
spends time building and nurturing the personal and business relationship with
internal boundaries
within the customer several individuals throughout the buying center.
buying center.
Dyadic interactions are

REPEATED, ONGOING RELATIONSHIP The relationship between the seller
one-on-one meetings or and buying center members is often a series of dyadic interactions. The seller
sessions between builds the enhancing elements of the relationship and minimizes the threats to
stakeholders in the buying the relationship over the course of these interactions. As the duration and
center and the seller or complexity of the relationship grows, the seller must convince the buyer of the
other individuals in the
selling organization’s
seller’s interest in the success of the buying organization and of the buyer as an
value chain. A typical individual. The repeated, ongoing nature of the relationship can eventually
“sales call” by a seller permit the seller to be a motivator (though not necessarily the prime mover) in
on a buyer would qualify new solutions for the buying organization.
as a dyadic interaction,
as would a meeting
between a field marketing SOLUTION ORIENTED, TOTAL SYSTEM EFFORT A natural outcome of the
representative and the seller’s focus on the success of the buyer and the buying organization (though cause
project manager of a and effect could probably be argued) is a solution-oriented, “total system” effort or
new development effort
total offering approach. As repeated throughout and a major theme of this book,
in the buying
organization. customers buy solutions, not technologies or core products. This approach, of
• 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
EXHIBIT 12-1 Business-to-Business Selling Characteristics

course, requires the seller and the selling organization to fully understand the customer, including the
customer’s market environment and culture as well as every facet of the differing needs of the buying
center. The successful seller also understands the different motivating elements between members
of the customer buying center. These factors contribute to a level of “knowing” that reinforces the
relationship with the customer and assists the seller to develop and nurture an appropriate solution.
LONG TIME PERIOD BEFORE SELLING EFFORT PAYS OFF In most consumer selling situa-
tions, the seller will know in a matter of minutes whether the sales effort has been successful.
In business-to-business sales situations, the outcome of the effort may not be known for months
or even years. For example, the complexity of decisions in the design of a new electric power-
generating facility may extend the period for selecting turbine suppliers for several months or
longer. As described in Chapter 3 from a behavioral context and again in the discussion of
the marketing operation forecast in Chapter 11, the solution provider selection process is time
consuming. Throughout the development period, astute sellers use the development period to
reinforce the value of their offering versus potential competition
CONTINUOUS ADJUSTMENT OF NEEDS Sellers and selling organizations must be flexible

and responsive to the changing needs of customers, particularly if the selling organization has
joined with the customer in a mutual development effort. The next-generation solution that
results from the application development process may not be what was initially envisioned. The
specific needs of customers evolve as they learn more about the product and how it can be
applied to their needs. The development process is usually an education for both the buying and
the selling organization.
CREATIVITY DEMANDED OF SELLER BY BUYER Business-to-business customers, particularly

large ones who may specify the use of significant quantities of the selling organization’s products,
expect an innovative and creative approach to their needs. They do not appreciate being offered
exactly the same solution as another customer, even if the success of the offering at the other
customer is what attracted them to the supplier in the first place.
Approaching each customer’s problems in a way that can be recognized as unique has
subtle advantages to the seller. Unique offerings to customers who are in competition with each
other can relieve the seller of many concerns regarding pricing and price discrimination. Unique
offerings may very well have different costs associated with them. Depending on the customer’s
view of single versus multiple sources for purchases, the buying organization may prefer a
unique offering from the seller, perhaps enhancing the exclusivity of its own offering.
THE ROLE OF SALES IN A MODERN ORGANIZATION

“Nothing happens until somebody buys (sells) something.” This statement, and variations on
the theme, is as true today as it has ever been. While new communications technologies such as the
Internet and new management tools such as customer database management software have the
capability to make the task more productive, buying and selling are still at the heart of business.
Relationship Sales and Marketing

The term relationship selling has been used frequently in recent years to describe the context of
business-to-business selling. Unfortunately, there seems to be no clear definition for the term.
Often the “relationship” between seller and buyer is sometimes considered to be far less important
in low-involvement, low-technology sales than it is in more involved situations. This is not neces-
sarily the case. In fact, given homogeneous products late in the PLC, the case could be made that
the buyer–seller relationship is one of the important differentiators between competing suppliers.
“The relationship” between buyer and seller is always important though the nature of the relation-
ship and the expectations of the parties involved change under different circumstances.
DEFINING WHAT A RELATIONSHIP IS Successful relationships between suppliers and business

customers involve mutual respect, trust, and authenticity. At this level of relationship, the busi-
ness-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.
As is true with all marketing, relationship marketing is based on the concept of exchange.
The intricacy and complexity of the exchange directly impact the nature of the relationship.
Different levels of relationship associated with different levels of intricacy or complexity can be
seen as follows:7
Switching costs are the • Discrete exchange. Interaction is of a short duration, with a minimum of in-
costs to the buying volvement. Applicable in one-time-only exchanges, these transactions have
organization of changing very low switching costs. There is little reason or motivation for any loyalty.
suppliers after an initial
selection has been made
Economy or necessity is often the primary motivation, with little interest by ei-
and supply has begun. ther party in an extension of the relationship. Sellers need not be much more
Switching costs result than order takers.
from, among other things, • Differentiating an undifferentiated product. In competitive situations with
changes in logistical homogeneous products, suppliers seek to differentiate the total offering with
requirements, engineering
and design, and services.
the strength of the relationship between individuals and organizations. In these
Switching costs can circumstances, the relationship often involves a greater degree of social inter-
create barriers to exit for action rather than collaboration or partnering in a new development. Ownership
firms, contributing to a of the relationship is at the individual level, often fostered by the seller. The
customer feeling locked in seller is in the role of a persuader or, in the case of continuing existing business,
to a particular supplier.
Appropriately, incurring
a sustainer.
high switching costs • Multiple transactions. Interaction is repeated, and individual transactions
should be mutually tend to merge into an ongoing relational exchange. In these situations, there is
beneficial to both parties. usually mutually high investment by supplier and customer. Both social and
Relational exchange is the economic interaction occurs, and both parties see strategic implications in
term given to customer–- continuing the relationship. Mutual benefits exist. The goals of the buying
supplier relationships and selling organizations have evolved to be interdependent. Beyond persua-
where the interaction sion, sellers become problem solvers and effective resources for the customer.
recognizes the long-term
The seller in this role has opportunities to encourage and motivate customers
benefit of the combination.
Interdependence is an toward processes, technologies, and techniques that reinforce the use of its
accepted, even fostered offerings.
element of the relationship. • Collaboration or partnering. A level of intimacy is proactively sought by both
parties. In business-to-business markets, organizations interested in obtaining the
best value from their suppliers view the suppliers’ representatives, whether sellers or marketers,
as resources. The parties involved work toward bringing the capabilities of the supplying firm
and the customer firm together to provide value for each party. Both buyer and seller view the
relationship as a potential element in their competitive advantage.8 These relationships are
strategic in nature, fostered by senior management in both organizations. The relationship is

dynamic, with each organization actively seeking opportunities for the other. In many cases,
these relationships lead to joint operations or ventures that are mutually beneficial. At the
extreme, this level of collaboration can lead to acquisition of one party by the other.9 The
selling role in this context is one of relationship/value creation.
RELATIONSHIPS AND ATTITUDE In practice, a major element of many relationships is attitude

rather than behavior.10 For instance, in the HP situation discussed in the opening vignette, Mark
Hurd felt that a key component of revamping the HP sales force was to change the attitudes of
salespeople from passive sellers to proactive relationship builders.
The attitude and culture of an organization and how these are reflected in the attitude of
individual sellers and marketers will imply certain behaviors toward customers. All relationships
are not on the partnering level, nor should they be. Relationships imply investment by both parties
and not all suppliers or customers will perceive the other party as a viable investment. Many sales
and marketing relationships, while having elements of both social interaction and partnering, are
haphazard rather than planned. The costs and benefits of complex relationships vary and are often
very difficult to quantify. Like any relationship, both parties must want the relationship to work. In
some instances, buyers will not want any type of relationship other than that which is purely trans-
action-based. Though this is not the norm, selling organizations must be willing to accept this view.
RELATIONSHIPS AND LOYALTY The basis for long-term relationships is satisfaction with prior
experiences between the parties. (Note that this relationship can be either individually based or
organizationally based. Obviously, organizations will seek to ensure that the relationship grows
beyond the individuals involved to protect the firms from employee job changes.) The longer the
relationship has had to mature, the greater its stability. Loyal customers remain loyal after an unsat-
isfactory experience.11 Recall the relationship of Ford Motor Company and Firestone, used
in Chapter 1, Exhibit 1-2. The relationship between Ford and Firestone dates back to a close friend-
ship between the two companies’ founders. The severing of the relationship as a result of the
Firestone tire debacle is surprising, and Firestone tires are not likely to be found on many new Ford
products in the near future.
RELATIONSHIPS AND CORPORATE CULTURE Increases in competition and the ever-shorter life
span of new technology are contributing to the evolution from product selling to offering selling
(i.e., transaction-based to relationship-based sales). The diversity of choices available to customers
makes it more difficult to be the seller of the customer’s choice. Depending on the philosophy of
marketing or culture under which the firm operates (see Chapter 1 and Exhibit 12-2, “The
Philosophies of Marketing”), sellers will be focused on different objectives and be expected to
perform different tasks.12 Corporate culture and the level of importance in the firm’s marketing mix
given to customer relationships will determine the approach of the seller. In product- or sales-driven
organizations, sellers are measured and rewarded by the short-term results obtained.
Seller objectives are focused on meeting the needs of the selling organization—selling
more now. If the organization is truly customer or market driven, the seller is measured and
rewarded with longer-range goals in mind. Seller objectives are focused on satisfying customer
needs. Exhibit 12-3 discusses the success that Kinko’s business-to-business sales force had
when management transformed order takers into relationship-creating sellers. One of the key
things that Kinko’s management did was change the nature of the objectives for which sellers
were accountable.
Different eras in business history have spawned different marketing eras or philosophies: These eras
or philosophies assist in the understanding of marketing and its role in business and society. All
organizations, however, have not moved on to the marketing or societal marketing theme. Depending
on corporate culture and marketing environment, some firms continue today to embrace earlier
philosophies.
• Production era and product era: Management focus was on maximizing consumption, making
sales the objective of sellers. Production efficiency has high value, while, with little or no effort to
understand customer needs, customization is almost nonexistent. In the production era, supply
was not always able to keep up with demand. Early beginnings of product differentiation occurred
in the product era. Sellers are order takers.
• Sales era: Sellers still focus on making sales, and maximizing consumption is still important,
though some attention is paid to customer needs. “Fit the market to the product.” Sellers use
persuasive techniques, often interpreted as a hard-sell approach.
• Marketing era: The primary objective of the sales force is satisfying customer needs.
Conceptually, this marketing philosophy works to maximize choice in the market. Differentiation
efforts extend to the total offering.
• Societal/partnering/value network era: (Many terms have been used to describe this era.) The
sales force objective is to build stable, long-term relationships. Conceptually, this marketing
philosophy works to maximize relationship or life quality.
EXHIBIT 12-2 The Philosophies of Marketing
Four Forms of Seller Roles

Given the preceding discussion on the components of and types of relationships, seller role patterns
can be defined for different organizational cultures and types of offerings.13 These roles vary by
complexity of skills required of the seller, proactivity, and the degree to which the relationship is
transactional or value creating, as discussed in the following sections.
THE ORDER TAKER The order taker’s primary role is taking orders and ensuring timely
delivery of the correct products. The buyer’s need for product and the seller’s need for short-
term sales results are the driving factors in the relationship. Most selling efforts are concen-
trated on making potential customers aware of stable product offerings. A major part of the
marketing mix is place, providing locational convenience and timely delivery. Product types
associated with this type of selling are usually in the late maturity or decline stage of the PLC
and/or of common usage knowledge, such as those products often sold through industrial
distributors to customers whose volume doesn’t justify a direct relationship. Users may be
conservatives or laggards as described by the TALC, generally avoiding risk associated with
innovative offerings. Little, if any, customer education is required to obtain maximum value
from the product, as the market is familiar with the technology. Sellers are rewarded based on
short-term results. Product- and sales-driven selling organizations that rely on this type of
transactional selling are unlikely to have the skills or approach to handle more sophisticated,
innovative offerings.
At first glance, it may seem like the order taker can be replaced to a large extent by a
Web site. In many instances, this may be possible. Certainly, a well-developed Web site can prove
a valuable productivity-enhancing asset to both buyers and sellers. However, this works as long as
the Internet-based relationships are primarily transactional. When there is an element of personal
In 1998, Kinko’s was still an independent company: it was the twenty-four-hour copy shop for business
travelers who lost their luggage and students whose dog ate their homework and it obtained approxi-
mately 20 percent of revenues from business clients. Efforts to attract business customers were largely
left to the discretion of each local copy shop. Kinko’s headquarters provided little assistance for
business-to-business selling efforts. As a result, sellers were little more than order takers, an extension
of the retail shop, waiting for customers to come to them. Business-to-business sales were small, one-
time corporate deals. There was little repeat business, and new business was difficult to forecast.
Kinko’s management recognized that it had to turn its sales force from a collection of hardly
managed order takers into a team of relationship-creating, problem-solving sellers. Business-to-business
sales were reorganized. Management created a focus and goals. Sellers were encouraged to find long-term,
profitable relationships with large customers. Marketing tools were created that helped sellers approach
higher levels of management in potential customer organizations, enabling discussions of continuous
duplicating services, rather than overflow copy making. A new Intranet site was developed with information
on the new sales process, frequently asked questions, customer case studies, and aids for new employees
approaching unfamiliar customers and customer types. To effectively use these new tools, the newly
created 500-person sales organization was trained in a seven-step sales process that focused on building
value for customers. Key to the success of the process was continuous communication with customers.
They were no longer to be treated as “some people who need a rush set of copies” but as business partners
who had selected Kinko’s as the provider of choice for their copying and duplicating needs.
The results? Not only did sales increase more than 50 percent but sellers reported that the
new process, with common measurements, procedures, and more clearly defined offerings, assisted in
creating lasting relationships. Having gone from order takers to relationship builders/problem solvers
proved very satisfying. Turnover was lower, and sellers were excited about future prospects. Sales?
Results were 110 percent of plan. Not bad for an organization that had not met its sales targets for the
three previous years.
EXHIBIT 12-3 Kinko’s Prints a Business-to-Business Plan Source: Based on Andy Cohen, “Copy Cats,”
Sales & Marketing Management (August 2000), pp. 50–58.
service required, Web-based systems have not yet proven to be good substitutes. The quality and
depth of the selling relationship become major differentiating elements of the marketing mix.
In the example about Kinko’s, the company’s business-to-business sales organization,
before the change described, was made up primarily of order takers. As described in the opening,
this reactive sales model can make repeat business subject to significant reselling effort. If
the buyer feels that it has been the proactive party in the transaction, it is more likely to seek
assistance from any providers who could meet the customer’s requirements. Since no close
relationship exists between buyer and seller, the buyer would not be inclined to define its future
purchases with a single provider who knows the customer’s business intimately.
One type of the order taker role is the inside sales or customer service specialist. The
individual in this position seldom meets customers in person. The relationship is usually over
the telephone or via e-mail. The primary functions of the position are to administer the sales
order system of the supplier and to facilitate the logistics needs of the customer. Many of the
commitments related to availability and delivery made by the field selling organization are
satisfied by the efforts of the inside sales team. Known by many titles (sales service specialist,
order facilitator, customer service representative, etc.), these individuals are often the backbone
of internal customer order handling. In the case of routine purchases, the inside sales team
is often the direct contact for the customer. Once a customer buying pattern is established, a
proficient sales service specialist anticipates orders and proactively solicits routine business
buyers in the customer organization. The inside sales team serves the field seller by freeing time
for relationship building and value creation and serves the customer by always being available
to take, track, and expedite orders.
THE PERSUADER/SUSTAINER The development of the order taker relationship into a major
differentiating element of the marketing mix leads to the persuader/sustainer role for the seller.
In this role, short-term results are still the primary sales orientation. However, the seller takes a
more proactive role in the relationship.
As a persuader, the seller continuously informs and updates customers about products
and offerings. The persuader attempts to convince the customer of the value of the product
versus competitors’ products, though the focus is still on the needs of the selling organiza-
tion. Though a hard-sell approach is of diminishing value in business-to-business sales,
the persuader often resorts to such techniques to obtain orders now rather than later. In this
selling situation, product types, though similar to the order taker scenario, are still evolving
and thus have an added degree of heterogeneity. Some customer education may be necessary.
The product is likely in the maturity stage, and differentiation from horizontal competition
does not rest solely on price.
As a sustainer, the seller has a responsibility beyond that of obtaining short-term sales to
include maintaining and nurturing an existing relationship with established customers. In the
circumstances described here, customers look to the supplier for help in making the best selection
among heterogeneous offerings. As described in Chapter 11 and in Exhibit 12-4, “New Business,
Different types of “new business” require different seller resources. Real new business is the result of a
major R&D, product development, and/or marketing effort, usually in conjunction with a customer. This
results in first-time applications or adoptions of technologies. Many parts of the organization are involved.
These are the applications and efforts that everyone in the organization finds the most exciting. Seller
resources required for real new business include training with the product, training on matching customer
needs to product capabilities, prospecting assistance, and other market intelligence. Real new business
produces new revenue but usually incurs greater selling costs than either translation or core churn.
Most “new business,” of course, is not real new business, not a “first of its kind” application of new
products or technologies. While a partnership with the customer may have developed a specification for
your company’s product, and it may be new in the view of that customer, it is not “new” to your organization.
It is merely a translation of a previous success with another customer. In translation business, sellers must
be accustomed to the new products and uses among prior customers. Some prospecting assistance may be
required. The revenue is new to the company, and the costs will not be as great as with real new business.
What if the translation business replaces an application of your older technology product? Is this
business still considered new? It certainly requires an effort by the team to get the business, however, it
should not require as large an effort—assuming the translation tools were adequate and the customer
relationship has been at least sustained. Unfortunately, the organization does not experience an increase in
business volume equal to the sales of the new product. The seller realizes the net of the old and new
volumes. This replacement business, core churn, is necessary, important, and critical to market ownership
but not as glamorous to the team as real new business. Such selling effort requires some new resources in
terms of product and usage knowledge but generates the lowest level of the three in the way of additional
selling costs.
The organization needs all three types of new business—real, translation, and churn. Each type has
different implications for margins, customer support, and product development—the entire marketing mix.
EXHIBIT 12-4 New Business, Translation, and Churn

Translation, and Churn,” this sales role is most likely to deal with business that would be described
as core churn. Because of the differentiable nature of the product and the variety of alternatives, the
sustainer must actively recognize the role of sales in maintaining the positioning and image of the
selling organization. The activities of sellers for enlightened industrial distributors and supply chain
service providers fit this category.
THE MOTIVATOR/PROBLEM SOLVER Customers rely on sellers for advice, particularly as

product offerings become more innovative and complex or require a significant degree of
customer education to obtain full value. Under these circumstances, the persuader/sustainer
evolves into the motivator/problem solver. This is not, however, automatic. The selling orga-
nization must be market driven—sensitive to customer needs. The type of offering described
(complex, innovative) and the need to assist customers in maximizing the value received
would seem to naturally apply to products in the introduction or growth stage of the PLC.
Depending on the level of customer education necessary and the level of customer interest in
new and innovative offerings, typical customers are visionaries or pragmatists. In this
scenario, the selling organization has a much different task than in prior role descriptions.
The motivator/problem solver is part of a sales force whose primary objective is satis-
fying customer needs. This is accomplished less through short-term sales goals and more
through the ability to create unique customer solutions through matching of supplier cap-
abilities with customer needs. The seller is expected to fully understand the customer organi-
zation, its culture, buying habits, processes, and its customers. This level of knowledge assists
in anticipating customer needs or recognizing problems where seller solutions can be applied.
This type of business often fits the description of translation business—often proving the
segment through discovery.
The motivator/problem solver is most certainly considered a resource by the customer.
Customers, as described earlier in this chapter, demand creativity and commitment on the
part of the seller. The motivational aspect of this selling role consists of the seller’s ability to
encourage customer product development personnel to incorporate the offerings of the sup-
plier. Involvement begins early in the new-task buying process. The closer the relationship
between supplier and customer, the earlier in the buying decision process this influence can
be applied.
For the motivator/problem solver approach to be successful, the seller must expand the
sphere of influence to a greater number of stakeholders in the buying center. This is a major
distinction between this role and the role of the persuader/sustainer. This proactive approach
begins to take on the appearance of field market development. Sales management, recognizing
that compensation must be tied to results, is challenged as a larger quantity of seller resources
become committed to development of solutions rather than maintaining existing sales.
(Compensation is discussed later in this chapter.) When the supplier has a line of products that
require significant customer education, the likelihood increases that the customer development
process will require considerable attention.
The complexity of motivator/problem solver objectives has led management in many
organizations to recognize the value of splitting the functions into a sales role and a missionary
sales or field marketing role. When this occurs, it is important that the field marketer’s reporting
arrangement is to the marketing organization, freeing the individual from short-term sales
objectives (the title of the field marketer position varies and sometimes holds little descriptive
evidence of the job function—i.e., customer engineer, product evangelist, etc. See “Missionary
Sellers/Field Marketers” section).
The example of Kinko’s, described above in Exhibit 12-3, readily demonstrates the value of
the motivator/problem solver role even with products and offerings that, at first glance, may seem
generic. After the rebuilding of Kinko’s business-to-business sales force (and continuing after the
acquisition by Fedex), new business-to-business customers were not likely to see the service pro-
vided as generic, particularly since the offering was tailored to the individual needs of the customer.
THE RELATIONSHIP/VALUE CREATOR In the relationship/value creator role, sellers are

expected to build and maintain relationships with all elements of the customer buying center. The
relationship between supplier and customer develops into a partnership that is mutually inspiring
and stimulating. Both supplier and customer recognize that for each of them their own success is
tied to the other party’s success. Rather than an individual seller effort, these relationships are
often built by sales and marketing teams.14 Value is created by both customer and supplier teams,
and each appreciates the value of the other. In this role, the selling objective is to creatively join
supplier capabilities with customer needs. The outcome of this effort would be “new business”
development (as opposed to translation or core churn).
The partnering role of value creation adds many different tasks to the responsibilities of the
seller. The seller becomes a liaison between elements of the supplier value chain and the customer
buying center. In this role, the seller is a diplomat, a manager of conflicts, a resource allocation
expert, and a director of a team whose mission it is to provide value to both organizations. There is
no mention of maximizing short-term sales or use of persuasion tactics.15 In fact, short-term results
are often sacrificed to build the relationship and the associated long-term benefits.
At this level of relationship, there is not anything that is not the seller’s job. A crucial element
of success in this type of customer–supplier relationship is the commitment of senior management
of both firms. Customers must be equally interested in relationships at this level. It is important that
all members of the team, both customer and supplier, understand the nature of the relationship.16
The relationship/value creator is a more sophisticated sales approach than other role
models described here. The seller must be solution oriented for the needs of both the customer
and the supplier. This more sophisticated approach requires a more complex set of seller and
selling organization skills. This context is not served by the typical sales training advice on
selling tactics. Suppliers and their sellers must have a strategic vision of the customer’s industry
and the clientele fit in it.
Knowledge of the customer’s market environment, an understanding of the nature of the
customer’s business and the customer’s approach, is also important. (See Chapter 6, regarding
knowing your markets, which is also summarized in Exhibit 12-5.) Individual seller capabilities
Knowing your markets includes knowing:

• The customers’ technologies
• The customers’ products
• The customers’ markets and customers
• The customers’ competitors
• The customers’ channels
• The customers’ buying center and buying patterns
• The customers’ culture
EXHIBIT 12-5 Knowing Your Markets Note: Chapter 6 discusses

knowing your markets in greater detail.
Takes orders; ensures correct and timely delivery of offering.

Order Taker Major effort in the “place” marketing mix variable.
Proactive role in relationship. Informs customers about offerings

Persuader/
and ongoing updates. Attempts to convince customer of value of
Sustainer offering, though the focus is still on needs of selling organization.
Focus on the needs of the customer organization, potentially

Motivator/ creating unique customer solutions through match of supplier
Problem Solver capabilities with customer needs. Considered a resource by the
customer.
Build and maintain partnership with all elements of the customer

Relationship/ buying center. Supplier–customer relationship is mutually inspiring
Value Creator and stimulating; both parties recognize an equity in the other’s
success.
EXHIBIT 12-6 Summary of Different Seller Roles
should also include strong interpersonal skills, business analysis skills, and problem-solving
skills. The nature of different seller roles is summarized in Exhibit 12-6.
Other Types of Selling Roles

As discussed throughout this text, the customer decision process and usage situation for many
business-to-business products and services are so complex that several other selling-related roles
are needed to successfully deliver value to the customer. The two most important of these are the
missionary salesperson and the post-sale customer service provider.
MISSIONARY SELLERS/FIELD MARKETERS The four models of seller roles described evolve
from simple order taking into complete immersion in the internal organization of the customer.
When the supplier–customer relationship is complex—such that significant sales and business
development are ongoing or when the development period is significantly long, regardless of the
existing sales relationship—it is inappropriate to expect sellers, compensated on commission
with a short-term focus, to be responsible for the development effort. In these cases, creation of
a FMD team can separate the long- and short-term efforts into more appropriate field functions.
Missionary sellers/field marketers are known by several position titles (customer engineers,
product evangelists, market development specialists, to name a few) but are best categorized as
field marketers.
Field marketers are critical in finding new prospective customers, finding and testing new
market segments to address, and in developing new business within existing customer accounts.
As discussed in Chapter 3, the initial phase of the customer’s decision process may extend over a
relatively long period of time, particularly when the product or service includes significant learn-
ing or represents a significant departure from the way that the customer is used to operating. The
Vice-president of Marketing and Sales
Sales Manager Marketing Manager
Regional Regional Programs Manager

Field Manager
Sales Sales Field Sales
Manager Manager Team
Headquarters Headquarters
Segment Segment
Field Field Field Specialists Specialists
Sellers Sellers Sellers
Purchasing influences Field Marketing

at customers who are Field Team Field
contract providers to Marketer Marketer
end users.
Purchasing Specifying influences Specifying influences Specifying influences

influences at at end-user customers at end-user at end-user
integrated who have integrated customers who rely customers who rely
customer facilities manufacturing facilities on contract providers on contract providers
Direct sales flow Outsource/contract provider flow Field Marketing Flow

Key:
EXHIBIT 12-7 Organizational Relationship Between Field Sales and Field Marketing
missionary salesperson then must be adept at building relationships and participating with those
relationships to create value for both parties.
Recall that, as mentioned in the endnotes of Chapter 3, missionary sellers are part of
the marketing organization. Exhibit 12-7 shows a typical organization that uses the dual field approach
of sales and marketing. The field marketing team, consisting of missionary salespeople or FMDs,
reports to the marketing manager through a field manager. The missionary salespeople or FMDs can
be located in headquarters but are more effective as field positions, sharing regional facilities with the
field sales team. The primary functions of missionary salespeople or FMDs are as relationship/value
creators, working with members of the buying center at the specifying customer.
The field sales organization shown in Exhibit 12-7 has a primary role of either motivators/
problem solvers or persuader/sustainers. Purchasing influences in integrated customer orga-
nizations that buy directly from the seller, as well as influences at contract providers who supply
to the specifying customer, make up the primary field sales relationships.
As described in Chapter 11, these field marketers are often the individuals who are respon-
sible for the marketing operations forecast. As part of the marketing operation, these marketers
can rely on the entire marketing management chain to reinforce value creation efforts at various
levels of the customer organization, leaving the sales organization to concentrate on short-term
revenue generation. Additionally, the entire organization relies on these individuals to deliver
the necessary information contained in the MOF. Regardless of level, the purposes pursued are
the same: to obtain information, to establish rapport, to educate, and to explore ways that the
supplier can create value for the customer.
POST-SALE CUSTOMER SERVICE For many relationships, the customer organization needs
considerable attention and assistance from the supplier organization to effectively use the
products or services it purchases. Effective customer service can make the difference between
delivering superior value to the customer and having a customer that is not fully satisfied.
Customer service done right is expected; done wrong is a disaster. Service requirements can
cover a range of needs, including product or process design assistance, marketing planning
and execution assistance, installation, training, troubleshooting, repair, and upgrades. In some
cases, suppliers provide customers with assistance in product design and management.
Two principal problems must be addressed to provide good customer service in
business-to-business markets. First, the service has to be useful and appropriate for the
customer. In many business markets, the customers are few in number and their needs unique.
Accordingly, the customer service staff must be skilled in tailoring its service to the cus-
tomer’s special needs—major customers may be provided with dedicated, specialized service
personnel within the supplier organization. In other markets, the customers are numerous
and varied. Customer service personnel must be able to handle service requests quickly and
appropriately.
The second principal problem to be addressed is that service must be provided in a cost-
effective manner. Service costs are usually imbedded in the price of the offering, unless the
customer specifically declines that level of packaged value. When service is sold as a separate
offering, the offering can be subject to close scrutiny by the customer. Still, the service organi-
zation must be able to manage costs in such a way that profitability is maintained.
Customer service situations are opportunities to build and reinforce the customer relationship,
not cost-based situations to be avoided. A product problem that could become a major issue can
be transformed into a service success, creating “a fan” of the customer. Poor customer service only
reinforces the initial difficulties that caused the customer to seek aid in the first place. Because
customer service can be so important to providing value to customers, the marketer should be
involved in the design of the service offering or in directing the personal interaction required
between service provider and customer.
This task of building customer relationships through service is made more difficult
when the service delivery model does not provide for continuity of contact between the
customer and individual service personnel. It is important that the service organization have
some sort of institutional memory. Suppose, for example, a technical problem arises at a
customer site. If the service organization has a database of interaction histories, the service
person that gets the call can see the service history and have more information on which to
base a solution.
Customer relationship management software and services have been developed and
deployed in recent years that have greatly improved suppliers’ ability to deliver good service.
The software keeps track of all orders and service provided. It gives any service personnel
updated information on the complete history of every customer. It tracks current order progress
and current service progress. It further gives callback schedules and reminders.
Good service people can also initiate the customer decision process for future purchases.
A good CRM system (automated or not) prepares the service people to recognize opportunities
through observation of other customer problems and to begin the collaboration between
customer and supplier toward finding a solution.
Note that CRM software is not a replacement for an effective MOF, as the MOF, created
by the marketing organization, is an essential tool of the entire organization, not just the sales
organization. The MOF provides information to effectively plan and develop marketing efforts
over a longer time frame. Boundary personnel must recognize the necessity of providing correct
and timely information to the forecast effort and management at every level must reinforce this
posture.
Management Perspective
In all of the roles discussed, management must consider what the selling organization is trying
to accomplish and match that with what the best information available says that the customer
organization is trying to accomplish. The most sophisticated seller role does not automatically
work with all customers. Developing a sales force and establishing the context for the sales
relationship require an understanding of what is seen as having value by both the supplier and
the customer.
Exhibit 12-8 generalizes the correlation of value and relationship complexity. While
this summary is a generalized case, it does illustrate that the appropriate sales force design is
dependent on many factors, often situational. In Exhibit 12-8, the shading of transactional
sales and relationship sales bars is not intended to imply that relationships have no signifi-
cance in transactional sales. In fact, a strong case can be made that the buyer–seller relation-
ship may be one of the strongest factors by which the product is differentiated from the
horizontal competition.
The increasing complexity of the buyer–seller relationship can be based on many factors,
such as the size of the buying center, the need for customer training, design assistance, and the
overall attitude and approach to relationships by the customer organization. Responsibilities and
coincident training needs of the seller will vary with the expected role type the seller will play.
As the sales relationships depicted in Exhibit 12-8 become more reliant on a value orientation
and an increasing complexity of the buyer–seller relationship, the demands on the skills of the
A Generalized Case
Increasing Value Increasing Complexity

Orientation of Relationship
Complexity of Seller Skills

Relationship/Value Creator
Relationship Sales Motivator/Problem Solver
Transactional Sales Persuader/Sustainer
Order Taker
Degree of shading indicates relative degree of importance.
EXHIBIT 12-8 Correlation of Value and Complexity of Relationships

seller increase. The seller roles will be a reflection of management commitment and support.
Based on the commitment of senior management in both the supplier and customer organiza-
tions, the relationship/value creator role is far more likely to create value with technophile and
innovator customers and sellers.
THE MUTUAL NEEDS OF BUYER AND SELLER

In effective dyadic relationships, the creation of value is not limited to the immediate task at
hand. Both buyer and seller will have expectations of the role each will play and how individ-
ual and organizational needs will be met. The most effective relationship is one in which
the individuals involved recognize the factors that make each other a success. What defines
success, however, is broader than satisfactorily completing the immediate task and varies
with the individuals involved. With this in mind, consider that organizational buyers and
sellers have three needs to satisfy:
1. The needs of the job function
2. The needs of the organization
3. The individual needs of the buyer and seller.
The Needs of the Job Function

At the most elementary level, each member of the buying center in the customer organization as
well as each member of the value creation team in the supplier organization has a specific, short-
term job to perform. Tactical sales trainings and purchasing seminars cover the necessary content
of “good selling and buying.” This section is not intended to elaborate in this area. The emphasis
is with the context or attitude of the effort. In most selling efforts, it is no longer adequate to “just
sell” and not be concerned with satisfying customer needs beyond the immediate transaction,
just as in buying, it is not wise to leverage a supplier in a manner that threatens long-term
survival. Exhibit 12-9 takes a look at some of these issues.
Both sides of the relationship have job-related tasks that must be performed to achieve a
minimum degree of success. Other members of each organization rely on them to meet day-to-day
expectations associated with the job function. Within the selling organization, these expectations
depend on the type of seller roles employed. Within the buying organization, role types are deter-
mined by the complexity of the purchase, from new task to routine repurchase. The number of
participants in the buying center and the value creation team will change, depending on the
purchase complexity and frequency of the purchase. In a customer-sensitive organization, the sell-
ing team becomes a mirror of the buying team. In other words, sellers will sell the way buyers
want to buy.
The Needs of the Organization

The needs of the supplier and customer organizations extend beyond the short-term needs of
the job functions of buyers and sellers. Members of the buying organization will place
demands on the selling organization that will be focused by the buying center through the
seller. Sellers then need to be not only competent in representation of their product or offering,
but must represent the image, culture, and value potential of all elements of the company they
represent. Sellers have an obligation to their organization on a day-to-day basis, to be goodwill
Though the relationship has received attention lately, the automotive industry has always talked of
the Tier 1 supplier base as a group of critically important suppliers. To reduce their own design and
development costs, the auto makers have encouraged suppliers to take on development of vehicle
modules—suspension systems, interior seating systems, climate control, and other subsystems.
Though suppliers would incur higher costs as a result, they were assured that their efforts would be
considered at price-setting time. In other words, the ideal partnership is building relationships that
create value for both parties.
There have been a few problems. It seems that as soon as the overall automotive market
turns down or one auto maker gets into a profit squeeze, suppliers are asked to make up the differ-
ence. The first episode was in 1992 when Jose Ignacio Lopez, then purchasing chief for General
Motors, forced, with the threat of losing the business, suppliers to cut costs. This began an all-out
war between GM and suppliers that lasted through much of the 1990s. Supplier relationships crum-
bled. GM never realized the savings that Lopez projected, and supplier quality and performance
declined. Even after Lopez left GM for VW, his name became an icon for relationship busting and
price cutting.
During the period that GM was damaging relationships, Chrysler had come from near bankruptcy
into a period of prosperity. Chrysler insisted that it knew the value of supplier relationships, as suppliers
could make or break the company. Suppliers were encouraged to work with Chrysler to find cost
savings, and both supplier and Chrysler shared in the outcome. Suppliers rated Chrysler as their favorite
customer. In 2000, however, Chrysler, then part of DaimlerChrysler since 1998, was in trouble. Group
CEO Dieter Zetsche announced that, effective immediately, Chrysler would reduce all purchasing
contract prices by 5 percent. Under the new rules, if a supplier shipped goods, they were agreeing to the
new terms. In effect, Chrysler “did a Lopez.” In fact, trade press editorials soon had headlines like
“Lopez All Over Again.” Some industry commentators called it extortion. Suppliers, however, sent their
own shock back to Chrysler. Seventy percent of Chrysler suppliers said no. Supplier commentary was
similar to this: “They can’t say partnership in good times when we spend development funds and then
say cut margins when they have a problem. We can’t afford it. It does not benefit us in the long run.
Quality and warranty costs will suffer.” They did.
The debate over long-term relationships versus transaction-based relationships goes on. GM is still
haunted by supplier memories of Lopez. No customer will establish good working relationships with
suppliers as long as they treat them as commodities. Customers too, must be responsible for the long-term
benefit of supplier relationships. GM and Chrysler found out. Kinko’s figured it out. Next?
EXHIBIT 12-9 Relationships Have to Work Both Ways Update Sources: Based on several reports:
Mark Yost, “Suppliers Say Ghost of GM’s Lopez Haunts Online Auctions,” The Wall Street Journal/Dow
Jones Newswires (March 8, 2000); Lindsay Brooke, “It’s Not Business, It’s Extortion,” Automotive Industries
(March 2001), p. 7; Ron Harbour, “Nothing to Give Back,” Automotive Industries (March 2001), p. 16;
Maryann Keller, “Lopez All Over Again?” Automotive Industries (March 2001), p. 19; Gerry Kobe, “Supplier
Squeeze,” Automotive Industries (March 2001), pp. 26–30.
ambassadors and crisis management specialists. In the eyes of the customer, the seller is the
selling organization.
Just as customers will place demands on sellers that are beyond traditional transactional
roles, the supplier will expect its sellers to have an extensive familiarity with the backgrounds of
their customers. The seller is the first source of information about the customer. Sellers will have
an obligation to their own organization to know not only what customers buy and how/when
they will use it, but will be expected to understand the customers’ businesses well enough to
anticipate, with an adequate degree of confidence, how decisions will be made (refer again to
Exhibit 12-5, Knowing Your Markets).
Buying activities of customers also extend beyond just a transactional nature. It’s up to the
seller to recognize the organizational demands placed on each stakeholder in the buying center
and to be a part of the resolution of those demands. As discussed earlier in this chapter, attitude
is a major factor in the successful relationship. Both sellers and buyers need to recognize that
they are the first level of interaction in the business-to-business relationship.
The Individual Needs of the Buyer and Seller

Beyond job function and organizational needs, individuals in buying and selling roles will have
career, personal, and professional needs that are part of their goals. Sellers that recognize the mutual
nature of these needs can be far more effective in building relationships and creating value for both
organizations.
For professionals, rewards and goals go beyond monetary compensation. Individual needs
related to career advancement, recognition, professional organization membership, and office
holding and authoring of journal articles and features are all possible goals or needs felt by
different members of the organization. Particularly in situations where the offering will be a
result of a joint development effort by supplier and customer, there will be opportunities to
recognize individuals in both organizations. As the new business is prepared for translation to
additional users, contributors can be acknowledged by sponsorship of technical papers featuring
the participants as authors.
Buyers may also have aspirations that are related to how they are perceived in their roles
(“make me a hero in my organization”) or how they are perceived by family and personal rela-
tionships. Sellers have opportunities to play a role in the attainment of these goals. There may
even be opportunities, within the bounds of ethics and good taste, to impact perception in the
home environment (see Exhibit 12-10, Fruits, Flowers, Potted Plants, and Chocolate).
A substantial part of relationship building is getting to know the customer beyond the work environment.
Still, an accepted part of the sales relationship is business entertainment. Entertainment can take the form
of meals, attendance at conferences, tickets to sporting events, and similar gratuities. Many companies
will have policies that limit the extent of these events to prevent abuses from either buyer or seller.
Sellers often will find that they have pulled customers away from their families with business-
related meetings, trips, or occasional sporting events. This doesn’t help the customers with their
family relationships. In an effort to turn the home conversation from “are you going to the baseball
game with those business buddies again tonight?” into something positive, many astute sellers will
reward the home environment with delivery of flowers, candy, fruit baskets, or other tokens of appre-
ciation. The intended message: “We recognize your sacrifice for our business—we just wanted to let
you know we appreciate it.” Hopefully, this turns the conversation into something like this: “You’re
going to the conference with them—hey the flowers they sent were beautiful.”
Some care should be taken in this venture. Don’t send house plants to people who have serious
allergies, and avoid candy if someone is on a diet. Most of all, be sure to let the business associate
know that the gesture will happen. As the story goes, a few years ago, a major airline forgot this part.
As part of an effort to lure more business travelers, the airline offered a “spouse flies free” to business
travelers. They thought they had a very successful promotion until they mailed “thank you for flying
with us” cards to the homes of business travelers. Rumor has it that not so many spouses had actually
made those trips!
EXHIBIT 12-10 Fruits, Flowers, Potted Plants, and Chocolate

Selling Structures
A direct sales force consists of personal field sellers who rely on the “rep” for account coverage. Reps
directly employed by the supplier of the offering do not take ownership of the goods they represent.
and support staff and resources. Sellers’ respon- Reps are compensated by commissions on the
sibility may be defined by product or customer products they sell.
type, geographic region, or another segmentation A distributor represents manufacturers’
scheme that meets customer needs and creates goods by taking ownership and providing local
a manageable workload for the seller. The most inventory to businesses in the region. Distributors
costly type of selling structure is direct sales. provide many other business services involved with
A manufacturers’ representative is an inde- form, time, place, and possession—the four types
pendent businessperson who acts as a supplier’s of economic utility. Distributors make money by
agent or representative in a particular market buying products from suppliers at wholesale prices
segment. Manufacturers’ representatives usually and reselling them to final customers with distribu-
represent several noncompeting manufacturers tor’s markup (added margin).
SELLING—THE STRUCTURE
Should the business-to-business supplier employ its own direct sales force, establish an agreement
with a manufacturers’ representative, or rely on distributors for sales coverage? The answer to
this question depends on the nature of the offering, the concentration of customers, and the manner
in which customers want to buy the product or service. Chapter 14 focuses on the rationale for using
distributors and the development of various types of marketing channels. This chapter examines the
underlying principles behind the use of either direct sellers or manufacturers’ representatives or, in
some circumstances, a combination of both.
A sales call pattern is a
sequence or cycle of sales
calls typical for a given Sales Force Organization
type of product or cus-
The direct sales force can be organized in several different ways. This brief sum-
tomer. It is dependent on
the type of selling involved mary describes only the most common types of organization. The most common
with a product and the type sales force organization is by geographic territory. Firms with multiple products
of customer base. Products may organize by product, particularly when different products do not have the
with similar buying styles, same customer base or call pattern. When a firm has a large concentration of cus-
habits, customer types, and
tomers in a particular area—such as the automobile industry in Detroit, the com-
selling intensity may be
grouped together and puter industry in Silicon Valley, or the oil and gas industry in Houston, the sales
represented by the same team may be organized to focus on that particular customer type. An extension of
seller. An equipment this type of organization may be the “national accounts” or “account manager”
product line that is a new position. This is useful when one customer has many locations that are served on
task purchase, possibly
a daily basis by many different sellers. Such a situation would occur with a cus-
requiring a capital
investment decision by the tomer like IBM, with major facilities and buying centers throughout the world. An
customer would not fit the account manager is the coordinator of all the individual efforts. Of course,
same call pattern as items depending on the collection of products and offerings, different suppliers may
that are routine purchases elect to use any combination of these types of organization. Whatever sales orga-
such as supplies and
nization structure is used, firms must recognize that the organization should match
materials. Matching call
patterns is an important the buying habits and patterns of customers, not the convenience of the firm.
consideration in sales All of the factors already mentioned that differentiate sales organizations
force design. can be used to determine the correct manufacturers’ representative for a supplier.
When the firm cannot afford a direct sales force, when call patterns for a new product will be
significantly different from existing patterns, or when customer facilities are not concentrated in
a manageable geography, contract representation may be the best alternative. Often, firms
that have sales teams serving geographic concentrations of customers utilize manufacturers’ rep-
resentatives in other market areas with few customers, ensuring complete coverage for the firm’s
products.
DIRECT SALES FORCE

This section starts with an in-depth discussion of the direct sales force. Manufacturers’ repre-
sentatives are discussed later in this chapter. An in-depth discussion of distributors occurs
in Chapter 14.
The average value-added sales call costs the seller’s company over
A sales call is an in-person
$200.17 The approximate number of in-person sales calls that a professional meeting between the seller
seller makes in a day is four. This is down from almost five calls per day twenty and stakeholder(s) in the
years ago. What contributes to these numbers? customer buying center.
The cost of sales calls varies greatly, depending on the type of product or The meeting may be
service, the travel involved, and many other factors. Costs per sales call include all dyadic or involve several
members of each
the costs of putting a direct sales force in the field, such as the purchase or lease organization.
and operation of a company-provided vehicle, travel expenses and expense ac-
counts, cellular phones/faxes/laptop computers, and, of course, the seller’s compensation. The aver-
age cost of each in-person meeting with the customer is further influenced by the fact that sellers,
on average, spend slightly more than a third of their time with customers. The same study notes that
sellers spend approximately one quarter of their time performing administrative duties (paperwork,
meetings, and so on) and almost one third of their time traveling or waiting to see customers.18
Sales managers are always in search of methods to improve the sales productivity statistics
quoted above. One of the numbers noted, four sales calls per day, may at first look to be moving
in the wrong direction. Quite the contrary; through the more effective application of widely
available communications capabilities (phone, fax, e-mail, teleconferencing, and so on) and the
availability of large quantities of standard information from electronic sources such as the
Internet, sales force productivity has improved. A top–down forecast is
often the result of
research efforts to
Sales Force Deployment forecast market potential,
starting with a “whole
Effective deployment of a company’s sales force requires knowing the market market” forecast and
sales potential, compiling these estimates into sales estimates for specific reducing it to the specific
customers in specific territories, and evaluating trends that may impact this fore- segment(s) in question.
cast. Knowing the market potential is often the result of a top–down forecast, A bottom–up forecast
starts with an analysis
while market estimates for individual customers, if the territories are already
of how much product can
staffed, are usually the result of a bottom–up forecast. (A more in-depth discus- be sold to each customer
sion of forecasts, including the bottom-up marketing operations forecast, can be in a particular region or
found in Chapter 11.) territory. The forecasts
Some trends can be anticipated; others cannot. Natural disasters, wars, are rationalized with
the business objectives of
political crises, financial market upheaval—all of these can impact the design of
the organization. In a
the sales force structure. The newness of the offering—its distinction or degree market-driven
of innovation in the market—and the existence of ongoing relationships with organization, this is often
potential customers can impact the outcome. Smaller organizations placing new part of the MOF.
technology in the market may not have an extensive relationship base. Managers will have to
estimate the acceptance of the offering as it moves through the adopter categories.
The next step is to determine how many sellers will be needed to bring about the sales fore-
cast, consistent with the resources of the firm. The nature of the offering, the learning curve, and the
required level of customer education to get maximum value from the offering will
Intensity of territory have significant influence on the intensity of territory design and skill levels of
design refers to the the sellers. Managers are expected to estimate the average length of sales calls,
number of sellers in a travel time between calls, and the number of calls per customer per sales period
given region. If customer
education is a major
(customers must be prioritized). The offering position in the PLC will influence
consideration, sellers will the length of each sales call and the number of missionary or development sales
be required to spend calls that will be necessary to turn potential customers into buying accounts.
greater amounts of time This last factor, the amount of missionary or development effort required
with each customer. As to create a success, has significant influence on seller selection and compensa-
the customer base learns
how to use the full value
tion. Organizations that require a significantly large missionary effort from
of the offering and the their sales force but still need day-to-day short-term sales results may find it
purchase becomes appropriate to split the responsibilities between a short-term-focused seller and
routine, less attention to a long-term-focused field marketer. This “double field team” can be costly.
each account will be Small and/or start-up organizations without a strong base of core business may
required. While this can
appear as an opportunity
find it more appropriate to focus on the missionary role, regardless of position
to increase seller title, and provide appropriate compensation.
productivity, it may be a
false indication; in most Sales Force Compensation
instances it would be
preferred to have new, Rewards for sellers take various forms as part of an overall motivation package.
additional offerings Rewards can include sales contests, better territories, higher salary, better company
rather than change the car, and similar monetary and personal or ego gratification. Different activities
nature of the seller
relationship.
of the seller will be pursued with different levels of enthusiasm depending on
the expected reward. Studies have shown19 that sellers’ motivation is derived
from their beliefs about whether an expended effort will lead to a given amount of improved
outcome (expectancy); their belief that an improvement in a particular area of performance
will lead to a corresponding increase in a given reward (instrumentality); and the desirability of
the offered reward, relative to other levels of achievement and reward already obtained by the
individual seller (valence perceptions). At the risk of oversimplification, a summary of the
preceding statement could be that, generally, you get what you reward. Thus, in the process of
designing a compensation plan for sellers, managers must assess the job performance and
behavior that will most benefit the overall marketing and sales objectives of the firm.
STRAIGHT-COMMISSION COMPENSATION PROGRAMS Many managers believe that sellers

are primarily motivated by money and, thus, will favor compensation plans that are directly tied to
sales obtained and paid for. While money is a major motivator, this style of compensation must be
consistent with the objectives of the organization and fit with the type of product offered.
Commission-only plans are most appropriate for products and services where repeat efforts
are necessary to sustain customer purchases. Frequently ordered items (routine rebuy), such as
consumables and other supplies and materials and parts easily replaced by horizontal competition,
are such items. These are low-involvement, low-learning offerings, often in the maturity or the
decline stage of the PLC. The selling role is order taker or persuader/sustainer. Referring again to
Exhibit 12-8, the value of these sales roles is correlated to products with few if any adoption
issues, late in the PLC, with the least complex product-related value statement. “Product related”
is an important distinction. As described in “Four Models of Seller Roles” earlier in the chapter,
the buyer–seller relationship can be a major differentiating factor in these sales.
With commission-only compensation plans, rewards are linked to short-term, repeated perfor-
mance. Sellers most likely will concentrate their efforts with customer accounts that have a pattern
of frequent and substantial purchases. If the seller is meeting organizational and personal objectives,
there will be little incentive to develop new accounts or introduce new innovations to existing
accounts. Sales managers find that they have little leverage or control with which to persuade sellers
to engage in sales development efforts or even perform routine administrative tasks. The seller con-
siders any diversion from the time spent with preferred customers an opportunity cost. In an attempt
to exert some level of control, at least with regard to the attention paid to different products in the
product line, variable commission rates are used. More profitable products have higher commission
rates, hopefully encouraging sellers to focus on those products. Offerings that require a significant
time period for adoption or customer learning may be inappropriate products for a full-commission
sales force.
Straight-commission plans can also be a problem for sellers. Consistent with the personal
needs of the seller, the variability of compensation may not fit well with personal income
requirements. Negative changes in the economic climate will also cause instability in the income
stream. In an effort to reduce this variability, firms will allow sellers to borrow, or draw, from
future commissions, providing a stable income stream.
Straight-commission compensation is inappropriate during the initial period of sales
training and new seller familiarization with customers and territories. Unless coming from an
identical position with similar customers and products, new sellers should be given time to
acclimate to the position.
STRAIGHT-SALARY COMPENSATION PLANS Straight-salary plans overcome many of the

disadvantages of straight-commission plans. Management has significantly greater influence and
control over the activities of the sales force, because how the seller spends time will not directly
impact compensation. Managers can direct sellers to develop new territories or broaden their
customer bases without impeding the ability of the sellers to earn a living. The time-intensive
efforts associated with relationship building, market research, sales promotions and publicity,
and solving customer problems do not get in the way.
Selling roles that are required to provide design and engineering assistance are more
appropriately compensated with salary plans. The motivator/problem solver and the relationship/
value creator are roles typical of straight-salary compensation. Appropriate offerings for straight-
salary plans are products and services that have long gestation periods, high learning, and are in
the introduction and growth stage of the PLC. An increasing value orientation and complexity of
the customer relationship also increase the need for additional management control and stability.
Salary plans are also appropriate where management cannot reasonably determine the direct
impact of individual sellers on sales results.
The most significant objection that sales managers have to salary plans is the lack of financial
rewards tied directly to sales results. Straight-salary plans may attract sellers who are security
oriented rather than achievement oriented. Sellers who are compensated by straight-salary plans
will not always see a direct link between specific sales performance and reward. As with commis-
sion plans, the style of compensation must be consistent with the objectives of the organization and
fit with the type of product offered.
COMBINATION COMPENSATION PLANS Combinations of salary and bonus or commission

are the most frequently used and popular of seller compensation plans.20 Properly designed,
they can deliver most of the advantages of both straight-salary and straight-commission plans
while avoiding many of the disadvantages of both. Whether the plan uses a salary plus
commission or a salary plus bonus depends on the degree of flexibility and control desired by
management.
Salary-plus-commission plans operate much the same as straight-commission plans with
compensation tied directly to sales outcomes. The salary portion of the plan validates manage-
ment direction with regard to administrative duties and customer problem solving and service,
while the commission portion provides the seller with an opportunity to increase compensation
through increased levels of effort. The commission portion of the package is usually paid as
earned and is part of the seller’s regular income stream. The ratio of salary to commission in the
total compensation package should reflect what management believes to be the objectives of the
organization and the territory.
Bonus plans provide management with an increased degree of flexibility. Bonuses are paid
for exemplary performance, meeting specific goals (sales, marketing, or administrative), and
reaching specific levels of performance. A bonus is paid when the benchmark is surpassed rather
than on a continuing basis. The bonus, then, is an additional incentive rather than a regular part
of the compensation plan. The ratio of salary to bonus in such plans is usually greater than the
ratio of salary to commission in those plans. Bonuses are paid only when a specific goal is
reached and then usually at the end of the measurement period—quarterly or annually.
A final note about seller compensation is appropriate. There are many myths associated
with seller compensation and its relationship to performance. Compensation plans are not the
only motivational tool available to managers; not all sellers prefer high-risk or leveraged
compensation plans; and sellers are not motivated only by money. Professional sellers are results
oriented but not just short-term sales results. Successful sellers are oriented toward commitment
and accountability. As with other employees in different roles, sellers will be motivated by
effective leadership, acknowledgment, and reward.
MANUFACTURERS’ REPRESENTATIVES
The “rep” in business-to-business marketing jargon is an independent business person who has
specialized in a market segment or collection of segments that have common users or call
patterns. Reps act as agents for firms in particular markets or regions. They carry no inventory
and take no ownership of the goods they represent. The firms they represent are known as their
principals. When the rep’s customer makes a purchase, the terms of sale are often between
the principal and the buyer. From a transactional viewpoint, the rep is not in the
When is a sale booked? middle of the sale. The rep is compensated for the sale by the principal, after the
Many organizations will sale is culminated or “booked.”
have different policies The value of a good manufacturers’ representative is in existing relation-
regarding when a sale is ships with customers. Established reps have ongoing, successful relationships
“booked” for commission
with buying organizations in the market segments in which they specialize. In
purposes. In most
instances, a sale is not selecting a rep, suppliers will seek out those who already have good relationships
considered complete until with potential customers—often determined by asking the customers who they
the customer has paid the might recommend as the local rep for the product or product line.
invoice. Reps then, just Because of their ongoing relationship with customers, they already under-
like direct commission
stand the nature of the markets in which they compete. Little time is needed to get
sellers, must wait for all
terms of a sale to be “up to speed,” except possibly with the principal’s product line. Since it is in the
concluded to receive their best interest of the rep to keep the lines of products represented current, the rep may
compensation. solicit a new principal for a potential relationship as a way to complete or extend an
existing product line. In these circumstances, little time is required to explain the supplier’s product
line. The rep usually has a target buyer already in mind.
In the short term, there are few costs associated with the use of manu-
facturers’ representatives. Since all compensation is commission related, all sell- The fixed cost of sales
ing costs are variable. The fixed costs of sales are covered by the rep, spread out includes administrative
over the commissions earned from all products and organizations represented. overhead and field selling
expenses. Administrative
Thus, adding another product is efficient from the perspective of the rep when call overhead includes all
patterns required by the new offering match those of existing products. From the management and
perspective of the principal, no investment is necessary to establish a competent administrative salaries,
sales force. The lack of any significant fixed costs makes the use of manufactur- the salaries of planners
ers’ reps very attractive for small firms that cannot afford full-time sellers, firms and sales support people,
the cost of sales
who may have full-time sellers in areas of customer concentration but require literature, and other
coverage in territories where sales volume does not warrant a direct seller, and special costs that cannot
firms introducing new products or entering new territories. be linked directly to an
Over the long term, particularly when a rep is very successful with the individual transaction,
products of the principal, the mutual advantages of the relationship change. When such as prospect
seminars, sales meetings,
sales volumes increase, the principal does not recognize any economies of scale in attending industry
the selling process. At some point, selling costs associated with using the rep will conferences, and so on.
exceed the costs of placing a direct sales force in the same territory. When this
becomes significant, sales managers often believe that a direct sales force will better represent their
products because they will be focused solely on their products and will more aggressively represent
the firm. Many reps half jokingly say that they want to be successful for the principals they represent
but not so successful that they lose the product line to a direct sales force! Suppliers that rely on reps
as the primary sales force often must be reminded about the reason they selected to use reps in the
first place. The principal is compensating the rep for their knowledge of the industry and their
relationships with customers. While responsibility for sales in a territory may be transferred with the
termination of the rep’s contract, relationships are not so easily transferred.21
Market Conditions that Favor Manufacturers’

Representatives or a Direct Sales Force
Exhibit 12-11 compares the market conditions that tend to favor either a manufacturers’ representa-
tive or a direct sales force. While much of this information is a summary of the information already
discussed, there are a few situations, along with the trade-offs involved that bear special note.
TECHNICALLY COMPLEX PRODUCTS Products, services, or total offerings that are complex
will favor the use of a direct sales force. Whether because of the need for integration into other
products or a steep learning curve associated with a new technology, reps will be more success-
ful with standardized or generic products. This can lead to undesirable trade-offs.
Suppliers of high-technology, high-learning products are often small companies that may not
have the financial ability to invest in a direct sales force. Using manufacturers’ representatives may
not be ideal but may be the only choice because of the low fixed costs. When reps are to be used to
represent these types of products, a technical background or education is very important. The culture
and environment of the rep and the target market must be supportive of new technology.
LONG LEAD TIMES Whether because of the technically complex nature of the offering or the time
to actually build and book the offering, long gestation periods tend to favor a direct sales force. The
selling organization must have the financial wherewithal to support fixed selling expenses incurred
Appropriate for Direct Sales Force When Appropriate for Manufacturers’ Representative
When
• The product is technically complex • The product is standardized or generic
• The selling situation requires a specialized • For technical products, a general technical
background that reps do not usually have, education or background is important
e.g., scientific or special technical • Control of personnel is less important—reps
• Control of the seller is important—the organiza- are independent business people
tion selects, trains, and controls personnel • Short sales cycles are common, or long sales
• Long lead times for results are common— cycles without much pre-sale service required
direct sellers have more patience (and more • The reps have other complementary lines
budget) through the long sales cycles • Reps have established relationships with target
• Significant missionary work is required to customer segments
build relationships • The selling effort required for the product
• Significant prospecting for new customers is matches reps’ existing call patterns
required • The market is dispersed and/or when the market
• The customer base is highly concentrated consists of many small customers
• Explicit customer feedback is desired for innova- • Customer feedback is less critical (can stand
tions, new products, competitive information the filter or time delay)
• High fixed costs exist, but with economies of • Low fixed costs are required
scale
EXHIBIT 12-11 Comparison of Appropriate Market Conditions for a Direct Sales Force and
Manufacturers’ Representatives
during the period between customer specification and sale of the product. Manufacturers’ represen-
tatives are not likely to be interested in waiting through long design, development, and build cycles
to realize any compensation for their efforts.
If the selling organization finds that reps are to be used under these conditions, compensa-
tion becomes less straightforward than straight commission. Variations based on when a sale is
booked or payments based on progress or goals reached are among the alternatives. The selling
organization is at risk as funds will be expended before an actual sale is made.
SELECTION, TRAINING, AND CONTROL A manufacturer selects, trains, and has direct
control over its own sales force. Sellers can be selected who become aligned with the goals of
the organization and “fit” with the culture and environment. Sellers will be trained at the
discretion of the manufacturer not only in particulars of the offering but in the internal rela-
tionships, behaviors, and expectations of the organization. The sales manager, to the extent
allowed by the compensation plan used, will have significant influence and control over the
activities of the seller. Such will not be the case with reps.
Reps are independent business people, either in business for themselves or part of a manufac-
turers’ representation firm. They are directly responsible for their success or failure. Their efforts
are spread over many products or product lines. The time spent with the products of any particular
manufacturer will be directly dependent on what they believe will be a short-term success.
MISSIONARY WORK REQUIRED If a missionary selling effort is required to educate customers
or build relationships in a new market segment or territory, a direct sales force or field marketing
organization is almost always required. Few reps are likely to take on new markets or building new
relationships unless long-term benefits will accrue to the rep. Keep in mind that reps are selected in
large part because of their existing relationships. If a principal finds that the manufacturers’ rep is
often asked to approach new markets, it may be appropriate to question the process that selected the
rep in the first place.
EXPLICIT CUSTOMER FEEDBACK DESIRED Collaboration with customers, whether as part of a

value network or an individual effort, will require explicit communication between supplier and
customer. Situations that would normally require motivator/problem solver or relationship/value
creator sales roles usually require the use of a direct sales force.
There can be alternatives. If the supplier can accept less timely or filtered customer feed-
back, using a rep may still be possible. This is not likely in the development of first-of-a-kind new
business. A more likely scenario would be the use of the manufacturers’ representative for direct
selling and a direct field marketing or missionary sales effort for joint development efforts.
Combinations of Representation
The “explicit customer feedback” scenario described above leads into a representation pattern that
occurs often. Many firms will use manufacturers’ representatives or, as described in the next chapter,
industrial distributors for their products. These relationships are focused on the short-term selling
needs of the firm, usually fitting the role descriptions of order takers or persuader/sustainers.
How do these firms partner with customers to develop new products or “push the enve-
lope” in their markets? Does the use of reps preclude a firm from taking an ownership role in a
market? Firms that rely on reps and distribution for selling support will usually have a direct field
marketing or missionary sales organization. This releases the missionary seller from day-to-day
sales and account maintenance responsibilities to focus on longer-term R&D issues with
customers. The selling effort also benefits because sellers have been freed from development
responsibilities. A typical example of this type of arrangement can be seen in the sales arrange-
ments of manufacturers of communication equipment (e.g., telephone switching devices and so
on); computer workstations; and other products that have quick product delivery, installation,
service and training as part of the offering. Sales and local inventory are accomplished by the
distributor while installation, training, and service are provided by the missionary seller.

Basic selling is persuasion. This chapter has presented the basic role of selling and several levels of
complexity that become the selling model named here as the relationship/value creator. Throughout
this text, the discussion has focused on the value network and the total offering that can be provided
to the customer buying center. Elements of the value network, when brought forward to the customer
by the seller, represent the supplier’s approach to satisfying the needs of stakeholders in the customer
buying center. The seller represents the different solutions to the different stakeholders and returns
the feedback about each value element to the appropriate part of the supplier network.
Based on the complexity necessary to create a successful selling situation, a direct sales force
or a manufacturers’ representative is used. The greater the complexity of the offering and the greater
the collaboration between supplier and customer organizations, the more likely a direct sales force
will be used. The discussion has also revealed the role that missionary sales or business development
personnel can play in complex relationships, relieving the seller, either direct or rep, of the need to be
concerned with longer-term developments. Also discussed were the types of compensation appropri-
ate in these different circumstances.
A direct sales force to handle short-term situations combined with a missionary seller for a
long-term focus is just one marketing channel design that can be successful when it matches the
way the customer organization works. The next chapter examines marketing channels and, more
generally, value networks, their appropriate design and development, and looks at a variety of
business-to-business channel and network designs that may be appropriate in certain circum-
stances. Different types of channels, channel intermediaries, and partners will be discussed, and
their role in long- and short-term relationships examined. In going forward, consider the three
needs that buyers and sellers work to satisfy—the needs of the job function, the needs of the
organization, and personal needs. All must be considered not only in successful relationship
selling, but in value network development as well.
Key Terms
booked [sale] 302 dyadic interactions 282 persuader/sustainer 288
bottom–up forecast 299 fixed costs of sales 303 relational exchange 284
boundary personnel 282 intensity of territory design 300 relationship/value creator 290
call pattern 298 manufacturers’ representative 298 sales call 299
direct sales force 298 motivator/problem solver 289 switching costs 284
distributor 298 order taker 286 top–down forecast 299

1. Compare the role of a seller in consumer markets customer before the customer will adopt it.
with a seller in business-to-business markets. What are the advantages and disadvantages of
2. How is the repeated, ongoing relationship in busi- selling your product through manufacturer’s
ness-to-business selling an advantage for both the representatives?
seller and the buyer? 10. What are the three areas of mutual needs of buyers
3. Explain why a dyadic relationship between buyer and sellers?
and seller may be of value to order takers. 11. One-to-one marketing has been a goal for marketers
4. As a product moves through the PLC, how does the over the past two decades. One-to-one marketing is,
nature and complexity of customer support change? in essence, treating each customer as a segment of
5. Discuss how the changes examined in Question 4 one and marketing directly to that customer. In
are related to technology adoption. business-to-business marketing, how close do you
6. Refer to footnote 13, related to the levels of selling. think most companies can come to implementing
Of the four forms of seller roles described in this one-to-one marketing?
chapter, which would you assign Level A? Level B? 12. What risks must be considered when changing
Level C? representation from manufacturers’ representatives
7. Characterize the differences between the seller role to a direct sales force?
of a motivator/problem solver and the seller role of 13. At what level of sales success would you consider
a relationship/value creator. making the switch described in Question 11? What
8. Many sales managers claim, “Our sellers are the are the factors you must consider to make such a
first line of defense and the first line of offense in decision?
the supplier–customer relationship.” What does this 14. Consider the relationship between DaimlerChrysler
statement mean? What role types are the sellers and its suppliers described in Exhibit 12-9. Chrysler
likely operating in? was in trouble and needed cost reductions. Think of
9. Suppose you are the marketing manager for some ways that Chrysler could have obtained the
a small company marketing a new product reduced costs and maintained a strong working rela-
that requires extensive collaboration with the tionship with its suppliers.
Endnotes
1. Pui-Wing Tam, “System Reboot—Hurd’s Big Marketing. C level was doing everything right
Challenge at H-P: Overhauling Corporate but just maintaining the landscape, B level was
Sales,” Wall Street Journal (Eastern Edition) all of C level plus the ability to establish and
(April 3, 2006), p. A.1. maintain the customer relationship, and A level
2. Gilbert A. Churchill Jr., Neil M Ford, and was all of B level plus the ability to live up to
Orville C. Walker, Sales Force Management, the customer’s archetypical model of seller.
2nd ed. (Homewood, Ill.: Richard D. Irwin, This description has proven useful to demon-
1985), pp. 4–7. strate some of the psychological aspects of
3. V. R. Buzzotta, R. E. Lefton, and Manuel selling but does not consider all of the factors
Sherberg, Effective Selling through Psychology noted here.
(Cambridge, Mass.: Ballinger Publishing/Harper 14. Weitz and Bradford, “Personal Selling and Sales
& Row, 1982), p. 3. Management.”
4. Barton A. Weitz and Kevin D. Bradford, 15. Ibid., p. 244.
“Personal Selling and Sales Management: A 16. Sharma et al., “Antecedents and Consequences
Relationship Marketing Perspective,” Journal of of Relationship,” p. 605.
the Academy of Marketing Science, 27(2) 17. Michele Marchetti, “What a Sales Call Costs,”
(1999), pp. 241–254. Sales and Marketing Management (Bill Com-
5. Paul Sherlock, Rethinking Business to Business munications Inc.; www.salesandmarketing.com,
Marketing (New York: The Free Press, 1991). 2001).
6. Weitz and Bradford, “Personal Selling and Sales 18. Philip Kotler, Marketing Management: The
Management,” p. 244. Millennium Edition, 10th ed. (Upper Saddle
7. Michael H. Morris, Janine Brunyee, and River, N.J.: Prentice Hall, 2000), pp. 620–632.
Michael Page, “Relationship Marketing in 19. Churchill, et al., Sales Force Management,
Practice,” Industrial Marketing Management 27 pp. 434–450.
(1998), pp. 359–371, 361. 20. Ibid., p. 467.
8. Arun Sharma, Nikolaos Tzokas, Michael Saren, 21. The termination of the manufacturers’ represen-
and Panagiotis Kyziridis, “Antecedents and tative contract does not terminate commissions to
Consequences of Relationship Marketing,” the rep. The rep is usually compensated for ongo-
Industrial Marketing Management 28 (1999), ing core business and also receives a portion of
pp. 601–611. the commissions on new business that will close
9. Morris et al. proposes a common working shortly, the presumption being that the business
definition for all relationships, defining rela- would not have happened if it were not for the
tionships as “a strategic orientation adopted efforts of the rep. We know of one situation in
by both buyer and seller organizations, which which a rep developed a very lucrative business
represents a commitment to long-term mutually for a principal, the business becoming the largest
beneficial collaboration.” This is similar to the single contributor to the rep’s sales volume. The
collaboration or partnering definition discussed principal noted that the commissions paid to the
here, but we do not concur with its universal rep were multiples of the costs that were forecast
application. if a direct sales office, fully staffed, were placed
10. Morris et al., “Relationship Marketing in in the territory. The rep lost the product line. To
Practice,” p. 369. achieve the same level of coverage, the principal
11. Sharma et al., “Antecedents and Consequences hired two full-time sellers and administrative
of Relationship.” help and transferred two design engineers from
12. Weitz and Bradford, “Personal Selling and Sales headquarters to the sales office. The principal
Management,” p. 242. may have failed to recognize that the rep had a
13. Sherlock suggested three “levels” of selling, A, very productive and efficient relationship with
B, and C, in Rethinking Business to Business the customer base.
Chapter 13
Business-to-Business Branding
Creating and Fostering the Brand
OVERVIEW
Brand management is one way that marketing creates competitive advantage for
the business-to-business firm. Looking at branding in this light is a novelty for
industrial companies because branding innovation in the past has always been
hidden behind product innovations. In recent years, it has become clear that
branding could also make a difference for industrial companies that sell large
bulldozers or small screws.
Brands only exist in the minds of the customer. Many companies have
demonstrated that being known and having positive brand associations could be
extremely important in competitive situations. Branding adds value for the customer
because it makes the buying decision process easier and helps him to reduce the
risk of buying the wrong product. On the other side, branding helps the companies
because it adds value to their intangible assets and can create price premiums.
Business-to-business companies with high brand value such as Microsoft, IBM,
GE, and Intel (see Exhibit 13-1, Brand Value) stand out, but many lesser-known
companies have also discovered that effective branding increases the total value to
customers and also is of value in mergers and acquisitions.
Branding is a distinct way of differentiation: Do you sell ordinary pumps or do
you sell branded pumps? Do you sell commodities or solutions? Brand management
has become an integral part of managing business-to-business companies. When
an OEM identifies a supplier brand in its product, some of the market power shifts
away from the OEM to the supplier, allowing supplier companies to become visible
in markets where they wouldn’t ordinarily have a presence.
Branding can be viewed as a key element of an entrepreneurial orientation
where value creation and value usage come together at any point of the PLC and
help the company to differentiate themselves from the others.
Brand building requires attention across all the elements of marketing.
Branding is just as important in business-to-business marketing as it is in consumer
marketing. As manufacturers’ consumer brands lose market power to private
brands, strong brands in business-to-business markets receive favorable treatment
in the customers’ buying decision process. However, to create a strong brand goes
308
Chapter 13 • Business-to-Business Branding 309
65.3
$ 58.7
billion 57.1
51.6
33.7
32.1 30.9
29.4 29.2
23.6
Coca Micro- IBM GE Nokia Toyota Intel Mac- Mercedes Disney

Cola soft Donald’s Benz
Legend: % of B2C sales % of B2B sales Source: Interbrand 2008
EXHIBIT 13-1 Brand Value of Top Ten Companies (Based on Interbrand Best Global Brands 2007)
Source: David Kiley, “Best Global Brands,” Business Week (August 6, 2007); includes also two
ingredient brands: Microsoft and Intel
far beyond building awareness for the brand name; rather, it takes mastery of all the
elements in the offering that contribute to value for customers, which of course takes
time to establish. A strong brand is something for new companies and new market
entrants to strive to build; it is something for established companies to nurture,
protect, and use with care. This discussion addresses methods of making a brand
into a standard and generally building brand strength. The methods discussed in this
chapter build sustainable competitive advantage deep within the company’s inner
workings.
In the opening example, ITT Corporation, a global engineering and
manufacturing company, demonstrates the need for a single corporate brand initiative
for the emerging market in China. Building a unified approach with a clear stated
value proposition raises the possibilities for engaging successfully at home and
abroad. Branding plays an important role in markets, internally, and by attracting
qualified employees worldwide as well.
Example: ITT Industries—Brand Engineering in China1

Strong global brands have never been as important as they are now in China. No matter how powerful
and highly recognized some local brands may be, it is difficult for diverse names to compete against
those operating under a single corporate brand umbrella. That is why ITT Industries (ITT), a New York-
based diversified global engineering and manufacturing company, is now rolling out its extensive
rebranding strategy in China—linking the parent brand to the individual attributes of diverse ITT
products, including Goulds, Flowtronex, Wedeco, Flygt, Bell and Gossett, and Lowara.
ITT Corporation is a global engineering and manufacturing company with leading positions in
the markets it serves, generating 2008 sales of about $10 billion. ITT is the world’s premier supplier of
310 Chapter 13 • Business-to-Business Branding
pumps, systems and services to move, control, and treat water and other fluids. The company is a major
supplier of sophisticated military defense systems and provides advanced technical and operational
services to a broad range of government agencies. ITT also produces electrical connectors used in
telecommunications, computing, aerospace, and industrial applications. Further, ITT makes industrial
components for a number of other markets, including transportation, construction, and aerospace. Based
in White Plains, New York, ITT employs approximately 39,000 people around the world.
“Brand without performance is empty, but performance without brand is like a cry in the
wilderness,” says Thomas Martin, ITT senior vice-president and director of corporate relations. “ITT is
in urgent need of creating a single strong brand worldwide, especially in China, and now is a good time
to do it,” Martin emphasizes. The idea of the rebranding initiative results from research ITT conducted
among its 200 customers, and employees, worldwide toward the end of 2004. “We got valuable findings
from the interviews, which indicated the diversified brands were not uniformly designed in the past,”
says Martin.
ITT employees know much about the business they are directly involved in, but do not know what
ITT does around the world. Among employees, ITT is viewed as a “generic” corporation, and employee
allegiance is aligned with individual business units, which constrains the sharing of ideas. A strong
corporate brand could help ITT attract and retain the best talent during its global business expansion.
This is increasingly important in China, where the competition for talent is rapidly intensifying.
These are, however, only the internal benefits. According to the research, ITT customers are
unclear about what the company does and what ITT stands for. Historically, after the big reshuffling of
ITT in the 1980s, many of the ITT businesses went to market as individual brands, which watered down
the brand identity. The segmentation is seen clearly in the China market.
The multiple brand strategy seems to be particularly dangerous as ITT’s better-branded
competitors in various markets in China, including Siemens, GE, and Northrop Grumman, strive to seize
business opportunities there. “There will be tremendous investments made in infrastructure, health care,
water; GE can approach China as one company and form a company-to-country relationship,” said Jeff
Immelt, GE’s chief executive officer (CEO), in Business Week in March 2005. The former CEO with
Siemens AG, Klaus Kleinfeld, also noted that China is the most important market for Siemens.
From December 2005, the branding campaign, called “Engineered for Life,” officially kicked off
worldwide with a new uniform branding guideline. It covers all aspects, including name cards, product
brochures, building signs, corporate stationery, and Web sites, and aims to give all employees,
customers, and shareholders a clear picture of what ITT stands for.
Dong Ruiping, external affairs director with ITT Industrial China Investment Co Ltd., says,
“2007 was a critical year for the execution of the branding campaign in China.” There is no better test of
ITT’s rebranding strategy than the China market. “China offers us a greater chance than Europe and the
United States, ITT’s major markets,” says Martin.
In recent years, industries related to ITT’s businesses, including water treatment, construction,
manufacturing, and mining, have grown rapidly in China. Take water treatment for example. The world
is running out of clean water, and China is no exception. In the country’s recently endorsed 11th Five-
Year Plan (2006–2010) for the Peoples Republic of China, water cleaning and water recycling in cities
and rural areas have been given great attention. “ITT has a series of biological, filtration and disinfection
technologies and equipment to preserve increasingly precious water,” says Martin. “We are also good at
moving water from plentiful areas to thirsty communities, which could meet the nation’s demand
as well.”
ITT has provided pumps, mixers, and expertise to more than 250 wastewater treatment installa-
tions throughout China, including one in Zhaojiabang that began operation in 2007. In the station,
thirteen submersible Flygt pumps manage the flow of sewage and rainwater, meaning downtown
Shanghai is better able to manage wastewater after a heavy storm, enhancing the city’s image as a
metropolitan and commercial centre. The 2008 Beijing Olympics also spawns immense opportunities
for ITT. The company secured a major project to develop the kayaking and canoeing course in the water
park for the games in Shunyi, a district on the outskirts of the capital. The project will also utilize six
Flygt submersible pumps. “ITT has extensive experience in supporting the kayaking and canoeing
courses at the Olympic Games, with its pumping systems installed in the kayak projects in Atlanta,
Barcelona, Sydney and Athens for previous Olympics,” says Martin.
In 2007, ITT was very successful globally and sales in China grew by 40 percent year-on-year,
but Ms. Dong refuses to disclose relevant figures in China. “They are sensitive. What we can say is sales
and profits have kept increasing here, driven by organic growth instead of acquisitions,” she says. ITT
has invested more than US$125 million in China. “We will continuously increase our investment here
and try to provide localized solutions,” Dong says.
ITT is not alone in transforming a multiple brand into a single one. U.S.-based Ingersoll Rand, a
diversified company, rolled out its branding initiatives last year, including the deletion of the hyphen
previously used between the two parts of its name and refreshing the company’s logo. “It’s vital to cre-
ate the image that Ingersoll Rand is a well-integrated company, as the whole is greater than the sum of
its parts,” says Herbert L. Henkel, CEO of the company.
LEARNING OBJECTIVES
䊏 Understand the creation and application of brand management in order to compete
successfully in business-to-business markets.

䊏 Have obtained an understanding of how branding relates to entrepreneurial marketing and
gained a sense of how branding can be accomplished in all elements of the offering.
䊏 Understand how to implement brand management in business-to-business marketing.
䊏 Have developed 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.
INTRODUCTION
When Friedrich Krupp, who extended the running time on train wheels by tenfold, put his
famous steel rings on his products and registered them as trademark in 1875, his business
customers could easily distinguish the “right” products from imitations and fakes. Brands help
people to organize their thinking and reduce their risk of purchasing “wrong” products, both in
the consumer and business world.
In the opening example, ITT Corporation recognized that its customers were seeking a
sure way to get trusted product from one qualified supplier. The ITT unified branding
approach was the response. To align the product brand approach under one umbrella brand,
ITT formed a recognizable corporation with diversified product offerings. ITT also benefited
from this brand alignment for its internal understanding and its recruiting efforts worldwide.
This example illustrates some of the key ideas in this chapter. ITT acted entrepreneurially
through branding innovation. They reduced risks for the customers and opened the doors
for new markets and new employees. This kind of branding innovation has to be seen as a
continuous process to adapt to the customer requirements and the changing environment.
The theme of competing over time in a changing environment through branding as a key
competitive tool in business-to-business marketing is discussed in the last section of this
chapter.
HOLISITC BRANDING
The concept of branding can add more to organizational performance than just putting a logo,
an advertisement, or a tag line under a company name. Company executives can enhance
performance and create value all along the value chain for themselves and the customers by
creating and implementing marketing programs, processes, and activities that are intersecting
and interdependent. It is therefore necessary to have a broad, integrated perspective to assure
consistency of the comprehensive approaches. Relationship marketing, inte-
A holistic approach is one grated marketing, and internal marketing are components of the holistic
that emphasizes the total approach. Knowing that the brand influences any buying decision internally
offering— the functional
and externally needs an approach that can open doors even before the seller
relationships between all
of the pieces. This is knocks on the door.2 A brand is not the campaign and the classy brochures; it
consistent with the earlier is the way the customer perceives your action. Brand perception is influenced
definition of a total by everything the company does that comes in contact with the customer: the
offering—the offering that way the receptionists answer the phone or the service technician solves your
provides a complete
problem.
solution to the buyer’s
needs; this may include
financing, delivery, Characteristics of Business-to Business Branding
service, and so on.
The proliferation of similar products and services, increasing competition, and
incredible price pressures are among the numerous powerful forces that make
business-to-business brand building a crucial factor. Brands can help to differen-
A Brand is a collection tiate, reduce the risk and complexity, and compensate price pressures by offer-
of experiences and ing additional value. The most important brand functions are as follows:
associations attached to a
company, organization, • Increased information efficiency: Branded products make it easier for the cus-
product, or service; more tomer to gather and process information. Bundling information about the manu-
specifically, brand refers facturers and origin of a product in the form of a brand helps customers to more
to the concrete symbols
quickly find their way in a new or confusing product environment. Moreover,
such as a name, logo,
slogan, and design branded products have recognition value. Customers can repeatedly find trusted
scheme. A brand is a brands quickly and easily.
symbolic embodiment • Risk reduction: Choosing a branded product reduces the customer’s risk of
of all the information making the wrong purchasing decision. Brands create trust in the expected per-
connected to a company,
formance of the product, and provide continuity in the predictability of the prod-
organization, product, or
service. uct benefits. Especially in business-to-business marketing, brands can help to
ensure and legitimize buying decisions, since buyers often have a penchant for
avoiding risk.
• Value-added or image benefit creation: For consumers, the value added or image benefit
usually lies in the subjective, self-expressive value that brands can provide them. In a
business-to-business environment the additional value provided by brands is usually not
anchored in purely self-expressive values. Nonetheless, it can be very important. Through
a brand you do not only present your employees to the world but also the whole corpora-
tion. The brand is the shorthand for the value image of the company.
In light of these three main functions, it becomes apparent that brands and branding have
high importance as methods that a business can use to compete. Certain contextual factors
enhance the importance of the brand functions. The supplier industry structure and the number of
competitors increase brand relevance in monolithic markets with low numbers of competitors.
Also the complexity of the buying process and the size of the buying center make brands more
relevant. The more recognized a brand is among members of the buying center, the more likely
that the “hurdles” for approval will be lessened. When offering a clearly visible “public” product
offering, brand is very relevant. Branding is particularly important in new task buying situations
where “a way it is now done” doesn’t exist. Yet, there are still only a few successful business-to-
business brands that already prove the potential in that area.
The Role of Business-to-Business Brands

In many industries branding is undervalued, leaving a gap with huge unrealized brand potential.
Not only could companies profit from a tremendous first-mover advantage by deciding to jump
onto the brand wagon, future-oriented companies may even be able to set the business standard
with their brands. The establishment of a brand as the defacto standard in a market segment is
one of the critical ingredients in market ownership. Discussed in Chapter 5; the three elements of
market ownership are repeated in the box below.
The role of brands in business-to-business marketing can be summarized3 as follows:
• Differentiate—Brands are an effective and compelling means to “decommoditize” product
categories that are highly undifferentiated.
• Secure future business—Quite often it is important to establish brands for your products or
services in order to prepare for the future. There are many business areas where only those
companies survived that chose to brand their products from the beginning.
• Create brand loyalty—Brands assist companies in transitioning from a transaction-based
selling model to one that is relationship based. The customer always comes first. Brand
loyalty is created when the business manages to consistently deliver on what its brand
promises.
• Differentiate marketing efforts—Businesses with strong brands can benefit from increased
communications effectiveness. Marketing efforts will be more readily accepted than those
of complete no-name products and services.
Market Ownership
In “Marketing Is Everything,” McKenna discusses 3. Market owners benefit from other organiza-
owning a market. From his discussion, we can form tions developing ancillary products and mar-
three indicators of market ownership: kets that serve the owners’ customer base.
Third parties define their products as com-
1. Market owners define a market niche as patible with market owner. In this ancillary
theirs and work toward dominating it. product development process, the market
Their brand is immediately identified as owner may be consulted by the developer to
the standard in that market. Examples ensure compatibility with future products.
are Hewlett-Packard Laser-Jet printers The owner thus gains insight to other points
and GE Lexan Polycarbonate Resin. These of view about its market.
branded products are defacto standards
in their industries. Competitors to both Market share is not a defining parameter that
products note their equivalence to those leads to market ownership, as is often mistakenly
offerings. implied. Market share is more likely a result of, not
2. Market owners continue to evolve their a cause of, ownership.
offerings with the next generation as defined Source: Regis McKenna, “Marketing Is Everything,”
by the value presented to the customer. Harvard Business Review (January–February 1991).
• Create preferences—Brand preference at its best leads to the rejection of competitive

brands. Marketers who are naïve of the relationship aspects of business-to-business
markets may believe that this is true only for consumer markets. A strong brand, however,
will act as a barrier to people switching to competitors products.
• Command price premium—A business with well-known brands can command premium
prices for their products and services. It makes it automatically less susceptible to compet-
itive forces. That business-to-business brands are valuable resources is also reflected in the
acquisition prices. Brands can balloon these prices tremendously.
• Create brand image—Brands enable companies’ value propositions to be more emotive
and compelling. Above all, a positive brand image also appeals to all other stakeholders—
it makes it even easier to recruit and retain talent.
• Increase sales—The main goal of most business is to prosper. Companies with strong
brands can benefit not only from higher margins but also from high sales volume.
Not only are there considerable benefits for industrial companies in building strong brands,
there are serious penalties for those who do not. The alternative is to be continuingly challenged
through customer price cutting, discounts, and cost reduction programs (Exhibit 13-2).
THE BRANDING TRIANGLE As trust builds, the relationship between the buyer and supplier
moves into partnerships that recognize that the goals of both organizations can best be met by
working together. To illustrate this we developed the branding triangle (Exhibit 13-3).
The branding triangle4 illustrates visually the marketing-related connections between a
company, its collaborators, and its customers. Collaborators refer not only to employees but also
to wholesalers, dealers, ad agencies, and so on. The triangle aims to act as a common field to the
intersecting market participants. It is essential to provide a consistent picture of the company and
its brands across all different media and to all stakeholders. Only then is it possible to guide their
perception throughout the huge flow of different pieces of information. Nowadays brand
management—especially in business to business—is not only related to one product, service, or
Secure Future Create Brand

Business Loyalty
Differentiate
Differentiate
Marketing
Brand
Risk Reduction
Information Efficiency
Value Added
Increase Create
Sales Preferences
Command Create Brand

Price Premium Image
EXHIBIT 13-2 The Role of Business-to-Business Brands

General Public Company
Collaborators Customers
EXHIBIT 13-3 The Branding Triangle
market offering but rather to the whole company—the value image5—itself. Therefore, it is
important to recognize the value that a comprehensive brand portfolio together with a corporate
brand can provide. It is important to find the right combination of presenting your company
geared to the respective target groups and stakeholders while keeping the necessary consistent
value statement outside as well as inside the company.
The company stands for everything, the tangible and intangible; whether it is service or
product, it incorporates the history as well as the prospective future. The image of the company,
from its foundation to the present, is usually mainly formed by external marketing communica-
tions. Few customers or other stakeholders deliberately make efforts to find out everything there
is to know about a company. They usually only know what the company “tells them.” Not less
important of course is the performance of the employees and other related cooperators. What
picture are they drawing in the customer’s minds? If they internalized the message of the brand
they are representing, guided by effective internal marketing communication, that necessary con-
sistency is assured. So you see the brand is the one thing that connects everything across all
touch points. Brands are, at the same time, multifaceted but fragile figures. It is much easier to
dilute or even to ruin a brand than to build one.
Yet, many business decisions on a daily basis are based on opinions that do not precisely
reflect the real situation of the brand. In times where marketplaces change so rapidly it is
absolutely crucial to base every important decision on accurate, current, relevant, and objective
information in order to protect the brand. To ensure consistent performance, some kind of brand
checklist, Exhibit 13-4, can be very helpful. If you are about to make extensive decisions in
which the life of a brand is at stake you should rigorously stick to that checklist.6
BRANDING DIMENSIONS
A successful brand is a statement of who and what the company is. To take full advantage of its
brands as strategic devices, branding must be the thread running through the subject of market-
ing. To regard brand management as merely managing design or advertising seems to be too
superficial and tends to shorten the brand’s life expectancy. A company must be prepared to
carry out a considerable amount of marketing and brand planning.
Brand Identity
• Do you have clear values associated with your brand?
• Are you presenting a clear and consistent brand identity to your target audiences? (logo, colors,
designs, etc)
• Do your branding communications convey messages that communicate important elements of value
your company delivers?
• Do company employees know what your brand promises and their responsibilities in living up to
those promises?
• Does your company keep its promises embodied in the brand?
• Do you have control over trademarks and brand marks? Do you control over how these elements
are used?
Brand Awareness
• Does your audience recognize your name? Your logo?
• Do your target audiences remember you when they are considering purchasing?
• Do your target audiences recall your brand whenever they think about your type of product?
Competitive Positioning
• Do you understand your positioning in the marketplace?
• Does your brand have differentiating benefits associated with it in customers’ minds?
• Do you intended customers believe your intended positioning in the marketplace?
Process
• Does your company review the consistency between your operations and culture and your brand values?
• Do you review your communications, branding, and perceived brand image periodically?
• Is this done systematically? Do you measure your brand equity?
EXHIBIT 13-4 Branding Checklist Source: Nick Pauley Design Brand Check (2008) download under
http://www.pauleydesign.co.uk/PD_gd_brandcheck.pdf
Brand management is the Brand management, therefore, is the organizational framework that
organizational framework systematically manages the planning, development, implementation, and
that systematically evaluation of the brand strategy.7 The development of a holistic brand strategy
manages the planning,
development, implemen-
has to involve all levels of marketing management. Such a holistic perspective
tation, and evaluation of can also provide valuable insights into the process of capturing customer
the brand strategy value. In a world where product offerings are getting more similar, brands are
one of the few opportunities for making a difference. Brands can help by:
• Greater willingness to try products and services
• Less time needed to close the sale after offering
• Greater likelihood that a product is purchased
• Willingness to pay a price premium
• Less sensitivity to price increases.
These benefits clearly show the power of brand equity. There are many definitions about
brand equity available; all their drivers refer to perceived quality, name awareness, brand asso-
ciation, and brand loyalty. There are various ways to measure brand equity. In Exhibit 13-1 we
have highlighted the most important business-to-business companies. To increase the brand
equity, a consistent impression of the company relationship is needed (Exhibit 13-5).
Publicity PR/Advertising
Business Trade shows/

Cards Presentations
Innovation,
Ongoing Word of Mouth
R&D
Relationship and Pre selection
Referral Web site/
Networking
Web banners
Brand
Publications Products and Proposals
Services
Technical Sales
Support Collateral
Purchase and Usage
Customer Experience Service &
Care Delivery
Training Packaging
Sales Product
Representative Performance
EXHIBIT 13-5 The Brand Customer Relationship
Brand Strategy
A brand strategy can be defined as the choice of common and distinctive brand elements a
company applies across the company itself and the various products and services it sells. It
reflects the number and nature of new and existing brand elements while at the same time
guiding decisions on how to brand new products. To put it in other words, the brand strategy lays
out a future image for the company to aim for, providing a plan of action and
criteria against which to judge it. It is based on certain future goals. Among Brand strategy: Your
others, the most common goals related to the customers are to increase brand brand is one of the most
awareness, create a positive brand image, and to establish brand preferences valuable assets of your
and brand loyalty. The brand strategy also aims at increasing the appeal and company. You can make it
attraction of the company in the eyes of the stakeholders, who underpin the the driving force behind
your business. In order to
management of the company, and to give the employees criteria with which to plan and implement a
judge the value of their own actions. brand strategy, the
To structure and manage their portfolio of brands is one of the biggest current state of your
challenges businesses face nowadays. business must first be
understood so that you
can uncover the needs
BRAND ARCHITECTURE To develop a company-owned brand architecture is and issues that are unique
essential since it defines the relationship between brands, the corporate entity, to your company and
and product and services. For business-to-business companies, defining the your industry. It’s only
brand hierarchy to pursue is the most important aspect of the branding strategy. by gaining this
Brand architecture normally evolves starting with a brand that is strongly asso- understanding, and
aligning it with the
ciated with a distinctive asset such as the technological innovation or the found- company’s vision, that the
ing of the company. With diversification and mergers and acquisition activities, brand strategy can be
the company offering ends up with a mix of brands without consistency with the revealed.
broader company message. Keeping the brand architecture consistent and understandable for the
customer is the key element. Companies can stretch their brand by width (individual to corpo-
rate), length (low to high end), and depth (national to international). Companies can have
individual brands or brand families and everything could be put under a corporate brand. Brand
strategy and brand architecture have to be adjacent. If a company approaches various separate
and diverse market segments, individual brands may be the most favorable. If a company
approaches a whole industry, a family brand makes sense. If there is no consistent brand
management, companies end up with a mixed or hybrid structure of brands.
A good example of thorough brand consistency is General Electric. Since the launch of
their corporate logo, all new products or divisions must be part of the GE culture and brand
architecture—a “branded house” as referred in Exhibit 13-6. Other companies are successful
with other architectures. In hybrid architectures, such as is shown with AKZO NOBEL, consis-
tency as well as diversity is implemented. As a result of many mergers and acquisitions, the
business-to-business Daimler AG has had to manage many truck brands around the world, to
benefit from the brand equity and goodwill acquired and with the physical assets. The position-
ing of each individual brand is important to the value of the offerings in local markets. As a
result, maintaining a “house of brands” is a necessity.
Communication and Corporate Identity/Visual Identity Code

Now that we have covered the potential strategic options that companies can apply in an
industrial context, it is time to move on to the more concrete brand elements. Brand
elements are the visual and sometimes even physical devices that serve to identify and
differentiate a company product or service. The adequate choice and coordination of them is
crucial when it comes to brand equity. When building a strong brand the following brand
elements are key:
• Name
• Logo
• Tagline (or slogan)
• Brand story.
AKZO NOBEL
Organon Intervet
Sikken AKZO Nobel
DAIMLER GE
Mercedes Sterling GE Capital
Benz Trucks Hybrid
GE Medical Systems
Freightliner
House of Branded GE Aviation
FUSO Western
Brands House
Star Trucks GE Advanced Materials
GE Transportation
EXHIBIT 13-6 Brand Architecture Spectrum
The formal brand elements like name, logotype, and slogan taken together form the visual
identity of a brand or company. They should reflect the brand essence, brand personality, and
corporate culture of the business.
The visual identity has to be designed with a long-term perspective. In order to assure the
consistency of the brand performance, it is also very helpful to define branding guidelines that
exactly specify the use of each brand element. Such a guideline is called visual identity code.
This visual identity code for the brand elements should follow a set of choice criteria in order to
reduce the risk of diluting or weakening the brand:
• Available—They should be available and usable across all intended markets. Today it is
also very important to check the availability of the Internet domain for possible brand
names.
• Meaningful—Ideally the brand elements should capture the essence of the brand and
communicate something about the nature of the business.
• Memorable—Good brand elements are distinctive and should be easy to remember. Brand
names should be moreover easy to read and spell.
• Protectable—It is essential that the brand elements, especially the brand name, can be
legally protected in all countries in which the brand will be marketed.
• Future oriented—Well-chosen brand elements can position companies for growth, change,
and success. To be future oriented also means to check the adaptability and updatability of
the brand elements.
• Positive—Effective brand elements can evoke positive associations in the markets served.
• Transferable—Is it possible to use the brand element to introduce new products in the
same or different market.
The first four criteria can be characterized as “brand building” since they are concerned
with major implications when choosing and creating the brand elements in the first place. The
latter three are more defensive. They are important for the general value and brand equity cre-
ation. In making a business brand, marketers have many choices of brand elements to identify
with their products and services.
Because of its targeted nature, it is usually much less costly to implement a branding strat-
egy for business-to-business companies than for businesses in the consumer market. The content
of business-to-business brand communications is also different compared to consumer markets.
The primary purpose of consumer branding content is to create awareness and an emotional
experience that leads to brand preference, while business-to-business content serves important
practical and pragmatic functions. Communicating too many complex details about the
company, though, should be avoided, as this would leave the audience with information
indigestion. The communication tools should ideally focus on the advantages of a product or
Visual Identity Code—Corporate Identity
Contrary to popular belief, the term corporate sum total of its history, beliefs, environment, and
identity refers to more than just the design of a visual appearance (stationery, architecture, uni-
company’s logotype and stationery—it is a blanket- forms, signage, website, brochures, etc.) and is
term that refers to the particular way that an shaped by the nature of its technology, its
organization presents itself and interacts with its ownership, its people, its ethical and cultural
staff and public. An organization’s identity is the values, and its strategies.
service as well as the explicit needs that are being met by the offer. These needs can include
reducing costs, time, overhead and improving productivity and/or quality; they also can increase
flexibility and expandability.
Assuming that your customers and prospects as well as the press are as interested in and as
knowledgeable as you are about your product or even your product category can lead to misguid-
ed communication efforts. Customers are not interested in the product itself; they usually are
interested in a solution of their problems—the total offering. Before a company can come up
with a customized solution that highlights and promotes any kind of specific capabilities the
company may have, you have to uncover the explicit needs of the customers. Yet, many
companies in the business-to-business realm still inundate prospective customers with volumes
of paper expounding their competencies and capabilities.
In business-to-business marketing, especially when applying a corporate brand strategy,
effective segmentation and targeting is key. Information that is important to your investors is
usually not likely to motivate your prospects. A company with a diversified spectrum of products
and services has to acknowledge that different target groups often value different benefits. One
communication strategy rarely fits all.
Also, participants in a business-to-business buying center will vary in their involvement
and motivation in the decision-making process. Consequently, it is unlikely that all members of
the buying center will be equally interested in the same brand values. The selling strategies
employed by companies in business markets should be underpinned by a clear understanding of
the information processing that occurs as business-to-business purchasers make their decisions.
While the nature of many industrial products and markets may call for an emphasis on functional
brand values there is a need to recognize that organizational purchasers are still influenced by
emotional considerations such as trust, security, and peace of mind (see Chapter 3 for further
discussion of organizational behavior and individual decision making).
Brand value communication that demonstrates an understanding of the psychological
concerns of industrial buyers can be a powerful source of differentiation in markets dominated
by a focus on functionality. Brand communication that does not recognize the value attached to
intangible brand elements by different buying center members may undermine the sales process.
Successful business-to-business brand communication requires strategies that incorporate brand
values to appeal to the social and psychological as well as the rational concerns of the different
organizational buyers involved.
To establish an appropriate communication strategy it is essential to concisely know who
your message is meant for. The solution is to adopt a holistic perspective that takes into
consideration that business-to-business market encounters are complex interactions affected by
multiple players. Such holistic marketing perspective requires external, internal, and interactive
marketing, as shown by the branding triangle in Exhibit 13-3.
The branding triangle clearly illustrates the intersecting relationships of the three most
important market participants: company, customer, and collaborators (employees, partners).
External marketing relates to the regular work of pricing, distributing, and promoting of
products and services to customers. Internal marketing describes all actions that train and
motivate collaborators to become true brand ambassadors. The company directly affects external
and internal communication efforts while interactive marketing is primarily affected by inter-
nal marketing activities. The branding triangle is showing the equivalent importance of all three
communication approaches. It is no longer enough to merely rely on external marketing efforts if
you want to establish a successful brand. Yet, there are still many industrial companies that do
not effectively communicate their brand essence and values internally to their employees. If no
one takes the time to explain the effect of the brand, especially the brand promise, to employees,
branding efforts are in most cases doomed to failure. It is essential to realize the internal
implications and develop internal brand programs and training to educate collaborators on what
the brand represents, where the company is going with its brand, and what steps need to be taken
to get there.
Brand building tools are the means of marketing communication by which companies aim
to inform, persuade, and remind customers—directly or indirectly—about their products and
brands. In a way, they act as the “voice” of the brand and create a platform to establish a dialog
and build relationships with customers. The brand building tools are not fundamentally different
in consumer and business-to-business areas. The marketing communications program is made up
of the same major modes of communication, but the market conditions are very different:
• Personal selling
• Direct marketing
• Public relations
• Advertising
• Sales promotion.
However, priorities typically vary significantly. In business-to-business markets, the focus
is typically set on the first one—personal selling. But understanding the concept of “brand” as
holistic experience also conveys, “everything matters.” Therefore, all elements in the marketing
communications mix are potential tools for building brand equity. They contribute to brand
equity in many ways: by creating awareness of the brand, linking the desired associations to the
brand image, eliciting positive brand judgments or emotions, and/or facilitating a stronger
customer–brand relationship. The box “From Earth-Moving Equipment to Boots” describes the
innovative branding effort of Caterpillar, Inc. Notice that the kind of brand consistency involves
employees on all levels and positions.
Companies should periodically check the performance of their branding efforts.
Caterpillar is successful because the company has been vigilant in maintaining consistency of its
image in the consumer market with its image in the business market. A failure to maintain
standards of excellence in one market will reflect across all markets.
MEASURING EQUITY AND VALUE

Although the value of a brand cannot be measured precisely, it is important to establish estimates
that provide a frame of reference when developing brand building programs and budgets. Some
marketers regard brand equity measurement and brand valuation as equal although they need to
be distinguished from each other. Over the last two decades a vast number of brand evaluation
models have been developed.8 Most of them fall into the following categories (Exhibit 13-7):
• Research-based evaluations—Brand equity measurement is a behavioral approach that

puts a financial value on brands. Researchers measure customer behaviors and attitudes that
have an impact on the brands. The perceptual brand metrics include awareness (unaided
and top of mind), knowledge, familiarity, relevance, satisfaction, and recommendation.
• Financially driven approaches—Brand valuation is used to estimate the total financial
value of a brand. The estimation of the financial value of a brand is partially based on
subjective judgments of knowledgeable people in an organization. It usually involves
straightforward logic. First, you have to identify the earnings stream of each major market
EXHIBIT 13-7 CAT Footwear
From Earth-Moving Equipment to Boots
Let us take a look at Caterpillar. For more than components of this global supplier and leading
eighty years, the earth-moving equipment of U.S. exporter are manufactured in 49 U.S. facilities
Caterpillar Inc. has boldly shaped the world’s and 59 other locations in 22 countries around the
landscape and infrastructure. It is one of the few globe.
high-profile brands that are prominent and suc- As a technology leader, the construction-
cessful in two very different fields. In the business- equipment giant is represented worldwide by a
to-business area, the stylish yellow-tabbed CAT global dealer network that serves customers in
logo is best-known as the symbol of the leading more than 200 countries. The mostly independent
global manufacturer of construction and mining and locally owned dealerships provide CAT with a
equipment, diesel and natural gas engines, and key competitive edge since customers deal with
industrial gas turbines. people they know and trust while benefiting from
The history of Caterpillar dates back to the the international knowledge and resources of the
late nineteenth century, when Daniel Best and company.
Benjamin Holt were experimenting with ways to The company sets a strong focus on testing
fulfill the promise that steam tractors made for and quality processes that aim to secure its reputa-
farming. The Best and Holt families collectively had tion for reliability, durability, and high quality.
pioneered track-type tractors and the gasoline- Caterpillar products are premium priced and are
powered tractor engine. In 1925 the Holt regarded as more effective and money saving in
Manufacturing Company and the C.L. Best Tractor the long term because their systems are proven to
Company merged to form the Caterpillar Tractor work harder and longer than competitive products.
Corporation. In 2007, the company gained sales Faced with the threat of potential brand erosion
revenues of US$44.9 billion and a profit of about and customer confusion due to decentralized
US$4 billion. Today, CAT is truly a global brand. divisions the company decided to develop a
Approximately half of all sales and target customers program to secure and foster the integrity of its
are outside the United States. The products and corporate image. The result was the “One Voice”
campaign that put a strong focus on the corporate expensive heavy-duty boots and associated apparel.
brand strategy. The strength and extraordinary appeal of the
The strength of this iconic American brand, Caterpillar brand in business to customer lies in its
moreover, has been extended very successfully to brand heritage for rugged durability. CAT footwear,
consumer markets. Prior to 1994, to most con- for instance, combines the rugged durability of work
sumers, the brand was more familiar on a range of shoes with the easy comfort of casual footwear.
carrying the brand. Those are then divided according to the following criteria: those
attributable to the brand, to the fixed assets, and to other intangibles. After capitalizing the
earnings attributable to the brand, you get the estimate value for that brand in the product
market. This is especially important for companies that base their growth on acquiring and
building diversified brand portfolios. The usual way is to subtract the book value from the
market value and attribute the difference to brand equity.
• Combined approaches—These approaches are using behavior and financial brand valua-
tion methods combined. One of the best-known combined approaches is from Interbrand
Corporation, a global branding consultancy. The method—although not publicly open,
which is now recognized by auditors and tax authorities in many countries, defines the
brand value9 as the net present value of future profits attributable to the brand. The valua-
tion model, according to our understanding, integrates three core processes: financial
analysis (with focus on additional cash flow created through the brand), market analysis
(determining particularly the generated and achievable price premium), and brand analysis
(analyzing brand recognition, brand loyalty, and so on).
COMPETING THROUGH BRANDING

The unifying theme in this chapter is that branding can create competitive strength in a business-
to-business environment. Market ownership has a perceptual dimension. Being recognized as
the owner of a market conveys a competitive advantage whenever a customer is trying to decide
whose offering to choose or whether to purchase the next offering from the same supplier as the
last purchase. As was noted in Chapter 3, business buyers are people, too. They develop beliefs
(associations) and preferences. They remember some things and do not remember others. When
they lack information and do not have time to search, they fill in the blanks from what they
already know.
In general, building strong brands requires time to establish trust and confidence. There
are certain circumstances in which a supplier’s product can quickly become a standard, but the
general case requires time for extended interaction between customer and supplier. In this way,
brand building in business-to-business marketing differs somewhat from branding in con-
sumer markets—strong brands are built through careful establishment of a relationship with
each customer and prospective customer. Marketing communications has a role in business-
to-business brand building, but it is not nearly as short term and product centered as it is in
consumer marketing.
In this section of the chapter the discussion describes how, under certain circumstances, a
supplier obtains the status of being a standard for its market. Then the discussion moves to
consideration of how strong brands can be built in circumstances where it is not conducive to
build an industry standard. Then we will introduce the ingredient branding concept.
Importance of Brand in Business-to-Business Buyer Behavior

Re-examine the buying decision process discussed in Chapter 3. As the following sequence of
steps in a typical buying decision process illustrates, a recognized brand name with positive
associations attached has an advantage at each stage of the decision process, even under high-
learning (high-involvement) purchase situations.
• Determine that a need exists. Missionary salespeople from a well-known and well-
respected company may have entry into the buying center to discuss new products, which
triggers the buyers’ recognition that they indeed have such a need. Missionary salespeo-
ple from an unknown or start-up company may not be given such an opportunity or may
have to work harder to obtain entry.
• Determine product specifications. The designers for the customer may design around
component products from a well-known supplier; thus the recognized brand may be the
standard by which the specifications are set. Assistance and design input from missionary
sellers of the known brand will be strongly considered. The well-known supplier often has
permission to participate at a more intense level than the unknown supplier. An unrecog-
nized brand will probably have to go through extensive testing and competition against
other products before the designers feel secure in specifying it as a standard.
• Acquire solution providers. The list of suppliers from whom to invite bids will most likely
include the well-known companies. If the list of proposals does not include a branded
player, the buyer may specifically request a bid from a brand name player so that a
benchmark is established or so that upper-level management will sign off on the proposals
allowing the selection process to proceed.
• Cull the bids/proposals to a short list. The well-known supplier gets the benefit of the
doubt for inclusion on the short list or may be included for comparison purposes. If a
choice exists between a recognized brand and an unknown supplier, all other things being
equal, the name brand will usually get the nod.
• Evaluate the short list, or get revised proposals/bids. Evaluations of name brands are given
more weight or are trusted more than proposals from lesser-known companies.
• Cut the short list to finalists. Again, 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. The brand name may be included to give the lesser-
known brands more legitimacy. (It is easier to explain the list to upper-level management if
it includes at least one name that is known.)
• Presentations. The name brand may be treated with more deference or respect; holes in the
presentation may be assumed away. The claims from lesser-known companies may be
subjected to closer scrutiny.
• Final evaluation and choice. The well-known company wins ties. Higher price for name
brand may be tolerated if the brand means higher value to customers (e.g., Intel); the name
brand may have more negotiating power to obtain various concessions from the buyer; and
trust of the name brand will be a factor to consider.
• Postpurchase 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 doubt whether the situation could be improved with another supplier. For a
lesser-known supplier company, the customer may be inclined to seek outside help or
switch suppliers entirely more quickly if results do not live up to the customer’s
expectations.
In each stage, in each instance of a customer decision, the advantage for a well-known
supplier may be small. The accumulated effect in any one customer decision, though, can add up
to a sizable advantage. Over time, too, having a slight advantage in a large number of customer
decisions will result in a sizable number of wins for the well-known company.
Branding as a Standard
The ideal state for a marketer to reach is to have her product or service specified as the standard.
Every other potential competitor then has to show it meets or exceeds the specifications and that
its overall offering has better value. Even if the brand has not been attributed standard status,
having a known and respected brand brings competitive strength into the buying process.
Industrial products are often established by initial users as a defacto standard for that
product type. Just as one might say “make a Xerox” when we actually mean make a copy (using
equipment from Canon, Kodak, or another manufacturer), brands such as Loctite (anaerobic
adhesives), Velcro (plastic hook fasteners), Plexiglas (brand of acrylic sheet), and others have set
industrial standards. While generic forms of these products exist, the brand itself has become
jargon for the type of product and the expectation for product performance.
Under these circumstances, brands become a specification standard, often noted in “engi-
neering call-outs” as “Velcro #XXX or equivalent” or “Lexan 500 or equivalent” (engineering
call-outs is a “shorthand” term simply referring to design engineers’ specification of materials
and parts on the engineering drawings of devices). The use of the brand as the standard creates
shortcuts for purchasing and engineering, but also could lead to brand proliferation and the loss
of differentiation; therefore, the understanding of its development and conscious brand manage-
ment is required for continuous success. (All trademarks, such as Xerox, Velcro, Plexiglas,
Makrolon, and Lexan, are owned by their respective companies.)
How does a manufacturer’s brand become a standard? The following discussion offers
some possibilities.
FIRST WITH NEW TECHNOLOGY A new technology often requires extensive manufacturer as-
sistance for application (the role of missionary sales is critical to the product’s success).
Branding of the product at this point reinforces its use as jargon (what else will the customer call
it—manufacturer X new product number XXX?) The customer needs to be told what to call the
thing. Future similar or copycat products will be called by the first manufacturer’s brand. (At this
point, it becomes critical for the first manufacturer to take steps to formally and legally protect
the brand, while not discouraging its informal use in discussions. Note that many of the product
names mentioned here are trademarks of their respective manufacturers.)
Return again to Sensacon and the supply of the SensorSUV to sport utility vehicle manu-
facturers (Chapter 8). Customer laboratories, or an independent investigatory body as selected by
design engineering, will be asked to verify the performance of SensorSUV, based on samples and
performance data supplied by Sensacon. The lab will work with the manufacturer to develop the
standard, based on the accepted performance of the sensors as previously approved. Once this
standard specification is completed and accepted, copycat products will be required to meet it.
This standard is “owned” by the first manufacturer—Sensacon. The copycat manufacturer will
always be faced with the question “Does your sensor do everything that SensorSUV does?”
(Important even if the customer does not necessarily need all the things that SensorSUV can do,
tailoring of the product—also known as cost reducing—occurs later in the life cycle and is
motivated by a customer need to reduce the manufacturing cost of the product that has had the
sensor incorporated into it.)
BEING BEST WITH SERVICE When it absolutely, positively has to be there overnight, we
“FedEx it”—whether it goes via UPS, DHL, or some other carrier. FedEx established a service
niche that is not questioned under any circumstance and thus helped create this standard. This
level of commitment must also be applied to tangible products, parts, components, and so on.
Sensacon must realize that the technology edge does not suffice to create the brand. Market
ownership is necessary. (Market share does not equal market ownership.) Why did the customer
specify Sensacon? Without excellent service, product education, application assistance, and
general application development hand-holding, the customer would find other devices (not
copies or direct replacements for Sensacon but devices that can fill the need when included as
part of the design process) that meet the requirements.
The danger of a customer using alternative devices in the design of its product is particu-
larly acute when the alternative is a proven product in the eyes of the designer. Whenever there is
any doubt, the customer is likely to use what it is already familiar with. A new adhesive may be
entirely appropriate (e.g., less costly, lighter weight, etc.) to hold an assembly together, but it is
only as good as the confidence that the customer has in it.
INNOVATING THE NEED—NOT THE TECHNOLOGY As SensorSUV matures and becomes

known throughout the customer base, less application development is necessary on the part of
Sensacon. However, users of SensorSUV will begin to look to the next generation of their
product and how it can be enhanced. This enhancement can lead to a need for a next generation
sensor. This next generation product, if it is to be truly new, may require new technology, style,
and materials and/or have different performance requirements. By serving the need and not the
product, the SensorSUV brand becomes known as a solution rather than a component part.10
Internal marketing is LIVING THE BRAND Contextually, many of the above-mentioned elements are
more than the part of the integrated into a strong market-driven organization. As these elements con-
marketing effort that tribute to brand differentiation, the effort must be greater than an external
creates newsletters inside
of the organization. Just
campaign. Internal marketing plays an important role in brand consistency.
as positioning products in This must spread across not just product and OEM channels, but must be in
target markets, is an installation, service, logistics, after-sale communications, and so on.11
important part of brand
building, positioning the
product and organization
Defending the Brand
with employees and Obviously, if SensorSUV is a profitable item, there will be imitators, either
internal stakeholders
is critical. These
copycats trying to be the low-cost producer or modifiers trying to slightly move
stakeholders are the the technology envelope—at least enough to meet all the properties of
“face” of the organization SensorSUV while enhancing their own product’s attractiveness. A key idea for
and its brands. Their defending the brand is to “reach out and touch” everyone at all levels of the
attitude, appearance, customer organization. Some thoughts on how to make defending the brand
and belief in brand are
contextually important the
easier follow.
brand message. • Market up. As the specifying influence moves through the process of
establishing SensorSUV as the product of choice, the missionary seller should
build relationships with management above the influencers to reinforce the decision
process (as well as to learn more about what is going on at the customer—but that is
another topic).
• Market down. SensorSUV will have to pass several hurdles in the customer’s organization.
Laboratories will test the product; manufacturing will manipulate the product; and
purchasing will, eventually, buy the product. Technicians in the lab will appreciate atten-
tion from the missionary sellers. The lab personnel are often ignored, not only by specify-
ing influences but by suppliers. Yet, lab people can make or break a product. (Do you test
that fabric horizontally or vertically for the flammability test? Does color make a differ-
ence? What is the value image of this supplier? Who are they? How long did the samples
take to get here? etc.)
• Market sideways. The first specifier of SensorSUV should not be the only specifier. If
SensorSUV is used in a breakthrough (or otherwise significant) customer product, that
customer product should (with the customer’s concurrence) be used as a demonstration of
SensorSUV’s capabilities. This translation of an initial success should be featured in print
promotion, at trade shows, and at any other promotion opportunity in which influencers at
other potential customers can be exposed. Make SensorSUV a wagon that people want to
ride. (“Nobody ever got fired for specifying SensorSUV.”)
The SensorSUV example operates in a market where the customers are manufacturers of
SUVs. The customers face a market that is an oligopoly; this means that SensorSUV faces a mar-
ket in which it has only a few potential customers. Specification of a component part in the design
for a new vehicle almost automatically makes that brand a standard. Becoming a standard when the
customers’ market is characterized by monopolistic competition is more difficult and time consum-
ing. Because each customer is looking for unique ways to differentiate itself and because there are
a lot of customers, it is difficult to get agreement among the industry participants to declare
something as a standard. In many industries, there are standards bodies comprised of customers and
suppliers. To avoid accusations of antitrust collusion, these standards groups work hard to create
standards that do not convey monopoly status or unfair advantage to any of the participants. Very
often, standards bodies will continue to confer until the market has largely declared a winner. At
other times, standards are written so that only product interfaces are standard; the product itself can
be unique. In other cases, a standard must be declared before the industry can move ahead. In such
cases, a neutral solution is usually found in which all participants can choose to participate.
SUBORDINATE BRANDS Earlier in the discussion of brand architecture (Exhibit 13-6) we

noted that “corporate” or family brands seek to provide overall consistency. As consumers, we
have overall impressions of the Intel and AMD brands, but both companies have established
additional brands to aid the positioning of various products. When we hear Intel Core or
Phenom II we understand the reference to a high-end computer processor. On the other hand,
when hearing Intel Celeron and the AMD Sempron we recognize a lower performance, albeit
lower cost processor. These subordinate brands serve to protect the premium Intel Core and
Phenom brand positioning. In a price war, the first combatants are Celeron and Sempron.
Many business-to-business companies have established the same branding strategy.
Companies such as 3M and General Electric continually reinforce their corporate image.
However, within GE product lines will be strategic brands that define price points and overall
value. Imitators in the markets served by GE and 3M will often use price as a major part of their
total offering, particularly when the established brand is known as the “standard” in that industry
(see “branding as a standard” above). Competitors try to be “as good as” the standard but at a
lower price. Particularly in the growth stage, customers will not be as aware of the overall value
of the industry standard, or may not need “all” of its properties. In many instances, rather than
ignore this less than premium market, suppliers will create subordinate brands to offer. These
brands are used to not only provide broader market coverage, but to protect high-end brands that
have premium price and positioning. Typical examples are the 3M Spartan brand (to broaden the
line and protect Scotch) and GE Noryl Resin (to broaden the GE Plastics line and protect Lexan
polycarbonate resin). Not just a product strategy or just a price strategy, these subordinate brands
are part of an integrated long-term market strategy.
BUILDING A STRONG BRAND

Strong brands take time to build unless special circumstances prevail. A start-up or young
company without a brand reputation has the opportunity to become a standard in markets like
the one faced by Sensacon. In other markets, principally early markets in which there is no
established competition, a young company can also build market ownership and brand reputa-
tion quickly. Without special circumstances, the company must expend considerable effort to
build a strong reputation. In established markets in which young companies compete against
companies with strong brands, young companies are at a disadvantage because they have no
brand recognition or reputation. Consequently, from an early point in time, the young company
needs to think about whether and how it should build its brand. In general, unless a company is
going to be a low-cost, low-price supplier, a strong brand reputation will translate into compet-
itive advantage.
For established companies, strong brands are an asset to be enhanced and supported. A
company with a poor reputation will find it difficult to overcome that reputation for two reasons.
First, proposals offered will be discounted in the minds of the buying center. Consequently, even
if the company has solved the problems that have led to a poor reputation, it will receive
relatively few chances to prove its mettle. Second, when it does obtain the chance to prove it has
solved its problems and it performs well, the customer may be inclined to diminish the positive
results based on past history. It will take a series of positive outcomes before the blemished
reputation of the past dissipates.
Brand strength is generally made up of brand recognition or awareness, quality of the
products or services, and the customers’ positive beliefs—associations—linked to the brand.12
In business-to-business markets, awareness adds little until the company’s value chain is
established so that superior value is created for customers.13 So, building brand strength is a rel-
atively long-term process that revolves around building value for customers first, from which
come positive associations about the product and company, and then building broader awareness.
Note that positioning is a particular aspect of brand building. It involves matching the
product and directed message with the most important needs of the target market segment (see
segmentation, Chapter 7). It is a position that is maintained for a period of time and evolves into
a set of associations linked to the brand. The essentials of brand building include creating strong
products and communicating this to the appropriate target markets.
Building Associations
Brands are basically symbols. People use symbols to represent clusters or bundles of information
that are related to the things the symbols stand for. They can then efficiently compare and evalu-
ate alternatives by considering the symbols that represent those alternatives. People in a buying
center tend to make holistic judgments concerning the entity represented by the symbol, based
on all the associations attached in their minds to those symbols. The most powerful associations
come from customers’ direct experiences. If these are numerous and positive, the holistic evalu-
ation will be positive. The ideal situation is for everyone in the buying center to have at least a
few positive experiences with the company and its products or services. If the experiences of the
people in the buying center have not been uniformly positive then the political dealings within
the buying center can be detrimental. This suggests that the sales team and service personnel
have an important impact not only on the immediate outcome of a customer’s buying decision
but on the outcome of future situations as well. The effect of advertising and other less-personal
communications has an impact on brand perceptions but without the robust and durable character
of personal contacts.
Brand associations are not so hard to create as they are to control. Every time customers
interact with a supplier, use its product, or interact with a customer service person, impressions
are formed. Every time they see an advertisement, hear a news story, or talk to someone who has
an opinion, impressions are formed. However, memory is selective. They may not remember
what the marketer wants them to remember, so the marketer has to try to be as consistent as
possible in all the messages delivered. These messages also have to be consistent with the
customers’ own experiences. Ultimately, customers’ experiences with the product or service will
be the things that they will remember most. Accordingly, making those usage experiences as
positive as possible is critical for the marketer.
The communications part of association building, then, has to do with managing expectations.
Too much hype can create expectations that are hard to meet. This is one of the problems that Apple
faced with its Newton. Everyone was expecting this wondrous device, when wondrous was not
about to be delivered until version 3 or so. Underplaying the value created by the company’s new
product is also problematic. If customers do not believe they will get much value, then few will be
inclined to try it. This is not as bad as overblown hype where the aftereffects of unmet promises can
live on for years. In planning the effort to build a strong brand, then, the marketer must first under-
stand what associations customers currently have about the company and its offerings. Then, the
marketer must decide what associations the company would want customers and prospective cus-
tomers to have in the future. The marketer must then determine what combination of experiences
and messages is most likely to achieve the desired change in the customers’ and prospects’ minds.
Quality
Quality is the only type of association that is directly related to profitability, as determined by
researchers in the area of strategic management.14
Quality has special meaning: it is perceived quality from the point of view of the customer.
Further, quality can be thought of as the ability to provide appropriate value from the customer’s
point of view. Hence, “durability” when durability is not needed is not quality; “aesthetically
pleasing” when aesthetics are not valued is not quality; and so on. So, high quality means having the
ability to perform very well on the most important dimensions as determined by targeted customers.
To create quality, companies must know their targeted customers very well to understand
what it is that means quality to them. Second, the company must have a fair amount of creativity
to be able to turn the customer’s vision of quality into a product or service while being able to
keep costs under control.
If the marketer wants to create associations that denote quality, it is important that the com-
pany communicate this; and the product has to perform when the customer uses it, or the service
must provide superior satisfaction.
Ingredient Branding
Ingredient branding—or “InBranding”15—is one of the most promising branding strategies for
business-to-business companies. Generally, it is exactly what the name implies: an essential
ingredient or component of a product that has its own brand identity.
Ingredient branding is a special form of cobranding—the joint presence of at least two or

more brands on a single product or service. The scope of possible cobranding approaches can
range from a mere temporary joint promotional effort up to the organizational linked develop-
ment of completely new and innovative products. The regular cobranding approach is mainly
used for consumer products and services; application in business-to-business marketing tends to
be quite restricted. An example of industrial cobranding is the joint venture of Pitney Bowes and
Royal Mail (UK postal system), to offer customized document management and mailroom-
related services in the UK; another is the alliance of Amazon.de with DHL in order for each to
benefit from the positive image of the partner.
Examples of popular ingredient branding range from clothing (Gore-Tex, Lycra), carpets
(Stainmaster), diet soft drinks (NutraSweet), and packaging (TetraPak) to bicycle gears
(Shimano), sound systems (Dolby), as well as gasoline and chemicals (Techron, Microban)
promoting the inclusion of a value-enhancing, branded ingredient. Of course, we cannot leave
out the ultimate, widely quoted best practice example of ingredient branding which we will
consider in detail at the end of this chapter: Intel. In the following section we will provide you
with the basic information on how InBranding works and how to position it in the overall
marketing concept.
While ingredient branding is a form of multistage branding, most business-to-business
companies only use single-stage marketing approaches. They direct their marketing efforts only
to the next stage in the value chain, to their direct customers. Multistage or ingredient branding
is directed at two or more downstream stages of the value channel.
The basic underlying promotional principle that makes ingredient branding work is the
pull principle. According to the pull principle, the manufacturers of the ingredient brand direct
their communication efforts directly to the final consumers, thereby bypassing the manufacturers
of the finished product. The main idea is to create consumer demand for the ingredient at the
retail level, so that consumers pull the product through the distribution channel, forcing middle
stages to use the ingredient. In some very successful cases, the ingredient brand may even
become the standard in the product category.
Exhibit 13-8 displays the push–pull principle. A push strategy means that an ingredient
manufacturer concentrates his marketing efforts on promoting his products to the manufacturers
of the finished goods. In order to support the branded ingredient effectively, a manufacturer
should always use a coordinated push and pull program. The pull strategy helps consumers to
understand the importance and advantages of the InBrand while the push strategy aims to strive
for full support by all channel members. Without the support of the subsequent stages of the
value chain, an ingredient branding strategy can rarely be successful.
General targets of ingredient branding approaches are materials or parts that enter into
final branded products, but lose their individual identity on the way. In order to step out of such
an anonymous position, manufacturers attempt to establish ingredient brands that increase
awareness and preference for their products.
Not every ingredient can be successfully pushed or pulled. Does anybody really care
about what kind of lubricants his favorite car brand uses in its manufacturing process? Not
really, so it is obvious that there are certain requirements and restrictions that have to be taken
into consideration when thinking about implementing an ingredient branding strategy. The
most important aspect is that the “ingredient” should capture an essential part of the end
product. Intel processors, for instance, are regarded as the “heart” of the personal computer. The
ingredient should be perceived as important and relevant by consumers and, thus, contribute to
the performance and success of the end product. The InBrand has to be clearly marked with a
Sales-promoting from the Sales-promotion to the

ingredient supplier to the Ingredient- B2B customer
final customer Producer
Supply-push
Demand Supply
Incentives to
Pull demand creation
at the B2B customer
Final Product
Demand pull Producer OEM
Push
Incentives for the Supply-push
demand creation of a Demand Supply
certain ingredient in Incentives for
the final product demand creation
at the final customer
Final User
EXHIBIT 13-8 Push and Pull by InBranding Source: Philip Kotler and Waldemar Pfoertsch,
B2B Brand Management (Heidelberg, NY: Springer Publishing September 2006)
distinctive symbol or logo on the end product. Consumers need to be aware that the respective
product contains this ingredient.
In addition, brand alliances provide companies with a large number of potential advan-
tages. By capturing two sources of brand equity, brand alliances can tremendously enhance
the value proposition and points of differentiation of all products and services involved. With
equally strong and complementary brand associations, the impact of cobranding can be even
greater than expected. Such beneficial synergy effects of combined brand power might also
allow greater freedom to stretch.

Introducing the brand management paradigm to business-to-business companies is a great step
forward, but requires the reallocation of resources and the hiring of professional marketing man-
agers. Currently there are not too many marketing experts who understand branding, except if
they have business-to-business experience.
Branding gives the marketers the opportunity to produce more value for the customer and
the company. As discussed in this chapter, it is necessary to understand the principles of brand-
ing, apply them in the business situation, and continuously modify them.
Branding is a key part of marketing entrepreneurially. By marketing with branding, proac-
tive efforts, controlled risk taking, and attention to opportunities, marketers should be able to
compete on both value and time. Applying branding and measuring results is a crucial step of
enhancing the company’s future perspectives.
In reading Chapter 14, and beyond, you should keep in mind what branding can provide to
business-to-business marketing. Chapter 15, on communicating with the market will deepen
your understanding of business-to-business value creation and give you key ideas to keep in
mind when you land in a challenging job in one of these arenas.
Key Terms
associations 328 brand strength 328 interactive marketing 320
awareness 328 branding dimensions 315 internal marketing 326
brand architecture 317 branding triangle 314 loyalty 313
brand building 319 buyer behavior 324 push–pull 330
brand functions 312 external marketing 320 research-based evaluation 321
brand management 316 financially driven approaches 321 visual identity 319
brand image 317 holistic branding 312
brand strategy 317 ingredient branding 329

1. What are the benefits created by branding? 10. Can a business-to-business marketer be innovative
2. How does business-to-business branding differ in the way a brand is built?
from consumer products branding? 11. What are requirements for ingredient brandings,
3. Why should you approach branding in a holistic way? and what are current examples?
4. What are the important business-to-business brand 12. What industries are more inclined to use ingredient
functions? branding?
5. What roles do brands play for a company’s offering? 13. Many positive aspects of ingredient branding have
6. Why should marketing apply the branding triangle? been discussed. What are some of the potential
7. Why should a business-to-business marketer care problems?
about building a strong brand? 14. Why is it important to choose an ingredient brand-
8. Why is it advantageous to have your brand designating partner carefully? What factors must be consid-
ed as a standard by a customer’s purchasing process? ered beyond short-term market effectiveness?
9. How are positive associations for a brand estab-
lished in the memory of persons in the customer’s
buying center?
Endnotes
1. Based on China Daily Report (April 17, 2006), 7. Kotler and Pfoertsch, B2B Brand Management,
p. 3; Hoovers Report ITT (2007); ITT Corporation p. 66.
Press release White Plains, N.Y. (March 19, 8. David A. Aaker, “Measuring Brand Equity Across
2008). Products and Markets,” California Management
2. Philip Kotler and Waldemar Pfoertsch, B2B Review, 38 (Spring 1996), pp. 102–120.
Brand Management (Heidelberg, NY: Springer 9. Singfat Chu and Hean Tat Keh, “Brand Value
Publishing, September 2006). Creation: Analysis of the Interbrand-Business
3. Adapted from D.A. Aaker and E. Joachimsthaler, Week Brand Value Rankings,” Marketing
Brand Leadership (New York: The Free Press, Letters, 17 (2006), pp. 323–331.
2000). 10. If your company is strictly known as a technology
4. Kotler and Pfoertsch, B2B Brand Management, company, technology innovation is necessary,
p. 55. though not sufficient, for success. The argument
5. See Chapter 3. that “we are focused on our high-technology
6. Nick Pauley Design Brand Check (2008) product—that’s why customers buy from us” is a
download under http://www.pauleydesign.co. dangerous position. In fact, the technology-
uk/PD_gd_brandcheck.pdf oriented organization will have branding as a
more important task, as their product is expected repairperson to show up greasy and dirty,
to make a value statement rather than be a covered in toner, from the last repair.
“me-too” product. The “me-too” organization can 12. David A. Aaker, Building Strong Brands (New
focus on manufacturing efficiencies, distribution York: The Free Press, 1996).
economies, and alternative cost (read “lower”) 13. Kathryn Dennis, “A Q&A with Regis McKenna,”
positions with purchasing departments. Ironically, Marketing Computers, 20(12) (December 2000),
the technology-oriented company must establish p. 38.
a brand position or become a low-cost producer 14. C.f. Robert D. Buzzell and Bradley T. Gale, The
of maturing products. PIMS Principles (New York: The Free Press,
11. Kotler and Pfoertsch, B2B Brand Management, 1987).
p. 125. As an example, Canon insists that its 15. Waldemar Pfoertsch, Cheryl Ann Luczak,
repair personnel wear a white shirt and tie, not Frederik Beuk, and Jennifer D. Chandler,
only as a sign of their professionalism, but to “InBranding: Development of a Conceptual
reinforce the ease of use and service of their Model,” Academy of Marketing Studies Journal,
products. It just wouldn’t be right for the 11(2) (2007), pp. 123–135.
Chapter 14
Channel Relationships
and Supply Chains
OVERVIEW
We discussed buyer and seller behavior in business-to-business relationships,
market research and competitive analysis, and new product development and
pricing in previous chapters—all in the context of delivering value to the customer.
In this chapter, we focus on that delivery function. Marketing channel intermediaries
are necessary to make the connection between customer and supplier. Whether
done through intermediaries or directly between supplier and customer, the
functions and activities that form this channel comprise the “place” component of
the marketing mix. This chapter’s examination of the complexities of marketing
channels and how the different elements come together includes an emphasis on
the development of networks of partners to create value for customers.
Effective marketing channel designs 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. Customers in different target markets require different
combinations of channel services. As a result, unique channel designs are often
required to effectively satisfy different markets. The opening story, a classic
example, demonstrates how a successful company targeted a new market but did
not develop a new marketing channel to reach that market.
The Apple Lisa

In 1983, Apple Computer introduced the Lisa computer. This new desktop computer was the first
major new product to follow the successful Apple II line of personal computers. The Lisa initially had
a $10,000 price tag. Priced at this level, the system was obviously meant for large commercial or
334
Chapter 14 • Channel Relationships and Supply Chains 335
business users. Apple introduced the Lisa through the same channel that had been successful with the
Apple II computer line.
The Lisa was a major sales disappointment. Apple, the company that earlier had successfully
introduced the personal computer to an embryonic market, had now failed with its first premium,
business-oriented computer. While Apple enthusiasts were stunned, potential business customers
seemed uninterested.
What happened? Among other problems, Apple failed to recognize that the business target
market would have a different set of needs and expectations associated with the purchase of a
computer.1 Different target markets usually demand a different set of services and, thus, a channel
design focused at providing those services. The marketing channel for the Apple II line of computers,
comprised of independent computer dealers, had contributed to the success of the product. The target
markets for these early computers were schools and, to a large extent, home users. The home Apple
user was likely to be more interested in the computer as a technology device in itself than in the
functionality of the device. This hobby or enthusiast attitude—the technophiles of the home computer
market—was well served by the independent dealer network as many had entered the business as
would-be “hackers” themselves. Business users, however, want the computer itself to be “invisible”
while accomplishing the required business support tasks. Differences from the home market in user
training, product information, product support, financing, delivery, and many other facets of the total
offering, combined with a lack of awareness or ability of independent channel members to satisfy
these needs, contributed to this major product failure for Apple. Had Apple recognized this differ-
ence, it should have been obvious that its current channel design was ill-equipped to approach the
business market. Was Lisa a “good product”? Because of the poor channel design, we will never
really know.
LEARNING OBJECTIVES
䊏 Understand the principles of market channel design and the delivery of economic utility—
form, time, place, and possession—to customers.

䊏 Understand value networks and the relationship to marketing channels.
䊏 Understand classical vertical integration patterns and the value network alternative.
䊏 Understand the fundamentals of business logistics and how these principles are being applied
in today’s global supply chains.

䊏 Recognize the importance of building channel relationships from the view of providing
economic utility and developing sustainable value networks.

䊏 Have gained an understanding of how the Internet can enhance the value that marketing
channels can provide to customers.

䊏 Have obtained an appreciation for the limits of applying information technology to enhance
marketing channels.
䊏 Know when and how the Internet can provide competitive advantage by enhancing marketing
channels and when application of Internet technologies will not provide a competitive
advantage.
336 Chapter 14 • Channel Relationships and Supply Chains
INTRODUCTION
Primary channel Marketing channels comprise the place element of the marketing mix. A
participants are those marketing channel is the means to manage the presale contact, transaction, and
intermediaries such as fulfillment activities between the supplier and the final buyer. The original
wholesalers, distributors,
supplier of a product or service can provide the channel value, or the value may
retailers, agents, and
brokers who are part of be provided through one or more channel intermediaries—organizations that
the proactive marketing perform channel functions between the original supplier and the final buyer.
design of the channel. Without the place element of the four Ps—whether supplied directly or through
These intermediaries can intermediaries—the customer cannot realize the value contained in the supplier’s
have responsibilities
product or service.
associated with presale
customer contact, sales, Place involves many organizations—primary channel participants and
customer service, and ancillary channel members—that are independently owned and operated. These
transactions in the organizations, while participating in the channel, may very well have internal
channel. Primary channel goals that are not always consistent with the goals of the channel leader. Combine
participants form a vital
this with a natural resistance to change among well-established operating organi-
link between the supplier
and the final user of zations, and place becomes a very difficult part of the marketing mix to alter.
goods and services. The channel is usually direct in supplier–customer relationships in which
the volume of business is large, particularly in relationships between a supplier
Ancillary channel and an original equipment manufacturer. The sales force, market development,
members are those
businesses and service
customer service operation, and delivery system of the manufacturer form a
providers whose efforts direct channel with appropriate corresponding parts of the customer organization.
have been traditionally For instance, Dana Corporation, a major manufacturer of transmissions and
viewed as somewhat chassis components to the automotive industry, does not go through intermedi-
generic but without which aries to supply automobile parts to General Motors. Rather, they form a direct
the channel could not
work. Marketers often
channel in which Dana sales and marketing personnel work directly with GM
do not consider which engineers, buyers, and other stakeholders in the buying center. General Motors
trucking company products places orders directly with Dana; Dana manufactures and ships the parts directly
will be shipped on, just that to GM; and Dana personnel handle the GM account.
the channel design will When the target market segment is not oligopolistic—not dominated by a
include trucking as part of
its logistical requirements.
few, large participants, suppliers may not be able to provide the total offering
A similar approach is used desired by the market and still provide superior value. The high handling costs
regarding financing, and smaller order quantities associated with serving the many geographically
storage, promotion, and dispersed and smaller customers in such target markets make it unlikely that the
other facilitating services. costs of a direct relationship will be recovered. In such circumstances, channel
Marketers specify the
function in the channel
designs other than direct channels are necessary.
design, not necessarily the
specific provider.
THE RATIONALE FOR MARKETING CHANNELS
A direct channel is
formed when the supplier Why have channel intermediaries? Couldn’t the supplier do directly every-
markets and sells thing that channel members could? The answer lies partially in the economic
directly to the buying
theory of division of labor. A specialist is usually more adept at providing a
organization or end user.
No additional primary service when that service is the main offering of the business. When serving
intermediaries are dispersed customers who buy a large assortment of goods associated with
involved. the market segment, but buy in small quantities, intermediaries often have
efficiencies, special skills, or special circumstances that upstream suppliers do
not have.
Direct: V × C Via Reseller:

transactions V + C transactions
V1 C1 V1 C1
V2 C2 V2 C2
RS
V3 C3 V3 C3
V4 C4 V4 C4
V = Vendors; C = Customers; RS = Reseller

EXHIBIT 14-1 Channels Can Create Efficiency
Another example of the value of intermediaries is the reduction in transaction costs and
complexity. As shown in Exhibit 14-1, the number of transactions is cut considerably by selling
through a distributor, reducing overall selling costs and the opportunities for error. The ability of
the intermediary to purchase in quantity to serve a bundle of small users, rather than each user
making a direct purchase, lowers costs to users because the intermediary can take advantage of
quantity-scaled pricing.
Customers in different market segments may have different expectations about the level
of services that are provided with purchases. As a result, different target segments may
require differing channel structures. The classic example of the Apple Lisa illustrates what
can happen when the target segment wants and expects services that the channel is not able to
provide. The existing Apple channel served home users who usually purchased individual
units, but the target market for the Lisa was large- and medium-sized businesses more likely
to purchase in large quantities. The home user was likely an innovator or early adopter
of home computers, somewhat enamored with the technology. The institutional buyer, how-
ever, was likely far more pragmatic, requiring functionality and ease of use instead of hot
technology.
Apple’s existing consumer product channel was not particularly well suited to the value
sought by the target market. We can see how this might be done better, though, using the
Dana example. The relationship with large customers—the OEM market—requires a parti-
cular set of services and is identified as a separate target market in the Dana segmentation
scheme. The product is custom tailored to the specific customer application. While Dana may
supply, for instance, the four-wheel drive transfer case for SUVs to both GM and Ford, the
designs are the result of collaboration with each customer and are unique. However, these
transfer cases are not only delivered in large quantities as components to the vehicle manu-
facturers’ assembly facilities, but enter the service market—repair shops—as well. The
service and repair segment has very different demands related to economic utility. Repair
shops want one component, individually packaged and locally available for quick delivery.
Thus, the marketing channels for these two segments—the OEM segment and the service
segment—must deliver different levels of form, time, place, and possession value (see “dual
distribution” later in this chapter).
MARKETING CHANNELS DELIVER VALUE

Successful marketing plans require significant channel development and planning, if they are
to provide superior value as perceived by the final customer. As we have seen in the Apple
example, the importance of “how the customer gets the product” is often overlooked by both novice
and experienced marketers, and the recognition that different parts of the offering (services,
financing, and so on) may require separate and unique channel activities is often ignored.
In the rest of this section, we examine more closely the value generally provided by
channels. This reinforces why channel design and management are so important to the marketing
strategy and its execution. Channels principally provide the four kinds of economic utility that
we have discussed many times throughout this text. Channels also create costs, both for the sup-
plier and for the customer, in the creation of this utility. Supplier- and channel-incurred costs
must be recouped from revenue in a way that they have a minimum effect on the price that can
be charged. Customer costs associated with the channel subtract from the total value realized by
the customer. Accordingly, channels must be designed and managed in a way that controls
channel costs and allocates the savings among customers, channel members, and suppliers.
Economic Utility
The ideal product not only satisfies core customer needs but also is part of a total offering that is
provided in the correct quantity, at the right time and place, and in a manner that fits the routine
of the customer. This sort of value provided by the offering has been called economic utility and
has four parts—form, time, place, and possession. Often, the supplier can create
Form, time, place, and differentiation by uniquely providing these four kinds of value through the mar-
possession in business-to- keting channel. At a minimum, all four elements of value must be created for the
business markets are
described subsequently.
marketing strategy to succeed.
Economic utility is part
of place in the four Ps FORM Form utility is the usable quantity or mode of the product most preferred
of marketing. The by the customer. This may be an individual item on a retailer’s shelf in the con-
relationship between the sumer market. In an industrial setting, it might be a specified lot size of industrial
four Ps, the total offering,
and economic utility is
components with convenient packaging, containerization, or palletizing to
discussed in Chapter 1. accommodate the operations of a customer’s manufacturing facility.
Palletizing is the TIME Time utility describes the availability of the product when the customer
arranging and securing
needs it. In the consumer market, this may be reflected in a retailer’s store hours.
of products on pallets—
platforms that can be In business-to-business markets, just-in-time (JIT) delivery service aimed at
easily stacked and moved minimizing raw materials inventory at the customer is an example.
by forklifts—so that the
products can be handled, PLACE Place utility, also known as locational convenience, is provided in the
shipped, and deployed
consumer market by retailers as several stores in a region or stores clustered
for use quickly and easily.
Many customers have a with similar outlets of competitors, as demonstrated by the clusters of com-
particular style or design peting automobile dealers at various “auto rows.” In business-to-business
of pallet that works with markets, place utility might be demonstrated by delivery of component parts
the material handling directly to the customer’s manufacturing site.
equipment in their
facilities. Suppliers are
required to provide POSSESSION Possession is the methodology by which the customer obtains
shipment of goods on ownership or the right to use of the product or service. In consumer markets, pos-
compatible pallets. session may be the variety of methods a customer may pay for an item—cash,
check, credit card, or retailer-provided financing. In business-to-business markets, the financing of

customer purchases can be a major part of the total offering.
While each of these four types of utility can vary in complexity and degree of intricacy, pro-
vision for them must be in every marketing channel. The responsibility for satisfying customer
needs associated with form, time, place, and possession may be shifted to other channel members
(distributors, wholesalers, manufacturers, etc.), but the functions cannot be eliminated from the
channel; if these functions are not provided, chaos in the delivery of value would result.
Channel Flows and Activities That Create Value

How are these economic utilities—the aspects of channel value—created? Suppliers or channel
intermediaries may provide one or more of the following services in their effort to provide
economic utility:
Marketing and sales flows
• Creating product assortments aligned with customer demand rather than with the manu-
facturer’s product line
• Communicating with customers in both a sales role and as a communication channel
between customer and supplier (in the Apple Lisa example, the Apple retailer was
unprepared for the buying culture of large institutions)
• Setting and negotiating prices
Product and ownership flows
• Taking temporary ownership, transferring title, handling government documentation and
registration, and so on
Installation, training, and service flows
• Providing before and after sales services to customers (the Apple dealer’s role in the
education process for home users was quite different from the training needs of institutional
buyers who would need basic training for actual users of the computer)
• Installing and maintaining complex systems (the institutional buyer would expect installation
and testing on-site for all locations)
• Providing systems and services support to channel members (the indepen-
The channel pattern is
dent dealer is unlikely to have the staff to support ongoing inquiries from the particular design or
the numerous users of the institution’s systems) arrangement of various
intermediaries that
Ancillary flows perform channel
functions. Different
• Providing financing for customers or for suppliers (the institutional buyer circumstances in the
would have different finance needs than the usual Apple user) target market environment
may call for different
Contracted transportation, handling, and storage services channel patterns, that is,
different types of
• Contracted promotion services intermediaries to meet
• Arranging for insurance, financial protection specific requirements.
• Managing information gathering, analysis, and dissemination Different types of channel
patterns are discussed in
These services, shown in Exhibit 14-2a, exist to a varying degree in most the “Channel Design”
channels, but the channel pattern that performs the service changes. In the section.
Manufacturers/Suppliers
Sales and Marketing Flows Product and Ancillary Members of the Channel
Ownership Flows (Facilitating Agencies)
Missionary
sellers/field Install, Train, and Service Transportation
marketing Flows
Direct sellers Financing

Specialized
installation and
Distributors service
Promotion
providers
Manufacturers’
representatives Value-added
Insurance
resellers
Real estate,
storage, etc.
End Users
Note: This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.
EXHIBIT 14-2A Marketing Channel Flows—Supplier to Customer
Trade credit is the Dana example earlier in this chapter, sales and marketing would flow through
payment term provided to direct sellers for very large accounts (e.g., GM, Ford), while the service channel
end users by distributors would use distributors able to provide the specific needs of repair personnel.
and other channel Missionary sellers assist the distributors in assortment and quantity decisions
intermediaries to finance
purchases. Particularly in
and provide product training to distribution personnel.
the purchase of In the Dana direct channel, customer-specific product flows from the man-
components and ufacturer (Dana) to the customer (GM, Ford) directly. Shipments are likely in
materials, small business- large quantities, palletized per customer requirements, and are aided by a
to-business customers contract transportation services provider—an ancillary channel member.
will rely on trade credit
as a way to finance
Ownership transfers directly between Dana and the end users (note that, in the
operations. interests of legibility, a direct line from “ownership” and “end user” is not shown
Different target in Exhibit 14-2a). Exhibit 14-2b shows various flows from the customer to the
markets have different supplier. Naturally, payment flows are of great importance. Payment does not
expectations regarding the necessarily follow the same path (albeit, in reverse) as product, whether the
availability and duration
of trade credit. Channel
manufacturer has an in-house financing operation or uses ancillary channel
members should be aware members who provide financing services. The level of importance of the finan-
of market expectations cial institution in the channel is directly related to the level of importance of
with regard to credit financing as part of the total offering. Many small businesses rely on the
services and manu- availability of trade credit to finance operations.
facturers should be
prepared to grant terms to
Previous chapters have discussed the importance of marketers knowing all
distributors that aid in this aspects of the markets served. A major source of customer and market information
part of the total offering. is the participants in the marketing channel. As shown in Exhibit 14-2b, all
Manufacturers/Suppliers
Missionary
sellers/field
marketing Specialized
installation and
service Financial
providers institutions
Direct sellers
Distributors
Manufacturers’
representatives
Value-added Payment flows
resellers
Customer and Market Information Flows
End Users
Note: This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.
EXHIBIT 14-2B Marketing Channel Flows—Customer to Supplier
participants, not just those directly related to the supplier, can be a source of information.
Channel members’ proximity to customers provides a direct source of potentially detailed infor-
mation that contributes to “bottom-up” market analysis such as the marketing operation forecast
discussed in Chapter 11.
Marketing Channels Meet Customer Needs and Expectations

Marketing channel flows of possession, ownership, promotion, negotiation, financing, risk-
taking, and market information are organized by intermediaries comprising marketing channels
so that goods and services are provided to customers in the form and at the time desired. Just as
consumers have favorite methods that meet their particular needs to purchase products and
services, businesses have a preferred way they “buy.” While the core product may be similar in
many cases, different target markets have different expectations of the total offering.
Depending on the resources of the firm and the needs of the target markets, channel
designs may include a direct sales force, the use of independent intermediaries (wholesalers,
brokers, distributors, manufacturers’ representatives, etc.), or any combination of these options,
as previously shown in Exhibit 14-2a. These options, often referred to as channel patterns,
include dealer networks, franchise systems, Internet broker systems, and other various forms of
contractual relationships beyond the scope of this discussion. Additionally, there are ancillary
functions that every channel design must provide, including but not limited to transportation
Vertical Integration, as services, insurance, and other financial services. A very large firm with an
used here, refers to the established channel infrastructure will often elect to perform all of these
degree of ownership a
ancillary services itself. While this may have significant economies of scale, this
firm has of its marketing
channel. The firm may vertical integration limits flexibility. Today, companies desiring greater
own distributors of its flexibility often seek specialists to perform ancillary tasks, allowing the firm to
products and may actually concentrate on development of its markets. In the last ten years, we have seen
own the organizations that the emergence of “business logistics” providers—grown-up transportation
provide ancillary services,
companies who realize that they have more to offer than just moving goods (see
such as transportation,
inventory control, and Exhibit 14-3 for a discussion of services provided by UPS and FedEx). This
financing. Ownership of channel design technique, called functional spin-off, assumes that ancillary
these facilitating agencies services are provided most efficiently by experts in each service2—a basic
can be efficient through application of the principle of division of labor. For many small firms, using a
economies of scale but
service provided through functional spin-off allows a lower capital investment,
“expensive” when a
change in channel design greater flexibility, and a broader range of long-term options.
or services are required.
Industrial Distributors Serve Industrial End Users

Why would an industrial end user want to purchase from a distributor? Wouldn’t products cost
less by purchasing directly from the manufacturer? For very large customers, when the supplier or
manufacturer has the advantage of logistical economies of scale, this is likely true. Suppliers,
however, are often unwilling or unable, at a reasonable cost, to provide many services for medium
or small customers or those who have irregular usage patterns. Distributors fill the gap, giving
attention to and building relationships with medium and small users. These industrial distributors
Two key logistics-driven initiatives employed by United Parcel Service (UPS) put increased pressure on
FedEx, formerly Federal Express, in two areas in which they compete. First, UPS has built its capability
for providing overnight delivery. The improvements to UPS’s system involved integrating overnight
airfreight with short- to medium-haul ground transportation via UPS’s ubiquitous brown trucks. While
FedEx still leads in the overnight express market, UPS, through the integration with its existing ground
transport infrastructure, has grown significantly.
The second initiative, begun in 1994, is a logistics services line of business offered for medium-
and large-sized companies. Logistics services include supply chain and distribution systems design and
management. The group applies new technology where needed, but focuses on achieving desired
results with whatever methods are appropriate. This line of business has landed several major global
companies as customers and produced dramatic cost and time savings. Meanwhile, FedEx has had to
revamp its logistics service operation.
FedEx, through a major expansion of its system, now competes with UPS directly in its ground
delivery system. Both companies have forward integrated, acquiring small business and consumer
service companies Kinko’s (FedEx) and Mailboxes, Etc. (UPS). Each company has used its unique
capabilities to compete in the other’s primary market. Each is sensitive to and responds directly to the
competitive actions of the other. What will be the next battleground?
The lessons from this rivalry include the following:
• Core competencies in logistics can produce competitive advantage.
• New competitive strengths can be built through patient development of new core competencies.
• Traditional markets must be actively and creatively defended.
EXHIBIT 14-3 UPS and FedEx Compete through Focus on Logistics Capabilities Source: Charles
Haddad, “Ground Wars,” Business Week (May 21, 2001), pp. 64–68.
develop an understanding of the smaller customers’ business that the supplying manufacturer
could not achieve through the relationship possible within the profit margins provided by the
small purchase volume. The distributor spreads the costs associated with the relationship over
several products and product lines, often from many different suppliers. Small- to medium-sized
purchasers (these may be large organizations that purchase small volumes of certain items) can
receive better customer service from a modern industrial distributor. Within this context, distribu-
tors can serve customers in many ways:
• Provide fast delivery. Distributors maintain a local inventory of the products from
suppliers they represent. Arrangements can be made with customers to provide regular
JIT deliveries, allowing the customer to avoid a large resource commitment to incoming
inventory.
• Provide segment-based product assortment. Distributors can provide “one-stop shopping”
to small- and medium-sized industrial customers. A small electronics assembly company
may need a variety of components, from circuit board materials to computer chips and all
the ancillary components in between. The distributor maintains a product line focused on
the needs of its served markets, creating product assortments from many sources.
• Provide local credit. Small businesses often find it difficult to obtain financing, particularly
during periods of tight money. Most distributors provide trade credit for established cus-
tomers. It is not unusual for unique payment terms to be a significant part of a distributor’s
total offering. In many instances, the credit-granting capability of the distributor becomes
a major competitive feature.
• Provide product information. The electronics assembler in the earlier example may require
advice on the application of components or may need instruction about the proper use of
supplies. The assembler might be switching to a new soldering method that requires the
handling of new solvents. The distributor not only will be a source for the solder, solvents,
and ancillary equipment but also will be able to advise regarding their proper use.
• Assist in buying decisions. Our electronics assembler may need assistance in the selection
of technically equal components from two different manufacturers. The distributor can
assist in this selection process. The assembler will seek well-known industrial brands at the
inception of a project but may seek an alternative supply as production increases. This not
only helps to develop lower cost alternatives but also provides the assembler with a second
source of goods should a calamity befall the manufacturer of the industry standard.
Distributors of well-known industrial brands seek to include a generic equivalent in their
product line. The distributor can then provide both products to the assembler, preventing
the assembler from obtaining the generic product from another source. Manufacturers of
industry standard products attempt to dissuade their distributors from offering an alter-
native but often have little choice in the matter. (In consumer markets, distributors often
advise retailers regarding “hot sellers” and avoiding “turkeys” from a manufacturer’s line.
It is in the best interest of the distributor to have profitable, successful customers—that is
how the distributor can be sure of getting paid!)
• Anticipate needs. By maintaining a close relationship with customers, the distributor can
anticipate future needs and have inventory available in a timely manner. Through the
relationship, the distributor can know new business opportunities that the customer is pursuing
and, in a coordinating effort with the customer, have the necessary materials and supplies
available at the right time. The distributor essentially becomes the materials-handling
specialist for the customer—another example of functional spin-off, this time by the customer.
Industrial Distributors Serve Industrial Suppliers

Manufacturers benefit from distributor channels, particularly when the manufacturer recognizes
the proactive role distribution can play in a well-designed marketing channel. Distributors
perform many functions for manufacturers that enable the manufacturers to reach market
segments that would be prohibitively expensive to reach otherwise:
• Buy and hold inventory. Distributors purchase goods from manufacturers. In this context,
distributors are customers of the manufacturers, selecting, buying, and paying for goods.
With the purchased goods, the distributor provides local inventory for the manufacturer’s
smaller customers whose order volume and frequency make them too costly to serve
directly. The manufacturer is relieved of the financial and logistical responsibility of
holding local inventory in the form required by these customers.
• Combine manufacturers’ outputs. The customers served by distributors usually pur-
chase products of more than one manufacturer from the distributor. The distributor
serves many manufacturers by providing assortment and selection to customers based
on the needs of the customer segment, not the product line offering of any one manufac-
turer. In our earlier electronics assembler example, the distributor provides products
related to the assembler’s business. This may include supplies, such as solder and
solvents, worker protective clothing, and electrical components, such as computer
processors and memory chips. Manufacturers with narrow product lines may find
that distribution with complementary products is the only way to gain exposure with
potential customers.
• Share credit risk. Manufacturers often provide credit terms to their distributors to enable
them to carry and hold inventory. This actually becomes a service to the manufacturer. The
risks associated with credit terms extended to the distributor (assuming an ongoing
relationship between the manufacturer and the distributor) are significantly less than the
risks associated with extension of credit to the many small customers who rely on the dis-
tributor for trade credit. The credit granted to the distributor is a significant factor in the
distributor’s ability to grant credit to its customers.
• Share selling risk. Though distributors are often independent businesses who are
customers of the manufacturers via the purchase of goods, there is also an underlying
assumption that the goods purchased are marketable by the distributor and that
marketability has been developed in large part by the manufacturer. The manufacturer is
served by this shared risk and partnership—both parties have a stake in the success of
the product.
• Forecast market needs. Since distributors are much closer to the markets they serve, they
are able to provide manufacturers with realistic forecasts of business activity. This enables
the manufacturer to better schedule its own production activities.
• Provide market information. Beyond market operations forecasts, discussed in Chapter 11,
distributors can have a better understanding of unmet customer needs. Working with the
manufacturer, new products and services can be devised that enhance the value of both
parties to the ultimate customer.
The factors just described and summarized in Exhibit14-4 point to the partnership between
distributors and manufacturers. When both sides recognize the possibilities that a strong partner-
ship can create, the customer wins.
Seller Benefits Buyer Benefits

Buy and hold inventory. Provide fast delivery.
Combine supplier outputs Provide market segment-based
(reduce discrepancy of assortment). product assortment.
Share credit risk. Provide local credit.
Share selling risk. Provide product information.
Forecast market needs. Assist in buying decisions.
Provide market information. Anticipate needs.
EXHIBIT 14-4 Enhanced Customer Service—Distributors Serve both Buyers and Sellers
Value Networks Are Marketing Channels

We can think of a value network as encompassing a distribution channel, as shown in Exhibit 14-5.
The key thing to recognize is that the distribution channel is only a portion of the value network in
most cases. The value network includes the supply chain feeding into the supplier, the partners
providing product and service components of the offering, and the distribution channel reaching the
final buyer. All of these elements combine to form a final offering for the final customer as well as
having a role in contributing value for the final customer.
Recall that value for customers is the sum of the benefits minus the sum of the customer’s
costs. The incorporation of channel elements into the offering creates certain benefits and
imposes certain costs upon customers, which, of course, they evaluate when choosing among
competitors’ offerings. Before designing channels and determining how channels will be
managed, the marketer must understand how channels contribute to value in the offering.
Return to the opening example of the Apple Lisa and the ways that the existing Apple
channel could not provide value for the intended target market—corporate buyers of computer
systems. Apple Computer’s independent dealer network was adept at providing support and
services to the Apple II target market but was unable to satisfy the same needs of a larger, more
intricate target market.
Apple and the iPhone
The Apple entry into the telecommunications mar- channel with AT&T, an experienced player with
ket with the iPhone is far more successful than the established credentials. Consider all of the factors
Lisa was in the business computing market. Just sell- shown in Exhibit 14-4. Combined, the two organi-
ing the hardware wasn’t enough. Apple recognized zations can provide a level of service that each
that customers would need the specialized service independently would be hard-pressed to match. The
capabilities of a major telecommunications carrier outcome: a value network that has enhanced the
and a unique delivery channel. The telecommunica- offerings of both companies. Visit www.apple.com/
tions business is a large but specialty market with iphone/enterprise and review what you now under-
significant government oversight and regulation. stand as the value of building and managing
Apple could enter the business directly, though relationships. How many of these factors has Apple
this would require either acquisition or business built in to the “value” of the iphone business-to-
development, but the market was already under- business positioning effort?
going consolidation. Apple created a marketing Does anybody even remember the Lisa?
Marketing/
Supplier Distribution Customer
Channel
Offering
Supply Chain
Supplier Partners
EXHIBIT 14-5 A Value Network
The same needs? Generally speaking, yes, but not the same expectations and demands.
Just as consumers have favorite methods that meet their particular needs to purchase products
and services, businesses have a preferred way they “buy.” While the core product may be similar
in many cases, different target markets will have different expectations of the total offering. Look
at each of the following channel activities.
USER TRAINING The home computer buyer most likely purchases a computer for individual use
or use within the immediate family. This user seeks out the computer dealer to discuss the features
and capabilities of the product. The user does not need “computer for dummies” training. The
corporate customer, however, is unlikely to go to the independent computer shop to discuss the
purchase. More likely, the institution’s buying center has a diverse set of needs and the actual
users of the computer want to know how to use “this thing” (remember, this was in 1983). The
computer systems supplier is expected to go to the institutional customer. Training in computer
fundamentals is necessary on a large scale.
PRODUCT INFORMATION The home user’s enthusiasm for the computer is accompanied by a
knowledge of the computer obtained from magazines, user groups, and other sources. At the
time of the Lisa introduction, the home user was likely an early adopter of home computing
technology. The dealer’s role in the education process was probably limited to product techno-
logy alternatives and options. An institutional buyer, however, likely expresses needs in terms of
what the computer can accomplish, rather than how it accomplishes it. This is an important
distinction. While technophiles purchase technology just because it is new, business users are far
more pragmatic, requiring functionality and ease of use over technology.
PRODUCT SUPPORT AND DELIVERY For the home market, the dealer is likely to discuss the
product technology with the customer and provide one-on-one technical support. Outside of
making sure the buyer leaves the shop with all the necessary cables and computer accessories,
the dealer usually does not play a large role in the computer installation. The institutional buyer,
however, expects installation and on-site testing for all locations. This is a different expertise and
service context than the technical product support at the shop. Often, channel designs for
products that require on-site installation and service have separate channel intermediaries to
accomplish these needs. Exhibit 14-2a, previously discussed, shows some of the possible
channel flows and participants.
FINANCING A large purchase by the home computer user might include a printer and an
external storage device. The extent of financing provided by the independent dealer might be the
acceptance of third-party credit cards (Visa, MasterCard, American Express, and so on).
The institutional buying center may have particular finance needs. The acquisition of many
computers may be more acceptable as a lease rather than as a purchase, or the buyer might want
a payment plan spread over several years. The independent dealer is unlikely to have the
financial capability to support the financing portion of the offering.
Apple’s existing consumer product channel was not particularly well suited to the value
sought by the target market. The product itself may have been very well suited to the target
market (debatable, but possible in this case). The different types of value discussed, though—the
other kinds of value sought by the market segment—could not be delivered by the channel and so
the marketing of the Lisa was problematic. Compare Apple’s partnerships to offer iPhones to its
partnerships for the Lisa (see box “Apple and the iPhone”). For the iPhone, telecom partners are
positioned much better for both consumer and business markets than were Lisa’s consumer
retailers positioned for business customers.
THE ELEVATION OF BUSINESS LOGISTICS MANAGEMENT

TO SUPPLY CHAIN MANAGEMENT
Up to this point in this chapter, the discussion has been focused on the rationale, economic
utility, and design of marketing channels. The actual movement and storage of goods, major
ingredients in the marketing channel, have been relegated to the mention of ancillary members of
the channel. The management of the movement, sorting, and storage of goods in the marketing
channel is called logistics.
Historically, logistics has been conceived and implemented as an important tactical
function focused mostly on meeting customer service goals as efficiently as possible. In today’s
business environment, logistics design and management is often included in what has come to be
called supply chain management. The goal of supply chain management is to create value for
customers through effective and efficient flow of materials, components, finished goods, and
services. The supply chain extends from raw materials through to end-use customers. In theory,
the difference between logistics management and supply chain management is that supply chain
management can create competitive advantage through the creation of superior value to
customers. This value can come from any of the kinds of utility discussed above and in any com-
bination. Logistics on the other hand focuses on value principally through time and place utility,
provided at minimum cost. Conceivably, supply chain management could provide higher value
to customers, allowing the company to charge premium prices.
Another substantial difference between logistics and supply chain management concerns
scope. Logistics deals with materials and goods storage and movement. Supply chain includes
these, but also includes dynamics in materials sourcing, production, and service delivery. Supply
chain management combines the disciplines of channel management and logistics management.
As will be discussed shortly, the theoretical promise of supply chain management has not yet
been reached in most instances. Supply chain management still tends to focus on attaining cost
efficiencies, even if they tend to detract from customer value. Marketers must recognize that
supply chain systems are competitive tools that assist in differentiating the total offering. Like
other parts of the total offering, the definitions and requirements for performance will be deter-
mined by the customer. Though professional logisticians or supply chain managers will have
responsibility for the design and development of the specifics of logistics or supply chain
systems, marketers will provide critical input in such efforts.
The Physical Distribution Concept—A Cost–Service Relationship

In designing logistics systems, the economic utilities comprise the kinds of objectives that must
be met in performing logistical operations: meeting customer form needs, meeting customer time
needs, meeting customer place needs, and meeting customer possession needs. The logistics
system must get the right products to customers, in the right quantities, in the right place, at the
right time. Logistics must do this in ways that transfer ownership to customers (and to channel
intermediaries) at the appropriate time and place.
Logistics systems design includes decisions on inventory management, transportation
modes and scheduling, warehouse size and location, physical handling systems, and information
handling systems. System design is aimed at minimizing costs while maintaining a given level
of customer service. In this effort, managers are concerned with the simultaneous management of
three elements:3
• Inventory
• Transportation
• Warehousing.
The lowest system cost of these three elements combined will not necessarily be a result of
the lowest possible cost of each element. The balance of these three elements to minimize costs
at a given level of customer service is called the physical distribution concept.
INVENTORY MANAGEMENT Inventory management is often the largest cost associated with
any logistics system. Channel members have significant investment in inventory, and that
investment usually implies carrying and finance charges as well as the costs associated with
storing and assorting the inventory. Recognizing the high costs associated with large quantities
of inventory, tools to minimize these costs are used. Tools such as JIT inventory management,
JIT manufacturing and facility location, and electronic data interchange (whether in private
networks or facilitated by the Web) are employed. The lower quantity of inventory that can be
maintained at any time leads to lower inventory costs. However, lower inventory levels often lead
to more frequent and thus more costly transportation.
TRANSPORTATION Transportation decisions traditionally have involved the choice of water,

air, rail, truck, or pipeline utilization, depending on the nature of the product. Slower trans-
portation methods usually have lower costs, with airfreight the highest cost method. Slow
transportation methods imply that safety stocks—the amount of inventory available between
the time of reordering and the arrival of new inventory—must be of larger quantities than with
rapid transportation methods. While other factors can impact lead times, such as particular
product and manufacturing circumstances and optimal quantity order sizes, if transportation
costs are minimized without regard for the impact on the total system, inventory carrying costs
increase.
WAREHOUSING As the level of inventory increases so does the cost to store it. If low-cost
transportation leads to an increased inventory level, then warehouse costs are also increased. If
warehouse costs are minimized, transportation costs increase, particularly as suppliers attempt to
avoid “stockouts”—running out of goods just as a buyer may require delivery.
Depending on the nature of the products and the goals of the channel design, channel
management focuses on two functions of warehousing. The first of these is product flow or
movement, and the second is product storage. Channel designs that focus on rapid movement of
goods rather than on storage of large quantities of goods use facilities optimized as distribution
centers. Channel designs that accept slow movement and focus on storage of goods use facilities
optimized as warehouses.
Distribution centers are optimized to move product through the facility, creating assortment
in the process. Materials flowing into the center are immediately redirected to customers. The dis-
crepancy of assortment is reduced, and goods are held for a minimal period of time. Depending on
the nature of the goods and the lead times associated with their creation, rapid transportation may
be used to replace the need for significant safety stocks.
Warehouses are optimized as storage and assortment creation facilities. If the nature of the
goods is such that long-term storage creates an optimal logistical pattern, warehouses are
employed. Because inventory quantities are usually larger when the longer-term storage is used,
transportation costs can be reduced.
MATERIAL REQUIREMENTS PLANNING The storage, movement, and assortment of goods in

business logistics systems are part of the materials requirements planning (MRP) effort, which
is now often included within enterprise resource planning systems. While an extensive discussion
of MRP practice is beyond the scope of this text, business-to-business marketers should under-
stand the goals of MRP and how suppliers can create value for customers in this area.
Materials resource planning efforts involve many stakeholders in the organization, often
some of the same stakeholders that contributed to the buying decision in the buying center. MRP
requires forecasting demand on an ongoing basis, aimed at minimizing business logistics costs
and the impact of the bullwhip effect while maximizing customer service. Purchasing, manu-
facturing, transportation, and marketing contribute information to synchronize the various needs
of each part of the organization. MRP responsibilities usually reside in the purchasing depart-
ment of the organization. Successful MRP efforts involve purchasing professionals in the
management of the entire supply chain. This presents another opportunity for the supplier to
influence the specification and selection process of the buyer.
LOGISTICS AS A COMPETITIVE EDGE Logistics have become an important part of competitive

advantage in most product-oriented industries. Getting the product to the customer faster means
that needs of end users can be met more quickly. In the case of component parts, getting the
products into the production process faster means that supplier production schedules can
more closely match end customer demand, thus reducing inventories, carrying costs, and waste.
The discussion of the rivalry between FedEx and UPS, shown in Exhibit 14-3, illustrates the
importance of logistics in building or maintaining competitive position.
Economic Utility of Business-to-Business Markets

The examples noted demonstrate the broad array of methods that can be used to provide econom-
ic utility in a channel. Note also how different the methods are for business-to-business markets
versus consumer markets. In mass consumer markets, economic utility is provided, with much
Customers should not be speculation, by a channel design that attempts to anticipate consumer needs. In
required to match the business-to-business markets, economic utility is often the result of a specific
channel and logistics
demand by a particular customer—part of “the way a customer buys.”
design of the supplier.
Suppliers should develop Chapter 3 discussed the process flow model of the buying decision process.
channel designs that The Deliver Solution Stage and the End-game Stage (as shown in Exhibit 3-3 in
seamlessly match the Chapter 3), contain elements related to the transactional aspects of the process,
operation of customers. shown as analogous to Make the Transaction Routine and Resell the Job of the
For small customers, this
classical industrial buyers’ decision process. The marketing channel design is a
usually involves the use
of industrial distributors. direct result of recognizing and accommodating the materials planning, handling,
For large customers, this inventory, scheduling, and invoicing needs of the customer. Part of building a
involves matching long-lasting relationship with customers is developing a marketing channel that
delivery time and is differentially invisible to the customer. A differentially invisible channel
methods, palletizing,
meets all of the logistical parameters of the customer. The merging of the two
and other requirements.
We use the term systems is so smooth that the customer does not recognize any differences in
differentially invisible to operation or style. This can be a significant advantage should the customer ever
imply that the customer consider changing suppliers, as customers can incur significant costs associated
should not be required with changing or adding suppliers. In oligopolistic markets, a supplying firm
to adapt to the supplier—
may have a different customized “routine” for each major customer, as well as a
the process should be
invisible. This level of standardized routine for smaller customers. Each of these parts of the total offer-
service, part of the total ing is an opportunity to create value for the customer while demonstrating a
offering, can be a differential advantage versus the competition.
competitive The box “Supply Chain Design Eliminates Local Inventory” illustrates
differentiating factor.
how a logistics design can create value for a customer and extend business
opportunities for channel members.
CHANNEL DESIGN
With value for customers firmly in mind, the business-to-business marketer must design a working
channel structure as part of the marketing strategy and plan. Sherlock suggests that the marketer
must start with an understanding of the final customer and determine what channel-provided value
the customer wants.4 Then the marketer can begin to design the channel that delivers this value. This
sounds like an obvious, even trivial, approach. Too often, though, the marketer begins at the doors of
her own company and designs forward to “reach” the customer. Taking this ap-
Intensity of distribution
proach, as we saw with the Apple Lisa, can have damaging results.
refers to the level of As we just said, the marketer must know what the customer wants. The
locational convenience marketer must extend this analysis upstream as well. The environmental
required by the target analysis must also include an analysis of existing and potential marketing
market. Specialty products channels. The information desired is similar to that collected for customers—
are usually in exclusive
distribution while mature,
their needs, their buying behavior, how they view value, the nature of their
generic products (whose buying centers, and so on—but includes an analysis of the value they provide
marketing mix puts more and their internal value chains that produce that value.
emphasis on convenience In designing the channel, the marketer must decide whether to go through
factors) are usually in intermediaries or go through a direct channel. Other decisions include the level
intensive distribution,
creating horizontal
of intensity of distribution (how many distributors within a territory), the
competitors in the kinds of channel partners to obtain, how the channel flows will be structured,
channel. and, most importantly, how competitive advantage will be built. Recall from
Supply Chain Design Eliminates Local Inventory
Prior to 1995, J.C. Penney, the large retailer, would proposal sat for years, until senior management
routinely hold up to six months of dress shirts in began pushing for greater efficiencies throughout
inventory at its regional warehouses and another the system.
three months at its stores. This inventory level made To be done properly such a step includes sales
it necessary to forecast sales of colors, styles, and the forecasting not just volumes, but styles, colors and
number of shirts well in advance of actual customer variances by region across the country. TAL studied the
purchases. A mistake in these areas was often in market for J.C. Penney and, working with IBM as a
place for an entire selling season. This was costly not software and hardware supplier, developed the
just from a logistics point of view but also from a inventory system from point-of-sale to manufacture.
customer service standpoint. Today, thanks to a Data is continuously collected from Penney sales
supply chain designed with J.C. Penney’s major and sent directly to TAL. The data is run through the
shirt supplier, stores hold almost no inventory of computer model developed specifically for this pur-
dress shirts while maintaining the desired level of pose. TAL then determines how many shirts—by style,
customer service. color, and size—to make. TAL then sends the shirts
TAL Apparel Ltd., a Hong Kong shirt maker, directly to the retail store. There is no need for regional
major J.C. Penney supplier and maker of one out of inventory, and each assorted shipment is tailored to
every eight dress shirts sold in the United States, the forecast demand of the individual retail stores.
works directly with retail stores to maintain the While initially reluctant, J.C. Penney has now
most efficient level of inventory. When a shirt is turned the entire operation, including the design of
purchased in a Penney retail store, the transaction new shirt styles and subsequent market testing, to TAL.
is downloaded at a TAL factory. A replacement What happens if a store sells out of a parti-
for the purchased shirt is added to the package to cular style, size, or color? After all, TAL computers
be shipped to that retail store. In this process, determine the ideal inventory for each shirt. If two
J.C. Penney corporate decision makers are absent. shirts, in a particular style, size, and color, is the
Through the 1990s, TAL recognized that forecast ideal inventory level in a store, what
new competition from mainland China garment happens if both sell on the same day? TAL manu-
producers could impact its business and sought factures two replacement shirts, ships one by the
methods other than price to maintain its relation- regular process, and ships the other by air to quick-
ship with customers. At the time, J.C. Penney kept ly replenish the store. TAL pays the shipping, Penney
almost nine months of inventory—roughly twice gets billed for the shirts, and the customer (Penney
the level of competitors. TAL proposed a direct and its customer, the consumer) relationship is
link from the customer (the J.C. Penney store) to maintained.
the manufacturer. Penney, using its own ware- Rodney Birkins, vice president for sourcing of
houses and employees, spent 29 cents per shirt to J.C. Penney Private Brands, say the results have been
sort TAL incoming shipments for distribution to “phenomenal.” While on a routine basis, under the
individual stores. TAL could do it at the factory for old system, Penney would have thousands of shirts
14 cents. warehoused all over the country, the new system
By understanding its customer’s inventory cuts inventory to “zero.”
situation, TAL proposed that Penney turn it all over
to them, suggesting that TAL could respond more
Sources: Gabriel Kahn, “Made to Measure: Invisible
quickly than Penney to consumer demands. This Supplier Has Penney’s Shirts All Buttoned Up,” The
was a bold step—it was asking Penney to out- Wall Street Journal (September 11, 2003) Case Studies:
source the inventory management of dress shirts. IBM boosts quality and productivity at TAL, IBM case
Management resisted, worried about shipping studies online, http://www-0-7.ibmcom/hk/e-business/
errors, technology incompatibilities, and so on. The case_studies/manufacturing (April 29, 2007).
Dual distribution is a Chapter 10 that we suggest that marketers innovate across the offering to create
channel pattern that uses competitive advantage. Designing channels is one area where large advantages
more than one channel
can be created.
design, each intended to
reach a different target When a manufacturer selects more than one channel intermediary at the
market. Incorporation of same level—such as two industrial distributors in the same market, horizontal
dual distribution is a competition is created. This channel pattern is called multidistribution. The
decision to reach multiple multiple distributors serve the same market segment and compete for the same
market segments with
customers. Manufacturers selecting multidistribution are increasing the
different economic utility
needs. The Dana example intensity of distribution for their products. Recall from your principles of
earlier in this chapter is marketing course that intensity of distribution refers to the degree to which a
an example of dual product is available from one (exclusive), a few (selective), or several sources
distribution. Two different (intensive distribution). Multidistribution occurs later in the life cycle of a
channel designs, one
product when generic forms may be available in the market and locational
direct to the OEM market,
the other through convenience is of prime importance in the marketing mix.
intermediaries that reach
the service parts market, Reduce Discrepancy of Assortment
provide coverage to
market segments based Another service provided by channel intermediaries is the creation of assort-
on the buying ments based on customer needs rather than on manufacturer product lines.
requirements of each Industrial end users who purchase through channel intermediaries select the
segment.
intermediary that has a product line representative of the needs of the end-user
Multidistribution is the business. A nursery supplying landscaping services businesses purchases
deployment of multiple supplies—fertilizer, soil additives, agricultural chemicals, and flower pots—
channels of the same from a distributor who has specialized in supply to the nursery market. It is
design in a given
unlikely that the nursery buyer could find a manufacturer with a product line
territory. Multidis-
tribution is a decision that included all of these items. Most manufacturers produce a large quantity of
about the intensity of a few items, and most end users purchase a small quantity of a diverse set of
product placement or items that serve many aspects of the business. The distributor has sought to
distribution. create an assortment of items needed by the nursery market segment. By carry-
ing the products of several producers, the distributor creates a “one-stop shop”
for nurseries. This effort transforms the manufacturers’ assortment into a market assortment. By
reducing the discrepancy of assortment, the distributor has saved the end user the cost and time
of dealing with multiple suppliers.5
The creation of market-based assortments serves producers and users. Suppliers seek
channel members that carry complementary product lines. The value of a single product is
enhanced by the availability of associated items from a single source. Producers also seek
intermediaries that have product lines that include items from recognized market owners or well-
known industrial brands. The association with the market standard bearer becomes a positive
attribute for the producer of the lesser-known product.
When Use of Distributor Channels Is a Good Channel Design

When is it appropriate to use a distributor, and what products are good candidates for distributor
channels? Distribution, as part of the “place” of the marketing four Ps, does not stand alone but
must be fully integrated with the other parts of the marketing mix. The previous discussion
centered on the four economic utilities and how manufacturers and distributors can serve each
others’ needs. The following discussion examines other factors that are necessary and appro-
priate for successful distributor channels.
MARKETING MIX ISSUES Obviously, some products are appropriate for distributor channels
while others would be unsuccessful in the market if distributor channels were selected.
Traditionally, products that favor the use of distributor channels require local stock, are
somewhat generic, and have very low unit value. This traditional view of distribution can be
limiting, and there is often a predisposition against distributors by manufacturers as low tech or
unqualified. Customers in each market segment will have an expected channel of delivery for
product, service, and all other marketing channel flows. Competitor efforts will also influence
channel design. With this in mind, let us examine when use of distributor channels is appropriate.
In the following discussion, while each factor is discussed individually, they are seldom solitary
influences in the marketplace.
FACTORS FAVORING USE OF DISTRIBUTOR CHANNELS
• Product requires local stock. Certain products require local and immediate accessibility.
Certainly this is the case with food stuffs, but it also applies to certain industrial chemicals,
components used in construction trades, and any product (or service) for which shelf life or
perishability is a consideration.
• Small product line, unable to support a direct sales force. Regardless of other factors
involved, companies with limited product offerings just may not be able to afford their own
sales force. Distributors who have compatible product lines and established relationships
with appropriate customers will be sought out to carry the limited line.
• Product is somewhat generic. While few marketers relish admitting that their product is
substitutable, those who are in such markets should realize that they can be the substitute
for the competitors’ products. Goods in the maturity stage of the PLC are often sold based
on accessibility and/or availability. Local stock and established distributor–customer
relationships are the deciding factors in these sales. Margins on generic or easily sub-
stitutable products may be insufficient to support a direct sales force.
• Product has low unit value. Similar to generic products, items that are relatively inexpensive
on a unit basis and are sold to many customers but seldom in high volume are likely candi-
dates for distributor channels. Office supplies are an example of this category.
• Product is near the end of its product life cycle. Beyond availability issues, products that
are in the mature or decline stage seldom need significant customer education for proper
application. As a product matures, channel redesign is often an important tool to maintain
profitability. It is easier to place a product into distributor channels as the need for
customer education or missionary sales lessens.
• Customers are widely dispersed. The logistics expense of serving customers who are
geographically spread out can be a real problem. Depending on the volume of purchase by
each customer, distributor channels are usually a more effective channel design. Often, a
manufacturer will have dual channel designs—distributor channels for small-volume,
dispersed customers and direct sales for the few very high volume accounts in the same
geographic region.
• Local repackaging, sizing, or fabrication is required. The steel industry relies on steel service
centers to cut, blank, and perform some first-stage processing on products shipped to the
centers in very large rolls. Customers of the service centers are able to purchase custom-
formed components that are more readily incorporated into their operations. Many chemical
and plastics manufacturers ship their products to distributors in bulk railcars where the
distributor repackages into 25 kg to 500 kg packages (solids) or large drums or gallon
containers. These smaller sizes allow customers to purchase in smaller lots and lower their
investment in inventory and risk from spoilage and obsolescence. A significant portion of dis-
tributor margins are derived from the different prices for the bulk versus packaged products.
• Many small buyers. Similar to the situation with geographically dispersed buyers,
many small-volume buyers will create a transaction nightmare for a volume-oriented manu-
facturer. Distributors can take over the small but frequent transactions on a routine basis.
FACTORS NOT FAVORING USE OF DISTRIBUTOR CHANNELS
• Product is highly customized. When individual customer applications of products require

customization, shorter channels are more appropriate. Close contact by design, manufac-
turing, and engineering personnel in both the supplier and customer organizations is essen-
tial to application success. Distributor channel services like local inventory and rapid
delivery are more suited to products that have a more generic nature.
• Product is new or innovative. The application of new products often requires that customers
be educated in the most efficient use or service. The role of missionary sales is very impor-
tant. While distributors can be used for logistical needs, the application development efforts
necessary to deliver full value to the customer are best handled directly by the supplying firm.
• Product is technically sophisticated. Complex or technically sophisticated products,
similar to the situation for new or innovative products, require advice and counsel in their
correct application (see the subsequent glazing example).
• Significant missionary selling is required. If part of the total offering involves high-service
and design assistance, distributor channels may be suitable only for the logistical needs of
the product. Many of the product types already noted fall into this category, but the list is
not exhaustive. Regardless of other factors, a manufacturer may elect to promote products
through missionary sales while spinning off logistics to independent distributors.
• Manufacturer requires control over product application. Regardless of the degree of inno-
vation, some manufacturers may not be comfortable with leaving application counseling
about their products to third parties. Pharmaceutical companies’ use of “detail persons”
calling on physicians is an obvious example. Prescription drugs are specified for patients by
physicians, requiring the “detail” person to provide up to date and accurate application
information. The product flows to pharmacies through distributors who maintain local
inventory and provide timely delivery. Other products that have significant liability issues that
manufacturers wish to control also fall into this category. Consider manufacturers of bullet-
resistant glazing (better known as bulletproof glass—only their legal counsel won’t let them
say “proof”). Application of these products in banks, gas station kiosks, and similar locations
requires careful product specification and installation to be fully effective. Manufacturers wish
to reduce their vulnerability through control of all aspects of the product application.
• Geographic concentration of large buyers. Regardless of other product characteristics, when
the customer base is made up of a few geographically concentrated large users (typical
oligopolistic markets), shorter channels better meet customer needs. Large-volume deliver-
ies, price structure, and other service factors favor direct relationships. The same product
may be represented by independent distributors in areas of lesser customer concentration.
OTHER CIRCUMSTANCES There are many less obvious but equally important possibilities
favoring the use of distributors. When an offering requires extensive sales effort directed at
buying professionals (purchasing agents, buyers) because there are many direct competitors,
existing buyer–seller relationships may be critical in gaining acceptance by the customer. If

sourcing decisions of a product type or within a particular market segment rely primarily on the
relationship aspects of the total offering, it may be necessary to use distributor channels to pene-
trate the market. In these circumstances, the distributor’s existing relationship with the industrial
end user becomes the primary competitive feature.
Another possibility that seems to defy the logic of when to use distributor channels is the
case of a new business. Whether offering an innovative new product or a product with several
substitutes in the market, new companies without the resources to place their own sales team in
the field may find that a distributor channel is the only affordable way to reach certain segments.
Similarly, an existing business-to-business manufacturer about to enter a new market may find
distributor channels particularly attractive. Customers in the new markets may have significantly
different buying patterns than existing customers. The direct sales force of the business-to-
business manufacturer may be well trained and organized but only in relation to the existing
products and markets. Placing the new product in distributor channels avoids distracting the
direct sellers from their normal call pattern and customer base.
When customer buying patterns indicate that customers expect to find the offering in
distributor channels, it is necessary to also use distributors. If known competitors use distributor
channels and your company expects to reach the same market, it may be necessary to use distri-
butors. The channel relationships for the product or service type may be already established, and
customers are unwilling to establish different habits. Even if the product is the next-generation
innovation targeted to replace existing offerings in the segment, users of the established product
expect their needs to be satisfied by the same distribution pattern.
Often, particularly with smaller customers, purchases through distributors are preferred.
The smaller industrial end user may be taking full advantage of the inventory services and
trade credit available from the distributor, taking advantage of the complete solution offered.
To penetrate this customer it may be efficient to join the buying pattern rather than compete
with it. Exhibit 14-6 summarizes factors favoring or not favoring the use of distributor
channels.
Favoring Not Favoring

Product requires local stock. Product is highly customized.
Product line is small, unable to support direct sales. Product is new or innovative.
Product is somewhat generic. Product is technically sophisticated.
Product has low unit value. Significant missionary selling is required.
Product is near end of PLC. Manufacturer requires control over product application.
Customers are widely dispersed. Large buyers are geographically concentrated.
Local repackaging, sizing, or fabrication is required.
Market has many small-volume buyers.
Product requires extensive sales effort directed
at buying professionals.
Start-up venture or established company is
entering a new market.
Competition uses distributors.
Customers prefer distributors.
EXHIBIT 14-6 Factors Favoring Use or Not Favoring Use of Distributor Channels
Vertical Integration versus Finding the Right Channel Partner

Throughout this chapter we have referred to industrial distributors with the idea that when you
need one, one will be readily available. This is not always the case. Traditional patterns of distri-
bution will vary depending on many factors, not the least of which is whether or not there is a
distributor capable or willing to take on the product line. This availability can be problematic
when designing international channels. In some instances, manufacturers may be forced to forward
integrate because of the unavailability of fully developed distribution channels. In developing
economies an integrated system of industrial distributors may not exist. It may be necessary to
establish a distribution subsidiary, wholly owned by the manufacturer. This creates special concerns
of channel control, time to market, and flexibility. These concerns may be magnified when the
manufacturer faces distribution infrastructures at different levels of development in the different
regions or countries where distribution is required. The market ultimately determines most
effective channel design, based not only on those factors shown in Exhibit 14-6 but also on the
economic and industrial development of the target market and on customer expectations
DISTRIBUTION AND THE PRODUCT LIFE CYCLE

The preceding factors address a combination of marketing mix variables and how they can
impact the use of distribution. These factors may exist alone or in combination with others.
Consider these factors as they relate to the PLC.
Introductory Stage
Early in the PLC (introduction) a start-up with a new product may not have the resources to fund
a direct channel. A start-up organization may often be the least able, from a marketing view, to
use a distributor for many of the other marketing mix variables previously noted. While contrary
to conventional wisdom, it may be appropriate that start-ups in this position seek additional
financing from their investors to build the appropriate sales force.6 This sales force will most
likely take on the organizational style of missionary sales or an application development team
while business logistics functions can be handled by independent distribution. As already noted,
an established manufacturer may also use distribution for a new product if the target market is
not consistent with the existing markets served by the manufacturer’s sales force.
Promotion as it relates to marketing channels during the introductory stage consists
primarily of establishing brand awareness. New brands must prove viable not only in the market
but also to channel intermediaries. Listing allowances and discounts may be required to gain
acceptance among intermediaries.
Growth Stage
Once an offering has proven its worth in the marketplace, obtaining distribution is much easier.
Distributors want successful products and will readily accept an offering that their customers are
likely to want. During this period, missionary sellers can help establish the product in distribution and
build loyalty with the distributor sellers by providing customer and seller training and sales leads,
particularly with high-learning products. When the supplier goal is to position as the industry stan-
dard, loyalty built by a strong missionary effort at this time will help fend off imitators in the future.
In technology markets, the marketer may enlist the services of value-added resellers during
the growth phase. VARs have established relationships with technology buyers and provide
technology and integration services that are needed to complete the offering. One problem that
can arise with VARs is that, as the market begins to expand rapidly, the VARs may want to
continue to participate as high-volume resellers. This is fine as long as they have the capability to
do so, but VARs may not have the ability to handle large volumes, the desire to open new markets,
nor the willingness to reduce prices. Consequently, they may be a bad fit for fast-growing markets.
The channel manager or marketing manager must continually communicate with the VARs
to let them know how the market is evolving so that changes in channel patterns do not come as
a surprise. The wise manager will continue to work with the best VARs, setting them up for the
next set of new products coming through the pipeline as they become ready to market to the
VARs’ traditional target segments.
Maturity or Decline Stages

A product that has reached the maturity or decline stage of the PLC may require an entirely
redesigned marketing channel. A product that has moved into the low-learning stage as customers
become more familiar with its use and no longer need applications development support may be
placed in distribution for the first time. If the product has become an industrial commodity (with
several “or equivalents”), margins will be less than during its added-value stage, possibly not able
to support the development effort employed during higher-learning periods. Distribution will be
able to handle the new buying criteria more efficiently than direct sales. (New buying criteria may
relate to locational convenience, JIT, low cost in small volumes, and so on.)
During maturity and decline, particularly when there are a number of alternative products,
suppliers use a number of trade promotions to keep products in the forefront of seller efforts.
Rebates to channel members, special volume discounts, and sales incentive contests are all used
to attract and keep sellers’ attention.
MANAGING CHANNELS OF DISTRIBUTION

Once the channel strategy has been designed, the marketer must execute the plan. The kinds of
activities included are selection of channel partners and building relationships with them, run-
ning channel programs to keep them motivated and performing to the plan, and reshaping the
channel strategy as the market changes.
Selecting and Caring for Distributors

Selecting a distributor has some of the same elements as selecting a manufacturers’ representative
(see Chapter 12). Like manufacturers’ reps, distributors—even those that are part of nationwide
distribution companies—are designed to have regional impact. Nationwide distributor organiza-
tions need to be examined region by region. It is rare to find a national distributor who is equally
strong in all regions where they compete. Regionally based distributors or a combination of
national and regional players may be better able to serve your particular needs. In any event, here
are some basic points to remember:
• Ask potential customers who they would recommend. Who better to recommend a distrib-
utor with successful relationships?
• Determine which distributor fits marketing plan goals. While logistical concerns may be a
perfect match, the goals and aspirations of the distributor should be aligned with yours.
Contextual differences may not surface early in the relationship but will be difficult to
resolve later. A simple example, particularly for aggressive, growth-oriented companies, is
a distributor who is willing to sacrifice growth to maintain higher margins.
• Make calls with them. This can be part of the selection process as well as part of the
relationship-building process after selection. If acceptable to the distributor, make customer
calls with some of its sales force before the contract is signed. Remember that your dis-
tributors are both customers and sales assets. Making customer calls with them, often in a
missionary role, is an essential part of building the relationship and protects your company
from being isolated from your ultimate customers. (Many distributors will be cautious about
letting the customer–manufacturer relationship get too cozy.)
• Make calls on them. As we have said, your distributors are also your customers, particu-
larly if they distribute products for your competitors. Build the relationship at all levels.
• Train and support them well and often, at both your facilities and theirs. Your training and
education of your distributor can increase the comfort level with your products and your
organization. Show them your facilities, not only to provide product and service training
but so that individuals from each organization can develop connections beyond e-mail and
telephones. Make them feel like a part of your team.
Superordinate goals are TEAM PLAYERS Different channel designs exist for different markets. Some
those goals that go beyond are the result of years of unintentional channel design that has become cus-
a single intermediary, are
tomary in a particular market while others are tightly designed with signifi-
desirable to many of the
channel members, and are cant (and sometimes resented) control at many levels. Regardless of the
unobtainable through the details of the channel design, channel members must recognize that they are
effort of a single channel part of a team whose individual goals can be enhanced through agreement
member. Cooperation and with the system goals. Any channel member at any particular level can maxi-
mutual understanding
mize profits or performance as an individual entity. Successful channels are
between intermediaries
are necessary to achieve the result of teamwork—the creation of a win–win situation. Channel perfor-
these goals. Since the mance that is consistent with the needs and wants of the target market and
goals are considered internally consistent with the goals and objectives of members requires a con-
laudable by many of the textual approach that recognizes and develops both individual member and
channel members, the
superordinate goals.
process of obtaining them
fosters teamwork and To understand this dual-purpose goal setting, students must recognize and
cooperation. understand the channel from the perspective of each member. Factors that can
improve the performance of a retailer are often costly to manufacturers and
wholesalers (increased promotion, local inventory, rapid shipping, and so on). While acceptable
to the retailer, these factors decrease the profitability of the channel for other members. Thus,
channel management must include a balance that is acceptable to all members.
Power and Conflict in Marketing Channels

Power in marketing channels usually results when one channel member (Member A) is depen-
dent on another member (Member B). The dependent member, A, is not completely free to select
its own direction on all issues. Member B then has influence and control over Member A with
regard to the issues in which A is dependent on B. The dependence may not be just monetary but
may include specialized knowledge, skills, and market access. Thus, the portfolio of resources
and skills that a channel member commits to the channel effort can have a significant impact on
how the channel relationship is managed and controlled.
BASES OF POWER Power can be classified as deriving from bases of resources and skills. The
bases of power7 include reward, coercion, legitimate, expertise, identification, and information
power. For discussion purposes, these bases are broken into categories. Soft bases are comprised
of expertise, identification, and information power; and hard bases are comprised of the remaining
reward, coercion, and legitimate bases.8
Hard power bases are usually quantifiable and specific. Rewards can be margin rates,
incentive programs, and special monetary promotions through the channel. Rewards may be
specifically related to performance in product sales results or territory coverage. Coercive power,
effective only when there is a significant imbalance in the channel, often takes the form of
punishment for a lack of performance or results. Legitimate power stems from a contractual agree-
ment that is enforceable by a third party or, in highly intraorganizational channels (i.e., a corporate
or contractual vertical marketing channel), a strong feeling of obligation or commitment.
Continuous use of hard power bases often leads to greater conflict as members feel required to
perform rather than invited to perform.
Soft power bases are more qualitative in nature than hard bases. Product and market expertise
and information are shared between channel members in the recognition that improved channel
performance can be of benefit to all members. Identification power exists when one channel member
possesses an image, reputation, or position in the market that makes belonging to that channel
system a positive asset. This association may be related to brands, channel support, or prestige
market positioning. In business-to-business markets, identification power can be associated with
exemplary assistance provided to channel members by a manufacturer’s missionary sellers as well as
a manufacturer’s brands being the industry standard in target markets. Agreement on goals and the
understanding of win–win outcomes are important in the effective application of soft power bases.
As is often the case, mutual dependence exists between members such that an imbalance that
leads to conflict can be avoided. Many marketing channels are often combinations of independent
businesses attempting to meet channel goals while also meeting the goals of the individual business.
Unfortunately, these goals are not always in complete alignment. Goal incompatibility and its vari-
ants are among the primary causes of channel conflict. Older, established channel members who
have “proven their mettle” may have as a primary goal stabilizing profit margins at the highest level,
while newer, less-known intermediaries have a more aggressive posture in the market. Other conflict
igniters are territory issues, where suppliers may reserve house accounts for a direct selling
function, and product line maintenance issues. The scenario of adding a second source for a
product type, discussed in this chapter, can lead to conflict between channel members if there is an
expectation of loyalty that has been lost or not earned. While many conflict resolution techniques are
available, their details are generally beyond the scope of this text. The following discussion looks at
channel design, leadership, and control as elements in channel power and conflict.
Channel Patterns and Control

Traditionally, channel power was the realm of the large manufacturer at the top of the channel.
Manufacturers who desired greater power and control over channels would either forward
integrate into corporate vertical marketing systems or enter into contractual relationships in
which goal setting included superordinate goals. As manufacturers moved to establish control
of channels, economies of scale in buying were created that began to influence intermediaries
who were not aligned with a vertical marketing system. The outcome was the joining of
horizontal competitors (intermediaries at the same level in a channel, usually existing in
multidistribution) into buying groups to create the scale necessary to compete with corporate
systems.
Exhibit 14-7 shows the organization of several traditional vertical marketing systems
(VMSs) and the addition of value networks, arranged in order of dependence on or degree of
supplier control (increasing left to right) and dependence on mutually beneficial relationships
Increasing Centralized Control
Value Horizontal Conventional Administered Contractual Corporate Vertical

Networks Sprawl Systems Systems Systems Marketing Systems (CVMS)
Conventional systems, not a vertical

Value networks are almost totally channel pattern, are similar to
CVMS were likely
dependent on relationships that administered channels but without Contractual developed when there
create cooperation and win–win agreement on goals. Intermediaries are systems include were no other channel
scenarios. The assembled team independent businesses with concerns wholesaler- and alternatives. In a
creates a solution to a particular only for their own operations. retailer-sponsored CVMS all functions
customer need. The team will be voluntary chains, and flows are
unified in the approach at that By most traditional views, administered and franchise performed by (or
customer, but there is not marketing systems are the closest to systems. Ace and contracted by) the
necessarily any agreement to conventional systems. Independent Tru-Value integrator. CVMS have
participate together beyond the intermediaries agree on goals related to a Hardware and IGA the greatest degree of
immediate collaboration. Today’s particular administrative leader’s market are voluntary centralized control but
may be part of a competing segment while maintaining disparate goals chains. New car less flexibility. Many
network tomorrow. associated with their own operations. dealers and fast- Goodyear tire dealers
food restaurants are forms of a forward
(e.g., McDonalds, integrated CVMS.
Horizontal sprawl is a term applied to the Japanese keiretsu channel pattern. A Burger King) are
keiretsu is a group of loosely associated companies that may have many ties at franchises.
the ownership and management level. A keiretsu is often a complete supply chain
with many buyers, sellers, and ancillary service providers. There is significant
sharing of goals, risks, and benefits among members of the chain.
Mutual Goals Increasing Voluntary Cooperation Directed Goals
EXHIBIT 14-7 Control and Cooperation in Vertical Marketing Systems
(increasing right to left). The following discussion characterizes these channel patterns from the
viewpoint of channel control and the importance of mutually beneficial relationships.
Historically, a large manufacturer’s size and financial power gave it the privilege to strongly
influence, if not control, the marketing channel. Manufacturers that desired greater control or
were unable to achieve distribution goals through independent intermediaries would integrate
operations, forming a corporate vertical marketing system (CVMS). This provides centralized
control but limits flexibility and requires a significant capital investment.
Contractual channels aim at control through binding agreements with otherwise indepen-
dent intermediaries. Of these systems, probably the greatest control exists with franchisors in
franchise systems. However, even with the significantly controlling contractual agreements that
exist in franchises, franchisees are independent business owners, not employees of the fran-
chisor. (Among the most interesting contractual channels are the farm producer co-ops—see
“Finding More Uses for Cranberries”). Contractual systems are voluntary; there is no unified
ownership. Most contractual arrangements were created to develop competitive buying posi-
tions. Faced with competition from large, vertically integrated organizations, independent
channel members formed voluntary chains. (Voluntary chains were started at the wholesale level
as well as at the retail level. The main difference is where the motivation for the cooperative
effort came from and is not significant to this discussion.) In the grocery industry, the
Independent Grocers Alliance (IGA) is among the best-known system, while Ace, Tru-Value,
Pro, and Sentry Hardware are all types of voluntary chains. Toro, the outdoor equipment
manufacturer, uses contractual channels (franchises) for commercial outdoor equipment; and
McKesson, the pharmaceutical wholesaler, has over 3,300 independent retailers that are part of
its voluntary chain.9
Finding More Uses for Cranberries
Imagine that you are the owner of a cranberry and establish quality standards that could be reflect-
bog. Your big market consists of one day a year— ed as premium brands in the marketplace.
Thanksgiving—and everyone does not like cran- To be part of the co-op, growers must meet
berries on turkey. You dream of cranberries on certain quality standards associated with their partic-
cereal in the morning, cranberry-apple juice as a ular produce and agree to certain resale terms. At
breakfast drink and a cocktail mixer. As the the inception of many co-ops, growers were very
owner of just one bog you might find it difficult interested in joining as there was significant upside
to develop new uses for cranberries, but as a potential—more markets would be available and
member of a consortium of bog owners, re- price and quality would be stabilized. With time, the
sources could be pooled and risks minimized in a co-ops developed channel power positions that
way that you could afford product and market benefited their members both in the markets for
development efforts. their products and the markets for farm equipment
Your dream is the vision that many farm pro- and supplies. Farm co-ops are big business. Consider
ducer cooperatives have been built on. Ocean Spray, this the next time you have whipped cream and
Sunkist, LandO’Lakes, and others are co-ops estab- cranberries on your ice cream. A farm-producer
lished to expand the markets for basic commodities co-op may have marketed all three products!
Because of their voluntary nature, contractual channels require a greater degree of

cooperation and mutual goal setting to be effective. This is more true with administered
channels, whose composition and level of commitment by intermediaries are not legally bind-
ing. Administered channel intermediaries are independent businesses who have agreed to
marketing goals and programs developed by other companies. General Electric used adminis-
tered channels for major appliances in consumer markets and industrial components and
motors in industrial markets. Owens & Minor, Baxter, and several other hospital supply
distributors provide JIT “stockless” inventory services to their customers. A sophisticated
refinement of JIT systems, stockless systems provide supplies in quantities as small as single
units to care stations within client hospitals.
Known for the implied business camaraderie that exists between suppliers and customers,
keiretsu systems often have little contractual control. Sometimes called horizontal sprawl, the
keiretsu consists of a very flat channel pattern, with few, if any, vertical layers. Each supplier has
a direct relationship with the customer. Ancillary providers in the pattern are also members of the
keiretsu, such that shipping, financing, and other services are available to members at favorable
terms. The favorable consideration is part of the relationship; members recognize that what is
good for other members will be good for the entire group, strengthening the keiretsu for all.
(In the United States, this may be contrary to antitrust law.) Operating without centralized
control, the composition of the keiretsu is dependent on members recognizing the value of long-
term cooperative relationships and win–win attitudes.
Value networks are similar to the keiretsu at any given customer or solution development.
However, members of value networks are often part of a specific network for only that develop-
ment program or customer application. The success of the network rests on members under-
standing that they must respect and value other members’ positions; they could very likely be
competing with others as members of different networks. While sometimes appearing ad hoc,
value networks provide ultimate member flexibility; particularly important are fast-changing,
high-technology markets.
CHANNELS AND THE INTERNET

Throughout this text, we have explored the effects of the Internet on business-to-business
marketing. One area that appeared to have potential for great change stemming from rapid
adoption of Internet technology is the area of business-to-business channels and supply chains.
At the height of the dot-com bubble, Web technology had the potential to bring significant
portions of business transactions online in a very short period of time. A sizable portion of this
online activity would be channel transactions.
Many companies that formed to change the nature of business-to-business channels never got to
profitability and hence disappeared—either by being acquired or by simply closing their doors. (See
Chapter 3, “Covisint: The Importance of Adapting to Customers’ Buying Behavior.”) However, this
does not mean that Web-based technology has not had an impact on business-to-business channels.
Many companies have adopted new 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.
The Internet’s Emerging Role in Business-to-Business

Marketing Channels
If we look at the Internet and the Web as enhancements to information flow, we can then think
about how the technology can affect channels. As we noted earlier, channels provide value for
business-to-business customers by creating form, time, place, and possession utilities. All of
these utilities can be enhanced through better and faster channel flows. Rapid flow of order
data between resellers and suppliers can closely track demand patterns for different product
models. The supplier can create better forecasts of demand for different models and thus pro-
vide better product assortments in real time. Better information flow also allows the execution
of JIT manufacturing and supply. This improves time utility for end-use customers, since they
can receive a product in days or even hours from the time they ordered it, instead of waiting
weeks or months. Real-time information can give suppliers more information about geographic
demand patterns, allowing more inventory to be placed downstream near locations where cus-
tomers actually need the product. Thus, place utility is improved (and time utility as well); and,
of course, this gets products into the possession of customers earlier. Analysts have also argued
that sharing real-time demand data has reduced the bullwhip effect over the past decade.10
In addition to these ways of creating value, the Web also reduces channel costs. Management
of channel relationships using Web applications squeezes costs out of the channel in several ways.
First, when considering ordering, inventory tracking, billing, and payment, the accuracy of using
the Web to manage data reduces a great deal of the costs associated with error checking and correc-
tions. Second, better information makes forecasting more accurate, reducing inventory costs. Better
information also makes timing of orders more manageable so that quantity and payment discounts
can be obtained on a higher proportion of orders.
Companies are also learning that value can be produced for customers by reducing
customer costs through the use of Web-enhanced order processing and fulfillment tracking. For
instance, four oil pipeline companies in the United States formed a joint venture project, called
“Transport4.” This effort, headed by Colonial Oil of Atlanta, created a Web-based ordering and
scheduling facility for shipments of oil products. Oil producers, industrial oil buyers, oil distrib-
utors, or any other institutional customer could go to the password-protected site to schedule and
route oil shipments from point of origin to any destination served by the four member pipelines.
Prior to the existence of the joint venture, a customer would have to arrange such a shipment
by EDI, phone, fax, or mail. The worst part of the old system was that each pipeline company
was a separate entity with its own product codes, data interchange protocols, and ordering and
scheduling procedures. The joint venture allows the customer to order and schedule across all
four pipelines in one step. Confirmation is immediate. In the past, a complicated order might take
a week or more to finalize. Now it can be done in a matter of minutes.11
Since its inception, Transport4 has grown to seven pipelines. After hurricanes Katrina and
Rita in 2005, Transport4 became an important component in bringing the oil distribution indus-
try quickly back into service in the Gulf Coast.12 Transport4 has added new services, including
an online auction capability.13
Companies are discovering that Web-automated channels provide better value to the end
customer. Lower channel and inventory costs, plus an ability to forecast demand more accurately,
mean that fewer stockouts and back orders occur for products moved through the channel.
Customers may benefit directly through reduced transaction costs. Value to customers may also be
enhanced from channel cost savings that are reinvested in such things as filling out product lines
and increasing inventory of complementary products; this results in customers receiving more
value from product availability. Suppliers or channel members might also invest cost savings into
enhanced customer service.
What Has Happened to New Types of Channels

New channel structures emerge as more companies obtain experience with the Web and as more
entrepreneurs are exposed to Web-enabled commerce. All of these channel arrangements have
the same general purposes as traditional channel structures: providing the appropriate selection
of the right products and making them available to end-use buyers, efficiently handling ordering
and order processing, and facilitating fast delivery at the lowest cost possible.
In our prior work,14 we reported two general types of business-to-business channels that
were beginning to emerge shortly before the dot-com bubble burst: affiliate networks and hubs.
An affiliate network is a sales channel more than it is a distribution channel. Affiliates show
a link on their Web sites that refer a prospective customer to the Web site of a marketer. If the
customer buys something from the marketer, the affiliate receives some sort of compensation for
the referral. A network of affiliates can potentially generate an enormous number of referrals—
sales leads—to the marketer who resides at the center of the network, and theoretically has great
potential for generating sizable sales numbers.
Hubs,15 or portals as they are often called, are a generic class of Web sites that “make
markets”—bring buyers and sellers together to facilitate transactions—in a business-to-business
context. They can be one of several types: catalog, auction, exchange, or barter. Catalog hubs
serve as agglomerators, in which the products from several vendors’ catalogs are combined in
a searchable database. Auction hubs match buyers and sellers in an online analogy of real-world
auctions. Exchange hubs act as clearing centers for bringing buyers and sellers together.
Commodity-like products are offered in a setting where buyers and sellers indicate the products
(or services) they want to trade and the prices they seek. Barter hubs act like exchanges, except
that “prices” are nonmonetary. Buyers and sellers each exchange something of value (the
exchange may involve a bartered service or product, plus some amount of money). Generally,
hubs make money by charging processing, handling, and marketing fees.
Since 2000, however, Internet businesses have run through a series of problems. Business-
to-business marketers have faced problems related to—but not identical to—problems faced
by consumer businesses. Both sectors faced dramatic shrinkage in funding as the investment
community re-evaluated the future profitability of Internet and Web-based businesses.
The concept of affiliate networks has caught on much more in consumer markets than in
business-to-business markets. Affiliate networks for business marketers tend to be too costly to
manage well. Participation in a network is usually not attractive for potential affiliates because it
does not generate enough revenue to be worthwhile.
For business-to-business hubs or portals, two interrelated problems emerged.16 First,
relationships require more off-line attention than online business models assumed. It is not
enough to cut transaction costs if barriers that arise in supplier–customer relationships detract
more from the value produced. Second, because relatively few potential users actually used the
online market exchange sites, volume did not rise to levels that produced profits for the market
exchange companies. New companies found low-entry barriers in the technology: almost anyone
could set up a market exchange site. As a result, too many exchanges were chasing too few trans-
actions. Chemdex, as an example, hoped to “make a market” in the life sciences industry. While
it was one of the first, it soon found thirty-seven other companies competing for the same
business. Ventro, the owner of Chemdex, discontinued the site in December 2000.17 To add to
these problems, many businesses have relied on advertising to supplement their online revenue
streams. Many advertisers have come to realize that the returns from online advertising often do
not warrant the expense.18 A combination of declining returns from advertising and reduced
advertising as the economy slowed has produced a precipitous drop in advertising revenue.
The end result was that new online businesses, the different kinds of hubs mentioned earlier,
often did not fare well. They did not acquire enough participants to reach critical mass, that is,
enough transaction volume to be profitable. Most are out of business or running at greatly reduced
activity levels. The business models in which a single company runs an automated supply chain or
distribution system have fared better. However, even these have proven to take longer and involve
more investment than was originally anticipated.
Future Adoption of Information Technology for Channel Management

The exuberance of the dotcom era has now been replaced with post-collapse caution. Even so,
the best business ideas from this period, enabled by innovative technology, are slowly taking
hold. For instance, while portals did not generally fare well in the early 2000s, some exchange
hubs have evolved and thrived in specialized markets. Global Healthcare Exchange has come to
be well established in medical products sold to hospitals and clinics.19 The potential gains from
exchange hubs are so great that the costs of implementation are offset for many users. Quadrem
Global eMarketplace—another exchange hub that operates in the oil and gas, mining, minerals,
and other industries—has built a business that appears to be sustainable.20 Taking small steps to
prove the concept to potential adopters seems to be working in this case.
Notwithstanding these difficulties, Internet and Web-enabled businesses and supply chains
still hold promise. As a cluster of technologies that fully integrates supply chain management,
we are probably still in the visionary part of the TALC. However, beachhead niches are starting
to emerge and we may see a chasm crossing in the near future.

Channels create and enhance value for business customers. They provide value in terms of
making the right products and services available, by giving buyers an appropriate level of choice,
by providing products and services in the appropriate quantities, and by doing so at appropriate
levels of cost. To do this, channel members perform a variety of tasks. The combination provided
by any individual channel member is dependent on the nature of the product and the way that
customers expect to obtain it. The combination may include such activities as forecasting market
needs, performing market research, buying products that create a selection, holding inventory,
creating product bundles or performing final assembly, providing service, setting or negotiating
prices, communicating with and selling to buyers, facilitating transactions, moving products,
providing financing, and establishing relationships with customers.
To create value for final buyers, suppliers need to understand those buyers, understand the
perspective of potential channel members, and then design a channel structure that is as appropriate
as possible, that is, it provides superior value to final buyers and that makes appropriate profit lev-
els for channel members and for the supplier. Once the design is in place, the marketer must recruit
and choose individual channel members to implement this design. In most cases, the marketer must
then work to establish a relationship with channel partners. One of the most pressing environmen-
tal changes that must be addressed today is changing technology. As the Web changes the way that
business channels are structured and managed, the business marketer must adapt. A proactive
rather than reactive approach is called for. The risk of “missing the boat” is too great otherwise.
Key Terms
administered channel functional spin-off 342 physical distribution concept 348
intermediaries 361 horizontal competition 359 place 338
affiliates 363 horizontal sprawl 361 possession 338
ancillary channel members 336 house accounts 359 primary channel participants 336
channel pattern 339 hubs 363 product line maintenance 359
contractual channel 360 intensity of distribution 350 superordinate goals 358
corporate vertical marketing keiretsu 361 supply chain 347
system 360 logistics 347 supply chain management 347
differentially invisible 350 marketing channel 336 time 338
direct channel 336 materials requirements planning trade credit 340
distribution centers 349 (MRP) 349 vertical integration 342
dual distribution 352 multidistribution 352 vertical marketing system 359
form 338 palletizing 338 warehouses 349

1. Does a company that markets directly to other 6. What does it mean for a channel to “reduce the dis-
companies have a channel? Why or why not? crepancy of assortment”?
2. Why can channel structure differ between segments 7. Why is carrying extra inventory so costly for sup-
even though the products are the same? pliers or channel members?
3. Explain the four kinds of economic utility. 8. What are three reasons that a business-to-business
4. When a channel provides financing to customers, marketer may want to market through channel
what kind of economic utility is it providing? intermediaries rather than market directly?
Explain. 9. Review the opening example of Apple and the Lisa
5. When a channel provides training for the customer’s computer. Using Exhibit 14-2a, determine what path
personnel, what kind of economic utility is being Apple used to get the Lisa to its market. Compare that
provided? Explain. to the path you think may have been more appropriate.
10. What sorts of risks does an industrial distributor 14. What kinds of value can be provided by Web appli-
share with the supplier? cations that manage channel transactions?
11. Suppose that a start-up company is offering an inno- 15. What kinds of value would channels provide that
vative product that management hopes will establish cannot be substantially enhanced through Web
a new product category. What forces will tend to lead applications?
the company to market the product through channel 16. Using Exhibit 14-4, review the Apple Lisa and
intermediaries rather than directly? What character- compare how well the factors were addressed.
istics of an early market will tend to lead the compa- Note how much better developed was the channel
ny to market the product directly to final customers? for the iphone in meeting customer needs as they
12. What are key causes of channel conflict? pertained to “the way the customer buys.”
13. What are the chief differences between an adminis-
tered channel and a value network?
Endnotes
1. Louis W. Stern, Adel I. El-Ansary, and James R. 11. Sean Donahue, “Pipe Dreams,” Business 2.0
Brown, Management in Marketing Channels (January 2000), pp. 90–95.
(Upper Saddle River, N.J.: Prentice-Hall, 1988), 12. Anonymous, “Transport4 Launches T4 Online
chapter 8, Instructor’s Manual Discussion. Auctions,” Pipeline & Gas Journal, 234(1)
2. Louis W. Stern, Adel I. El-Ansary, and James R. (January 2007), p. 12.
Brown, Management in Marketing Channels 13. Barton Brown, “A Web of Pipeline Commu-
(Upper Saddle River, N.J.: Prentice-Hall, 1988), nications,” Pipeline & Gas Journal 230(4)
chapter 8. (April 2003), p. 14.
3. Lou E. Pelton, David Strutton, and James R. 14. Robert Vitale and Joseph Giglierano, Business
Lumpkin, Marketing Channels, A Relationship to Business Marketing: Analysis and Practice in
Management Approach (Chicago: Irwin, 1997), a Dynamic Environment (Mason, Ohio.: South-
pp. 301–311. Western Publishing, 2002).
4. Paul Sherlock, Rethinking Business to Business 15. A good early description of emerging models
Marketing (New York: The Free Press/Macmillan, appeared in an article by Don Tapscott, David
1991), chapter 10. Ticoll, and Alex Lowy, “The Rise of the Business
5. Stern and El-Ansary, Marketing Channels, p. 5. Web,” Business 2.0 (November, 1999), pp. 198–208.
6. Sherlock, Rethinking Business to Business 16. Elise Ackerman, “Businesses Hit Rough Spots
Marketing. on Internet Journey,” San Jose Mercury News
7. Stern and El-Ansary, Marketing Channels, (February 26, 2001), pp. 1E, 10E.
pp. 268–283. 17. Cecelia Kang, “Online Supply Exchanges
8. The first three bases—reward, coercion and Refocus their Strategies,” San Jose Mercury
legitimate—are often referred to as mediated News (February 26, 2001), pp. 1E, 10E.
power bases while the remaining are called non- 18. Jennifer Rewick, “Beyond Banners,” The Wall
mediated bases. Street Journal (October 23, 2000), p. R38.
9. Stern and El-Ansary, Marketing Channels, 19. Gary H. Anthes, “On the Mend,” Computerworld,
pp. 331–334. 39(4) (January 2005), p. 35.
10. Thomas F. Siems, “Who Supplied My Cheese? 20. Susan Avery, “Rio Tinto Purchasing Uses
Supply Chain Management in the Global E-Marketplace for Supply Chain Efficiency,”
Economy,” Business Economics, 40(4) (October Purchasing, 136(6) (April 2007), p. 35.
2005), pp. 6–21.
Chapter 15
Communicating with the Market
OVERVIEW
All relationships depend on reliable and timely communications. Throughout this book
we have stressed the importance of building customer relationships at many levels. In
Chapter 12 we emphasized the importance of the personal selling portion of the
promotion mix. While personal selling plays a critical role in communication with
customers, the other three elements of the promotion mix—advertising, sales
promotion, and public relations—are required for the specialized role that they play in
the communication process. In this chapter, the discussion will focus on these three
elements and their value in business-to-business markets. Not only does each element
of the promotion mix have a specialized role, but the synergies between the elements
combine to provide a unified message to the marketplace. As discussed in Chapter 13,
marketing communication is a key component for building a strong brand.
This chapter starts with an overview of promotion and the differences between
consumer products promotion and business-to-business promotion. After the
overview, the discussion turns to achieving different outcomes with combinations of
the elements of the promotion mix. There are some forms of business-to-business
communication that defy categorization into only one of the elements of the
promotion mix. In discussion of the management of promotion, we will examine how
definition of outcomes desired rather than process employed is more likely to
provide insight into the promotion needs of the situation.
The implementation of positioning and differentiation strategies, as determined
by the strategic plan of the organization, is in large part the purview of the promotion
effort. The chapter will conclude with a discussion of the value creation elements of
promotion.
Andersen Consulting Does a Quick Transformation to Accenture1

After nearly three years in a courtroom squabble, on August 7, 2000, the arbitrator finally ruled that
Andersen Consulting could split from Arthur Andersen, the accounting firm. The $1 billion price was
deemed reasonable, but one condition seemed a monumental challenge: Andersen Consulting could no
367
368 Chapter 15 • Communicating with the Market
longer use the Andersen name (not too bad, so far: they were already moving to change the name), and
the name had to change by January 1, 2001. The split meant Andersen Consulting had to change its
name in 129 days and not “disappear” in the process.
Arthur Andersen had an excellent reputation as a business consulting organization, when in 1989,
the partners decided to institutionalize the consulting arm of the firm with a separate public identity. The
consultancy was still a part of the firm, contributing to the firm’s overall financial performance.
Disagreements arose concerning the strategic directions of the firm, allocation of resources, and clashing
cultures; and Andersen Consulting filed for arbitration in 1997.
Over the years, Andersen Consulting had redirected its consulting efforts from general man-
agement consulting to focus more on enterprise-level IT consulting. As client companies changed
over to business operations that relied on information technology and enterprise resource planning
systems, Andersen Consulting became the integration engine that accomplished the restructuring.
Now Andersen Consulting was faced with the task of continuing in this business, building on its past
success and reputation, without losing its identity when the name changed. And it did not yet have
a new name.
The task was Herculean on three fronts. First, a new name had to be found that conveyed the
strengths and vision of the new company. Meanwhile, the name had to be available, the URL—the Web
address—had to be available, and the name had to have no negative connotations in any of the sixty or
so countries in which Andersen Consulting did business. Second, the logistics of changing the name on
all the company’s materials was enormous: business cards, letterhead, brochures, paychecks, and
signage, as well as all the company’s advertising and corporate communications materials. Third, the
changeover had to be communicated to customers, prospective customers, and the world at large in such
a way that all these audiences would take notice and maintained positive memory associations with the
new name. The changeover had to be done well, too. If the changeover was managed poorly, people
would notice and Andersen Consulting would have to begin life as a new company digging its way out
of a credibility hole.
Andersen Consulting started by seeking suggestions for names from its executives and emp-
loyees, as well as from hired consultants. By October, after culling 2,677 entries, the partners and their
hired consultants, Landor Associates, chose the name Accenture. The name was originally the sug-
gestion of a senior manager in Oslo, Norway.
Andersen Consulting launched an advertising campaign that “teased” the audience, suggesting
a name change was coming. The name officially changed on January 1, and Accenture launched
an extensive campaign to make the change very visible. It involved advertising in several media,
a public relations campaign, and the culmination of the physical changes to identity materials
throughout the company. The logistics campaign had been implemented by fifty employee teams. To
accomplish all this, Accenture employed the project management skills that were the core of its
consulting business.
The results, of course, will not be fully known for a while, maybe for years. The early results,
though, indicated that Accenture was on the right track, particularly in light of the demise of Arthur
Anderson through the Enron debacle. A majority of target audience members realize that the name is
changing and the Accenture name is gradually acquiring memory associations. In all, Accenture’s
efforts stand as a good example of what it takes to accomplish such a name change.
LEARNING OBJECTIVES
䊏 Understand the distinctions between personal selling and the nonpersonal types of promotion.
䊏 Understand the differences between promotion in consumer markets and promotion in
business-to-business markets.
Chapter 15 • Communicating with the Market 369
䊏 Understand the role of promotion in providing value, information, and education to

customers and influencing the buying decision process.
䊏 Have become familiar with the kinds of promotion used in business-to-business marketing
and their uses.
䊏 Gain a sense of how to manage promotion in conjunction with the other elements of
marketing strategy and the offering.
䊏 Understand how promotion can assist the development of a firm’s strategic positioning.
䊏 Gain a sense of how publicity and Internet communications can play special roles in
business-to-business marketing.
INTRODUCTION
In Chapter 12, we discussed personal selling, which is, of course, face-to-face communication.
Business-to-business marketers also use other, less personal media to communicate with the
market. All forms of communication, called the promotion mix in most marketing principles
texts, are generally grouped into four categories: personal selling, advertising, sales pro-
motion, and public relations. In business-to-business marketing, there are some forms of com-
munication that defy such categorization. The communication effort does not fit nicely into
any one element of the promotion mix. For instance, participation in industry trade shows and
conferences employs all four categories of communication: salespeople are on duty at the
booth and interact with customers (personal selling); brochures on products and marketing
programs are given away (advertising); other sales premiums—promotional items such as
T-shirts, coffee mugs, and so on—are given away to provide incentives for customers to visit
the booth (sales promotion); and the company president, wearing the company’s polo shirt and
sun visor, sits on a discussion panel in a seminar session to expound on the company’s vision
of the industry’s future (public relations). At the same time, company technical professionals
are presenting a paper on the company’s newest technology breakthrough at the conference
that is a part of the trade show. The object of all this communication is to help the members of
the buying center move through their buying decision process and, strategically, position the
firm in the minds of customers.
This chapter concerns all the methods of communication that are not personal selling. In many
organizations, these promotional efforts are known as marketing communications (“marcom”) or, in
large organizations when public relations are handled at the corporate level, advertising and sales
promotion (A&SP). For brevity, we use the term nonpersonal communications to The term nonpersonal
describe these promotional efforts. communications refers
In the opening example, Andersen Consulting was faced with a monu- to the elements of the
mental communication task as it moved to quickly change its name to promotion mix other than
Accenture. In doing so, Accenture and its consultants followed the main guide- personal sales, such as
advertising, sales
lines for good communications. They started by choosing a name that would promotion, and public
communicate a desired message. Then they used multiple methods to deliver the relations. Depending on
message that the name was changing. The campaign was sequenced in such a organizational structure,
way that it got the attention of the target audiences and primed them for the nonpersonal
name change. Repeated messages in differing forms reinforced the message so communications may be
known as marketing
that audience members’ memory would be enhanced. All the while, the company communications (marcom)
kept in mind the role of the company’s name and the impact of these messages or advertising & sales
on the buying decision process. promotion (A&SP).
Communications contribute to the marketer’s delivery of value to customers. Without com-

munications the customer might not realize that the supplier has a solution for his problem or is
willing to work with him to develop a solution. The customer might not fully understand how
much value the supplier’s solution truly provides.
A COMMUNICATIONS MODEL
There are three key ideas in providing value through communications. First, the members of the
buying center respond to messages; media are only a means of delivering messages. Second,
messages must be crafted to assist members of the buying center to progress through the buying
decision process. Third, messages must be crafted to implement the positioning chosen in the
design of marketing strategy. Keep these three ideas in mind through the following discussion of
the communications model, shown in Exhibit 15-1.
Losing Meaning in the Translation

The simplest communications model, sender-encode-medium-decode-receiver, is familiar to
many students. As shown in Exhibit 15-1, there are several areas of this model that require
particular attention. Note that the sender and the encoding process are not separate. As the sender
creates a message, that message is placed into “code” that has meaning to the sender as an
accurate representation of the message. The message can be received accurately only by a receiver
who “decodes” the message the same way it was encoded. In personal communications (every-
day conversation), this is not usually a problem, though you can probably recall having asked
someone to rephrase something he or she said because you did not understand it. While this
Noise Noise
Medium Outcome
Sender Receiver
Encoding Decoding
Outcome can be
Message an action,
Message Message modification of or
formation of a
The message can suffer belief, increased
Original message distortion as it moves through Message enters the awareness, etc.
as intended the medium, either receiver’s decoding
Feedback
Feedback
inadvertently as a result of the process
Feedback with technology of the medium or Feedback
distortion from beliefs about messages
that use the medium. Noise
Noise
Feedback
Feedback
Feedback: Information about the

outcome returns to the sender, with Noise:
the potential of additional 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, pre-
determined beliefs, and other competing influences,
such as fatigue, distractions, crises, and
competitive messages. Noise can occur anywhere
in the communication process.
EXHIBIT 15-1 A Model of the Communication Process

sounds simple, many market segments have their own languages, usually referred Jargon is any specialized
to as the jargon of the market or discipline. Jargon improves communication language of a group
that is used to improve
efficiency within a group, but tends to isolate the group from outsiders and may the efficiency of
have the effect of intimidating non-group members. Jargon across industries communication among
may have the same alphanumeric form but mean something completely differ- members of the group.
ent, adding confusion to the isolation and intimidation (see box, “Now What A price paid for this
Did That Really Mean?”). In business-to-business marketing, messages must be efficiency within the group
is to separate the group
encoded in the language of the receiver or customer if the goal is to assist the from nonmembers who
customer through the decision process. may not have experience
with or knowledge of the
language.
Media Can Impact the Message
The means of transmission selected for the message will have an impact on how the message is
received. Receivers may prejudge messages because of previous experiences, or beliefs about
certain media, or the medium’s technology may have a distorting impact on the message. For
example, the telemarketer whose call is abruptly cut short may have had the deal of a lifetime, but
the receiver absolutely would not tolerate interrupting phone calls. Or perhaps the upper-level man-
agement of a company perceives that time spent at conventions and technical conferences is not
productive, so the engineering staff is not provided with any budget to attend. Whether reasonable
or not, different customers and markets have established methods by which they obtain infor-
mation. The medium used in a market segment must be an accepted conduit for information and
must be consistent with the positioning of the firm and its offering.
Feedback
In any marketing communication effort, it is critical for the marketing manager to know whether
the message was received by the targeted audience as intended. In consumer markets, because of
the heavy dependence on advertising (a monologue),2 sales results are often the first indication of a
message not performing as designed. In rapidly changing markets, the time lapse associated with
waiting for sales results is too great to effectively add correction to the message. When advertising
Now What Did That Really Mean?
Different things mean different things in different up to the bar. And of course, when a concept or
industries. In the chemical industry, ABS is acrylonitrile- idea is not anticipated to be successful, that dog
butadiene-styrene, a widely used plastic for consumer won’t hunt.
products. In the automotive industry, ABS is antilock In common language, many words imply
brake systems. Again, in the auto industry, rear win- meanings not intended. When polled as to the
dows are backlites (tail lamps are called tail lamps). PC meaning of the word compromise, students most
is a desktop computer, but is also politically correct in often reply to give up. Yet, compromise is often the
social situations. How many different meanings can outcome of negotiations aimed at creating win–win
you think of for “10K”? situations that work for all involved, enabling all
Colloquial expressions in some languages parties to commit to an agreed-on direction, goal,
can cause communication difficulties. In the or common promise. Compromise can thus be
United States, we say that someone who has defined as doing what works!
accepted responsibility for a situation has stepped
Direct response requests— is a significant form of promotion, firms must use other means to solicit feedback.
reader surveys, question- Still, even with the use of direct response requests inserted in promotions, feed-
naires, and warranty
registrations—are forms of
back through the Internet, toll-free access to customer service, and other means,
customer feedback. The feedback is often only available through a proactive choice of the customer.
difficulty with these types One of the advantages of the personal selling and strong relationship
of feedback is that they aspects of marketing in business-to-business markets is the opportunity for
require an active interest immediate, personal feedback through the field sales and marketing team. When
by the customer in
providing feedback. This
the relationship is also the medium that carries the message, feedback is
implies that only a portion immediate. The ongoing dialog with customers reduces the opportunities for
of the total market for distortion and misunderstanding.
the product is providing
information. The Noise
behavioral aspects of those
customers who will make Jargon and the other factors noted that create distortion or inaccuracies in mes-
an effort to provide sages are commonly combined into the category of noise. Noise can be a belief
feedback may be
significantly different than
or predisposition that acts as a filter that interprets messages. Noise can also
the entire market segment. distort messages. Distortion is caused by misunderstanding, misinterpretation,
rumor, beliefs, and other competing influences—such as fatigue, distractions,
Selective exposure, crises, and competitive messages—and can exist at several different places in
selective attention, and the communication process. Whenever the message is interpreted, either for
selective retention are transmission through media or creation of an outcome, the possibility exists that
different behaviors
the message will be changed. As the target audience for many types of promo-
associated with message
perception. As with any tion, customers screen incoming messages based on timing, their individual
behavioral element, there interests, the needs of their job function, or the immediate needs of the task at
is a degree of subjectivity, hand. Other messages get screened out. Receivers, to protect themselves from
based often on the recep- message overload, only pay attention to useful information. Thus, noise in the
tiveness or attentiveness of
communication process can be a situational factor. The successful message must
the receiver.
be created to survive the influences of media, break through the screening
Selective exposure refers
process, and be accurately perceived by the receiver.
to the actual media to Customer perception, then, is both selective and subjective.3 Message
which the receiver may be interpretation is subject to selective exposure, selective attention, and selective
exposed. Different retention. Successful promotion, as in other parts of the marketing mix,
stakeholders in the buying requires business-to-business marketers to make judgments about the behavior
center will experience
different types of media
of customers.
exposure. Just as
McDonald’s places Capabilities of Promotion
commercials during
Saturday morning In the next section, we examine the strengths and weaknesses of different ele-
cartoons focused on fun ments of the promotion mix. Marketers must understand the limitations of pro-
meals and Ronald motion as well as its capabilities. Exhibit 15-2 lists purposes that can and cannot
McDonald and
commercials focused on
be pursued with most promotional efforts. As you study this material, recall that
family relationships on promotion must be contextually consistent with the overall marketing effort and
the evening news, support the positioning of the offering and the organization. Recognize that the
business-to-business promotion mix is the implementation of the communication strategy. Every part
marketers must recognize of the promotional effort should be designed to communicate effectively with
the media that the target
audience is regularly
the customer under specific circumstances. There are not good or bad elements
exposed to (magazines, of the promotion mix, just inappropriate elements or combinations of elements
business press, etc.). for the task at hand.
What Promotion Can Do What Promotion Cannot Do?

• Inform about availability • Sell products that do not meet needs
• Persuade trial • Convince customers that an inferior product is superior
• Encourage repurchase • Convince customers to go out of their way to purchase
• Communicate advantages when comparable goods are more readily available
• Establish awareness • Convince customers to pay more than perceived value
• Aid in securing channels • Overcome a weak marketing strategy
• Assist in creating brand preference • Substitute for a bad product.
• Build image
• Move product to balance production
• Support selling efforts.
EXHIBIT 15-2 Capabilities of Promotional Efforts
THE ELEMENTS OF THE PROMOTION MIX Selective attention is a

protective method receivers
How are messages delivered to audiences? A variety of methods exists. We start use to prevent overload.
with general categories of the promotion mix from a marketing principles Based on an individual’s
ability to process and store
course—personal selling, advertising, sales promotion, and public relations—
messages, only useful
and then discuss common, useful methods, often a mix of elements, in business- information is seen. The
to-business settings. successful message may be
a reinforcement of a
previous decision or may
Personal Selling address an immediate
need. Either consciously or
Chapter 12 discussed personal selling in depth. Recall that personal selling is not, receivers only take
individualized communications, often a series of dyadic interactions—one- interest in information that
on-one conversations between the seller and customer. The seller’s message can has immediate value.
be tailored and adapted to the particular needs of the customer. Often the
Selective retention is the
marketer can reach several individuals at once in a setting that resembles one- measurement of the
on-one interaction. Executive seminars or “Webinars”—seminars conducted “storage function”—the
online—have both scripted and interactive components. Even when economies quantity or portion of a
of scale can be leveraged in the seminar or Webinar setting, personal selling message retained and the
time span over which it is
reaches a relatively small audience at any one time. Because of the closeness
recalled. Because of timing
of the personal interactions in sales, personal selling is the primary driver in or other circumstances,
building effective relationships. receivers will not recall
Personal selling is the most costly communication method on a cost-per- messages that have no
contact basis. Many companies use nonpersonal communications in the early immediate use, though they
may be of value at a later
part of the decision process for prospective customers, because, to build
time. Several reminder
awareness, it is more cost effective than contacting customers with sellers. techniques, such as leave-
Advertising, sales promotion, and publicity help make buying center members behind brochures and
aware and interested in the supplier’s offering and help draw them to contact other sales paraphernalia
the supplier to begin including the supplier in the buying decision process. (coffee mugs, pens,
paperweights, etc.), are
used to address this issue.
Advertising
As consumers, we believe we are experts in advertising, or at least in how to surf around or
through it! While advertising is most important in consumer markets, it still has a role in business-
to-business markets.
Advertising is usually a monologue—impersonal mass communication without any direct

feedback mechanism. When mass communication is used, the message must be short, to the
point, yet general enough to be understood by a broad range of recipients. Advertising is effec-
tive at establishing awareness in and providing general information to the target market. In both
the consumer buying decision process and the business-to-business buying decision process,
advertising’s impersonal, nonspecific nature is not usually effective when the final purchase
choice is made at the point of sale.
Initially, advertising costs can be high from both a production and a placement viewpoint.
However, once created, advertisements are most often used several times, spreading the
The media buy is the production costs over more than one use of the ad. Also, while the media buy—
selection of where and the cost of airing or placing the advertisement—can be expensive, the size of the
when the advertisement
will be distributed.
audience reached results in a relatively low cost per exposure.
Considerations should
include not only how
people are exposed to the Sales Promotion
message but whether they
are the right people.
Sales promotion is often considered the “all other” category in the promotion mix.
Business magazines and Sales promotions are incentives that are used to enhance the value of an offering
trade journals track the over a specified period of time. As consumers, we know sales promotions as
decision-level authority coupons, rebates, point-of-purchase displays, samples, and contests. While these
and influence of the are the sales promotion focus of consumer markets and are also used in business-
professionals who are
regular readers and use
to-business markets, additional categories such as promotional allowances, sales
that data to influence meetings, conventions and trade shows, exhibits, and cooperative advertising are
advertisers regarding the more often the focus in business-to-business markets.
frequency and placement Sales promotion can be divided into three general categories based on the
of ads in their results desired.4
publications.
• Sales promotion focused on sales team support
• Sales promotion focused on middlemen support—these “push” promotions are used to
influence channel members with regard to their operating variables, such as inventory
levels, payment timing, cooperative promotion participation, and so on.
• Sales promotion focused on customers to shift the time of purchases, stimulate trial, or
encourage continued use of a product—normally known as “pull” sales promotions.
The discussion that follows focuses on the first two of these three categories. The third
category—sales promotion focused on customers to shift the time of purchase, stimulate trial,
or encourage continued use of a product—is contextually more consistent with consumer
marketing. Consumer rebates encourage purchase during the period of the promotion,
often borrowing sales from later periods. Samples or bundled products (e.g., a sample jar of
a new jelly attached to a jar of peanut butter) seek to get customers to try new products. These
direct to consumer sales promotion tactics have only limited use in business-to-business
markets.
SALES PROMOTION FOCUSED ON THE SALES TEAM Company or organization internal

marketing programs often have a large element focused on internal motivation and annual or
seasonal themes. Annual sales and marketing meetings are often the kickoff events for these
programs, aimed at bringing everyone together in support of the common theme. While a
major internal promotion effort, the sales meeting affords the opportunity for all members of
the field team to interact with headquarters counterparts and be a part of the planning of the
strategy that they implement. It is at this time that many sales incentives and contests are
introduced and training in new products, merchandising programs, and support materials
takes place.
SALES PROMOTION FOCUSED ON CHANNEL INTERMEDIARIES The correct promotional

allowance to middlemen can make or break efforts to get product through a distributor channel.
Rewards to channel members for cooperation with seasonal promotion plans are essential to get
middlemen focused on products. The necessity of these promotions is most often obvious very
early in the product life cycle and again in the maturity and decline stages when a product is
likely to face horizontal competition.
Early in the PLC, incentives to middlemen may be necessary to get new products
accepted by the marketing channel. Listing allowances, incentives that provide for the costs
associated with adding a new product to the industrial distributor’s line, are common.
Merchandising assistance and training for the distribution sales force, particularly with new
offerings, are important sales promotion efforts. Coincident with the push promotional effort
through the channel must be the pull effort with end users of the product. Recall from
Chapters 12 and 14 that distribution sellers, often more involved in transactional sales, most
likely are rewarded on a short-term commission basis so they pay close attention to how they
spend their valuable time. The distributors must be convinced of a ready market for the new
product before encumbering their sellers with the additional time commitments of training
and customer development.
As the popularity and profitability of the new product grows, competitors will be attracted
to the market. Distribution will recognize the benefits of belonging to the channel for the product.
It is shortly after this recognition that the distributor seeks a second source for the product in an
effort to protect customers from relying on a single source or using other distributors for a second
source of the product type. In these circumstances, when products face horizontal competition,
sales incentives in the form of sales contests, volume bonuses, and rebates to the distributor or
directly to sellers can maintain focus on the product.
Firms that use distributors for products must recognize that, regardless of the product
position in the PLC, the distributor and the distributor sellers are an extension of the sales team
of the firm. Sales and marketing meetings at the distributor level provide an opportunity to
develop and improve relationships with distributors while giving them the opportunity to feel
a part of the organization. These meetings and seminars operate for the distributors the same as
the national sales and marketing meetings operate for the firm’s sales team. New products are
introduced; and training in new products, merchandising programs, and support materials
takes place.
Public Relations
The intent of public relations (PR) and publicity is to develop a positive image of the company
or product line through nonsponsored (nonpaid) messages. Public relations covers all efforts to
obtain the attention and favorable coverage of the firm’s business by third-party media and
publics. Companies engage in publicity to transmit a message that is viewed, interpreted, and
retransmitted by news organizations, reporters, and media “luminaries”—news commentators
that have developed reputations and are recognized personalities or expert authorities. In the
world of new media, these luminaries increasingly include “bloggers”—media commentators
Public stakeholders are that post Web logs, or “blogs,” that offer a running commentary on topics of
those public entities that interest. Since the message of PR has been digested by the media and public
have a vested interest in
the financial performance
stakeholders and supposedly evaluated on its merits, the retransmitted
and/or social respon- message reported in the media gains credibility. Very often, the reach and
sibility demonstrated by attention-getting ability of the media extend far beyond the reach and impact
the firm. These publics or that a company can buy with advertising. Well-executed PR efforts, then, have
public stakeholders may the potential to obtain much higher levels of response than can equivalent
be large retirement
systems with significant
expenditures in advertising. Within this definition, PR is somewhat analogous
financial holdings in the to organized word of mouth!
stock of the firm, mutual At times, management will need to be persuaded that publicity or an
fund managers whose ongoing PR effort has value. The results of these efforts develop over long time
funds are invested, periods, making them difficult to quantify. In addition to the difficulties associ-
government agencies
charged with regulating
ated with measuring results, PR efforts are difficult to control because so much
portions of the firm’s of the message will be interpreted and reinterpreted by other parties who will
business practices, and have their own level of knowledge and perception and may have their own
public interest groups agenda regarding the message. These difficulties contribute to a lower regard
whose agenda can be for PR among some business-to-business marketers. This is unfortunate, as
advanced or damaged by
actions of the firm.
publicity and public relations can serve the organization well, particularly
during difficult times.
PUBLIC RELATIONS ACTIVITIES PR activities include press releases, special events, press
tours, public appearances by company executives and participation in media dialog as industry
observers and experts, participation in trade shows and conferences, and any number of other
Guerrilla marketing is activities intended to obtain public recognition or notice (see guerrilla
the use of attention- marketing). Note that we have included trade shows and conferences as, at
getting small events least in part, a PR activity. While this is not the traditional definition, the out-
intended to get the comes of trade shows and conferences contribute significantly to the corporate
company noticed, to build
small pockets of sales,
image or PR effort. These events thus serve as an example of the overlap of
and to obtain word-of- different elements of the promotion mix. The purposes of these activities are
mouth diffusion of a to generate awareness, credibility, and reassurance of legitimacy and quality,
message. It might involve as well as to convey differentiation on a few important dimensions. Note that
passing out free samples all of these intended outcomes contribute to the value image and/or branding
or promotional
merchandise in public
effort of the firm.
places or engaging in Messages to be conveyed through PR cannot be complex: media cover-
small bits of “street age and interpretation will tend to simplify the message transmitted from the
theater” to attract company. The exception to this is evaluative expositions coming from media
attention. The idea is to luminaries, who can go into great detail in examining a company and its
generate grass-roots level
excitement while
offerings. However, so much evaluation and interpretation go into media
spending a minimum luminaries’ reporting that a company cannot count on a complex message to
amount of money. Small be retransmitted in whole.
companies or start-ups
often rely on guerrilla EFFECTIVENESS IN PUBLIC RELATIONS Two major dimensions of effort
marketing.
underlie effective PR. The first is effective management of relationships with
the media. The second is creativity. In both areas, prudent management often looks outside of
the organization to professional PR agencies. A good PR agency is “worth its weight in gold”
for managing media relationships (i.e., it is worth the hefty retainer it will charge for its
efforts). This technique may be the only way you have of exercising any control of how the
PR gets repeated in the marketplace. The right agency has established relationships with
reporters, editors, and Internet luminaries who influence the media that the target market is
exposed to. The media editors who make decisions about the content of their reporting trust
the agency to give them newsworthy information and rely on the agency to filter out unsup-
ported “hype”. Good PR representatives have nurtured the relationship with editors,
reporters, and luminaries and know the customs and nuances of the market. They know how
often they can contact editors without wearing out their welcome and know how to diplomat-
ically introduce new ideas to the media. Good agencies have the contacts and the credibility
to schedule press tours that draw the best reporters, industry analysts, financial analysts, and
industry luminaries.
As previously noted, management can be reluctant to hire the services of a full-time PR
agency. Too often, companies that are new to publicity underestimate the value of a good agency,
believing that they do not need such relationships with the media or that a summer intern can
come close to replicating an agency’s efforts for a tenth of the cost. Many companies, large and
small, have learned that the need for an existing positive public image can occur without warn-
ing. Then it is too late. Very few companies can ignore the need for a good public image. Those
that do must have an unassailable market position.
WHEN THE IMAGE UNRAVELS What happens when the firm is faced with a serious PR
problem? While the management of crisis situations is a major focus of Chapter 16, an under-
standing now of the fundamental concepts of PR is appropriate. In the preceding discussion,
public relations was defined as having a long-term focus with little management or control over
the actual reporting of the news or event and a reliance on (or fear of) the trust and credibility of
the secondary sources—the reporting media personalities. Recognizing these conditions should
also foster the recognition that just handling a bad situation does not suffice; closing the barn
door after the animals are already out does nothing to address the main problem! An ongoing PR
effort that has built relationships with the media and established a positive corporate value image
can create a significant predisposition to forgiveness from the market.
Knowing these fundamental concepts, why do some firms do so poorly when faced with a
serious image problem? It has been our experience that, because of the long wait for a payoff
(that may never be quantifiable), management spends promotion dollars on elements of the pro-
motion mix that have immediate, measurable impact. This predicament is aggravated by the
short-term business measurements used to reward many managers. Though a positive public
image can contribute to, among other things, the recruitment of employees and location and
development of facilities, these outcomes are seldom quantifiable. The PR effort may never be
missed—until it is needed.
PROMOTIONAL METHODS IN BUSINESS-TO-BUSINESS MARKETING

The methods used most often in business-to-business marketing are effective because they are
designed for use when there are relatively few people in the audience and the audience is looking
for specialized information on several dimensions. Nonpersonal communications—advertising,
sales promotion, and public relations—can have a positive influence on the way the buying
center progresses through the buying decision process. Care must be exercised to ensure that
messages are appropriate. This means that messages must be appropriate for the type of indi-
vidual, appropriate for the role in the buying center, and appropriate for the stage in the buying
decision process. There are two principal challenges in accomplishing this—aside from the
creative challenge of creating compelling, effective messages. First, the marketer needs a thor-
ough understanding of the customer, that is, what the behaviors of people are in the buying cen-
ter, what their roles are in the decision process, and what motivates them. We have, of course,
stressed this understanding throughout the text. The second challenge is to keep all these mes-
sages consistent. The marketer may be able to target certain roles in the buying center by placing
communications in certain media, but this does not assure that people in one role are not reading
messages aimed at someone else in the buying center. This is particularly true for print advertis-
ing, sponsored articles, or contributed material in trade magazines and for Web site content.
People in many different roles read trade magazines: executives, managers, technical people, and
purchasing managers. Web sites, by their nature, attract all sorts of viewers.
In business-to-business marketing, different types of nonpersonal communication can be
designed to have a significant effect at several points in the buying decision process, as can be
seen in Exhibit 15-3. The types of promotion used must have an order—a map or sequence—
associated with their placement. A trade journal editor may be willing to mention a new offering
in an editorial about changes in a particular market or include the offering in the “new products”
section of the magazine but would not consider either action if the offering had already been
featured in a print advertisement. The news would not be new.
As Exhibit 15-3 shows, communications early in the buying process among the members
of the buying center can influence and motivate to recognize a problem and to seek a solution. In
earlier chapters, we have discussed how sellers and missionary salespeople can influence this
aspect of the buying decision process. A coordinated effort of nonpersonal methods can also
influence buying center members’ perceptions. For instance, a print ad in a trade journal may
catch the attention of a product designer, creating a level of awareness that assists the missionary
sales effort and starting the process of thinking about embedding new capabilities in his product.
In the next stage of the buying decision process, nonpersonal communication can provide
a great deal of information as members of the buying center collect information and compare
offerings and suppliers. During this information search phase, nonpersonal communication may
In the Process Flow Stages . . . Non-Personal Communication Can . . . Using . . .

Definition Stage Help identify problems; Advertising; web site; trade
Problem definition provide info for defining solutions; show participation; publicity
Solution definition help customers remember vendors
Product specification
Selection Stage
Solution provider search Provide info on vendor; provide Web site; direct mail
Acquire solution provider(s) info on products and partners
Deliver Solution Stage
Customize as needed Deliver service and training info Web site
Install/test/train
Endgame Stage
Operate solution Provide reinforcement; deliver service Web site; advertising;
Reach end result info; share performance data public relations
Evaluate outcomes for evaluation
Determine next set of needs
EXHIBIT 15-3 The Buying Decision Process and Potentially Effective Methods of Nonpersonal Communications
influence the direction that the decision process takes. For instance, information on a Web site
may be enough for a process engineer to make early comparisons among alternative system com-
ponents and to decide to keep the vendor’s product in his consideration set. The process engineer
may have decided to look at the Web site because he received a well-designed direct mail piece
or read a product review in a trade magazine.
During the next stage, in which selection of a vendor occurs, the participants may remem-
ber communications they have seen before; or an executive may remember an ad for one of the
companies on the short list of suppliers that he is about to approve for final proposals for a
project. In these instances, nonpersonal communication may not have access to decision makers
during the stage. However, a well-designed ad that the decision maker has seen before may have
created a high enough level of recognition in the decision maker’s memory that it has a positive
influence on the decision, small though the effect may be. Also during selection, a sales pro-
motion offering may induce the customer to try a product or service to see whether it holds value
or not. For instance, an office supply dealer may send an e-mail coupon to an administrative
assistant that provides a 15 percent discount for trying the dealer for next month’s order, plus a
“special gift” for the administrative assistant. This may be enough to induce the administrative
assistant to make the decision to try the dealer (without feeling guilty about receiving the special
gift, because the company has received a discount in the deal, too).
As Exhibit 15-3 shows, after a sale has been made, the supplier’s communications could
reinforce the idea that the customer made a good choice. Promotion that features a customer’s
new use of the firm’s offering not only reinforces the customer’s selection but also encourages
other similar users in the market (often competitors of the first customer) to examine the value
provided by the offering. This can lead to translation opportunities for the firm and good
exposure for the customer’s products—assuming the customer is amenable to having its products
featured in the promotion. And, of course, nonpersonal information may be provided that helps
the customer to use the product.
Convergence of the Promotion Mix

In the following discussion, the methods and devices of business-to-business promotion are
discussed. Each of these methods or devices follows the basic tenets of the four elements of the
promotion mix—personal sales, advertising, sales promotion, and publicity. However, it can be
difficult to specify these efforts as fitting into only one of the promotion mix variables as they are
a mix, or combination, of many different parts of the promotion mix. Therefore, the discussion of
these methods focuses not necessarily only on the process by which promotion mix variables are
used, but on the desired outcomes of the promotional effort. After we discuss several of these
important promotional tools, we return to the Sensacon5 example, used in Chapters 8, 11, and 13,
to aid in understanding them.
Print Promotion
One of the key methods of communicating with customers in business-to-business markets is
through printed promotion. In most industries, there are several trade publications that reach
members of a buying center. When stakeholders in various positions find an ad for a product or
service they like, they often save the magazine issue, download a file from the magazine Web
site, or clip the ad. This provides extended memory beyond what can be kept in their heads.
There are other kinds of publications that run print advertising, principally business
magazines and industry directories. Advertising run in these vehicles has slightly different
purposes than ads run in trade journals, such as a longer time focus, and, hence, the execution
will be different.
ADVERTISING IN TRADE JOURNALS Most industry segments have several journals, maga-
zines, or newsletters reporting developments, events, conditions, and trends in the industry.
Audiences for the major publications cover large proportions of the membership of the major
buying centers for companies within the industry. One of the difficulties with trade publications
is that the audiences are diverse; executives, as well as design engineers and administrative staff,
are likely to read many of the same publications. It is therefore difficult to create ads that appeal
to all or many roles in the buying center.
In creating print ads, the marketer and his advertising agency should target specific
members of buying centers and the stage of the buying process that most will be in at the time.
The message should convey key benefits important to the buying center member at this stage in
the process and should be delivered in language most compelling to those benefits. This means
that product advertising does not always convey product attributes. This can be very difficult for
technology-oriented product managers to accept. For instance, a small manufacturer of emission
control equipment in the semiconductor industry was targeting process engineers with print ads
that conveyed a great deal of information on product features, technology, and specifications—
read: boring. They changed the ad design to focus on cost savings (a key benefit sought by
process engineers when looking for system upgrades) and ran it with the headline “Be a Cost-
Saving Hero”—read: attention getting. The company quadrupled its information inquiries from
the engineers! Again, customers do not buy technology; they buy solutions, so doesn’t it make
sense to promote solution-creating capabilities?
In business-to-business marketing, careful consideration should be given to the amount of
technical data that is included in the promotion. In making this decision, the marketing manager
should be aware of the attitude and behavior of the individuals in the target audience. Complex
data can be left to separate documents available on request; often made available as downloads
from the marketer’s Web site.
In general, advertising in trade journals requires some effort to break through the noise, but
this noise level is usually only moderate. At times, though, the noise level can rise precipitously.
During the Internet boom of 1999–2000, for instance, trade magazines such as Business 2.0 and
The Industry Standard greatly expanded the number of pages printed, mostly with more ads.
This made it difficult for individual companies to get noticed in amongst all this noise.6
DIRECTORY ADVERTISING When members of the buying center are looking to build a list of
suppliers to approach for an RFP, RFQ, or RFB, they often turn to an industry directory. A well-
placed ad in the appropriate directory for the marketer’s industry can generate significant new
leads. A clear statement of the principal products offered and the key points of differentiation
attract more attention than a simple listing in the directory. A problem with directories is that
they are usually compiled less frequently than product introductions, so the directory ad needs to
be fairly generic, yet convey points of differentiation. Often this amounts to stating the com-
pany’s general positioning, as well as pointing out the company’s key product lines. Additional
information is made available through a referral to the company’s Web site.
CONSUMER MEDIA Sometimes, important members of the buying center are not reachable
through trade media or other traditional business-to-business media. In other instances, the
marketer wants to reach a broad audience and convey a message in a way that evokes an
Billboards in Business-to-Business Promotion
It may not sound like a good idea at first, but bill- Located on major commuter routes, the bill-
boards—outdoor advertising—can play a role in boards will be seen by all passers, but as long as
business-to-business promotion. When a principal that executive who is the target of the ad sees it, it
stakeholder in the buying center is not reachable has done its job.
through other means and a thought-provoking This is one time when a slow, congested
message can be developed without complexity, bill- commute is a good thing!
boards may be a good choice.
emotional response. In such circumstances, advertising in consumer media may be appropriate.

Broadcast advertising—radio and television—may be the most effective way to reach a general
business audience. Consumer media may also be appropriate when targeting small businesses
that do not have a strong tie to an industry or to a profession, or, as described in the box,
“Billboards in Business-to-Business Promotion,” when a message that will be widely viewed
will, in fact, have a narrow target audience.
A problem with consumer media that business-to-business marketers may not be used to
encountering is the high noise level. Consumers have erected high barriers to attention and it is
easy for advertisements to get lost in the clutter. The ad agency must work at producing ads that
get attention. At that point it is crucial to not get carried away in the creative effort and under-
mine the message or to convey unintended messages that undermine the company’s positioning.
SENSACON APPLICATIONS OF PRINT ADVERTISING To briefly review, recall that Sensacon is

a company at the chasm of the technology adoption life cycle. It just completed a major deve-
lopment of its pressure sensor technology for application as tire pressure sensors on SUVs. The
size of this new business forced the remaking of the company. Sensacon has the opportunity to
become the industry standard for tire pressure sensors but must first position its product and
company as the market owner. The task is to communicate Sensacon technology and leadership
beyond the SUVs and the two manufacturers that have specified its product.
Now, consider the communication needs of Sensacon. What advertising should Sensacon
engage in? Recall that Sensacon is a new supplier to the vehicle industry—many participants
may not be aware of Sensacon capabilities or presence. The first task then would be an awareness
campaign in major trade journals. However, a review of exactly what Sensacon wants to accom-
plish and where it is now is critical.
Having a print ad is, in itself, of little use if it does not convey a well thought out, consis-
tent message. Recall that management at Sensacon has named its new product SensorSUV.
While this brand name differentiates the product from other Sensacon products, it does little to
identify the product with potential customers. What does the product do, sense the presence of
SUVs? No, the device monitors tire pressure. This is not a feature that the industry is likely to
limit to SUVs. By knowing the nature of the vehicle industry, Sensacon realizes that this feature
is likely to spread to other types of vehicles: sports cars, family sedans, and anywhere remote tire
pressure sensing may be a desirable attribute or feature. The name needs to be changed to some-
thing more indicative of what customers will identify with.
Sensacon retains an advertising agency and, among other tasks, the agency works to
rename the offering. SensorSUV becomes InflationGuard. Print ads to broaden awareness
among vehicle designers and engineers (a sizable group, who tend to pay attention to trade
magazine advertising) are developed that focus on the ease of use, low cost, and safety ad-
vantages of InflationGuard. The ads feature scenes of vehicles that use Sensacon tire pres-
sure sensors (with the concurrence of the vehicle manufacturer), perhaps SUVs in rugged
terrain or loaded for a family camping trip, with a caption that reads “Vacations are to get
away from worries about pressure.” Perhaps an inset picture of the sensor in a tire is part of
the ad.
Which journals should the ad be placed in? What exposure does Sensacon want? Since
Sensacon and its customers must prepare the tire service industry for these devices, print ads
in service industry journals, in addition to vehicle and tire manufacturer journals, are appro-
priate. The tire service industry may also be an appropriate audience for direct mail (discussed
subsequently), though with a different message. Service, repair, and replacement procedures
and advice are distributed by Sensacon to all tire dealers on industry mailing lists, advising
them of procedures and reassuring them that Sensacon will be available to assist in their
service efforts.
Corporate Advertising
There is value for the firm to achieve an image distinct from competition. Corporate advertising
is a promotional effort undertaken to enhance the value image or positioning of the firm itself.
Corporate advertising is not specifically related to any product of the firm. In this view, corporate
advertising is not unlike the institutional advertising done by many supermarkets in consumer
markets. By advertising the store, the firm adds brand recognition to all of its house and private
brands without the expense of specific promotions that would challenge nationally known
brands.
The use of corporate advertising can provide outcomes that would be difficult for specific
product-related promotion.7
• A company’s reputation impacts the chance of getting a first hearing at a new account,
and can help overcome problems at an existing account; a degree of forgiveness can
exist.
• Community concessions and subsidies, particularly when a firm seeks to expand or create
new facilities, can be enhanced.
• All things being equal (such as “average” sellers from all competitors), the larger, well-
known company will get the business over the lesser-known smaller competitor. Thus, a
smaller company should spend what might be limited promotion dollars to select and train
good sales representatives, to overcome the larger competitor’s average seller, rather than
spend money on advertising.
Company reputations help selling and marketing efforts most when the offering is complex
or the risk to the customer is high. When either of these circumstances exists, customers seek
suppliers who are willing to address needs in a collaborative manner. The customer seeks a part-
ner to share risk and to be able to help with recovery if something should go wrong. Similarly, a
customer favors the well-positioned supplier when it is less familiar with the technology or
market or the task at hand is not well defined. All of these reasons were important for Accenture.
When the name of the firm was changed, Accenture’s management wanted to leverage the strong
reputation they had as Andersen Consulting. To do this, they relied in part on corporate adver-
tising to get the attention of buying center members and attach their beliefs to the new name.
After being recognized and accepted in the market, Accenture moved to develop its own image
separate from Anderson Consulting—a move that was to be fortuitous.
Direct Mail
Direct mail advertising has several attractive features for the marketer. First, in many circum-
stances, it can be closely targeted to some important audience characteristics. Second, its effec-
tiveness can be fairly easily measured by determining the proportion of targeted individuals who
respond. Third, it is relatively inexpensive.
Direct mail also has its disadvantages. The most important of these is that a large portion of the
target audience can easily ignore it. At its worst, direct mail is annoyance that undermines customer
perceptions of the positioning of the offering. In general, though, direct mail is expected, and, while
not exactly cherished by customers, it can be a good source of information when it is well done.
Sales and Support Literature

As has been mentioned before, much of the communication effort in business-to-business
marketing centers on face-to-face personal selling and customer service. These efforts can be
greatly aided with well-executed printed materials. Often called collateral materials, these
materials are useful early in the customer’s buying decision process, when buying center mem-
bers are collecting and comparing information about several suppliers; they are useful during the
customer’s review of supplier’s proposals, since they help clarify and remind the buying center
members of vendor’s key differentiators; and they are useful at the end of the process when the
buyers are considering their next purchases.
Good sales support literature serves two general purposes: it tells the customer about ben-
efits they will receive, and it gives them enough information that they can determine how the
product or service will work. This helps the buying center members think about how the offering
can be integrated into their own operation. There are several types of printed
materials that are lumped into this category. Each type has a particular function Leave-behind materials
and capability suited to specific circumstances. are items that sellers can
give to customers
following an in-person
CATALOGS, PRODUCT BROCHURES, AND DATA SHEETS The use of catalogs, sales call. Leave-behind
brochures, and data sheets implies that the product or product line is relatively materials do not
stable. Offerings that are evolving, either through R&D by the supplier or in necessarily have to stand
conjunction with customers, are not likely to be featured in catalogs. As sales alone—the seller explains
the literature and the
support material, catalogs, brochures, and data sheets provide excellent leave-
value points to the
behind materials for sellers but are most effective in transactional sales in which customer.
the seller role is that of an order taker or persuader/sustainer.
Another very similar type
of promotional material is
CAPABILITIES BROCHURES When the seller’s role is that of a problem solver
called the seller stand-in.
or relationship/value creator, standard products are less likely to be the focus of Seller stand-in materials
the sales effort. Catalogs and product brochures are less likely to be as valuable. are often used in direct
This is similar to the situation faced by service companies. Collateral materials mail campaigns. This type
for service organizations focus on the capabilities of the firm and may include of material must be self-
supporting—the seller
testimonials from satisfied customers. The relationship between customer and
will not be able to
supplier in a collaborative development effort is not very different. The cus- emphasize or explain its
tomer is not necessarily interested in a specific product form as he is in the relevance to the
capabilities of the supplier as a collaborator. customer’s needs.
TECHNICAL BULLETINS, TEST REPORTS, AND APPLICATION HISTORIES Technical

bulletins, test reports, and application histories are excellent design guides and problem solvers
for customers. Customers in collaborative relationships with suppliers are interested in informa-
tion that will make their effort easier, timelier, and more productive. Technical information that
assists the customer with integration of the product or design features into his product, best prac-
tices data, and application histories—case studies of other successful applications of the product
or technology—can be very useful. For example, a paint manufacturer may have a specific treat-
ment process to get certain paint grades to stick to otherwise unpaintable surfaces. The best
practices information, the technical data relating to the chemistry and surface preparation, could
be in a technical bulletin. Application histories show unique and notable applications of the
technology. Printed advertisements used in trade journals, as previously described, that have
been replaced by newer examples often become part of application histories. Web page design-
ers should incorporate easy access to these materials, either to the general public or with opt-in
methods. Opt-in features of online newsletters and customer information systems are discussed
later in this chapter.
The technical bulletin and the application history, though used in the same manner, usually
are positioned differently. Traditionally, the technical bulletin is hardly ever a four-color glossy
advertisement reprint, while the application history starts out as exactly that. With the advent of
the Internet, technical bulletins and application histories are not only easily updated but are more
readily available to customers.
SENSACON APPLICATIONS OF SALES AND SUPPORT LITERATURE InflationGuard is a new

product with great potential but with only two customers—the SUV manufacturers who have
awarded Sensacon the business. Marketing managers at Sensacon want to capitalize on this
development effort in what they believe to be an expanding market. The Sensacon field team has
the task of translating this new business success to other customers. (New business, translation,
and core churn are discussed in Chapter 11 and again in Chapter 12.) The headquarters market
segment specialists (see Exhibit 12-2 for a perspective of where the headquarters market segment
specialist fits into the organization) are responsible for developing the translation tools that will
assist the field team.
Appropriate translation tools targeted at vehicle manufacturers include a capabilities
brochure introducing Sensacon; a technical bulletin focused on the ease of adaptability of
InflationGuard to other tires and vehicles beyond SUVs; and an application history featuring the
current SUV success story, partially culled from the print advertisement discussed earlier. As
Sensacon adapts InflationGuard to more vehicles and tires, the updated data can be made avail-
able through the Internet.
Translation tools for the aftermarket—tire service and repair facilities and SUV dealers—
require a different approach because these channels get information from different sources.
Sensacon plans to develop an aftermarket version of InflationGuard. Individual customers will
be able to have the product installed on their vehicles by a certified dealer. This is, however,
several months away. In the meantime, Sensacon will seek one or more tire manufacturers as
partners, training the field personnel to handle Sensacon inquiries.
Channel Promotions
When Sensacon does decide to enter the aftermarket, there may be several options. Collaboration
with a company that already has established aftermarket channels—a tire manufacturer or
automotive accessory company—may be the correct choice. Whichever channel design

Sensacon pursues, an appropriate promotion plan will be necessary. Sensacon will need to
consider various sales promotion techniques focused on middlemen, as discussed earlier in
this chapter.
Promotional Merchandise
Premiums, as they are called, are merchandise items given away to customers, prospects, chan-
nel members, media representatives, and other stakeholders or interested parties. Premiums are a
form of sales promotion, usually intended to augment other promotions. Sales promotions serve,
in consumer marketing, as short-term inducements to purchase, while, in business-to-business
marketing, they are intended to get action other than a sale. Most business-to-business trans-
actions are too complex and valuable for a sales promotion incentive to provide much induce-
ment. Rather, sales promotions are used to provide incentive for small, intermediate actions in
the buying decision process, such as an incentive to visit a trade show booth, an incentive to fill
out a questionnaire, an incentive to visit a Web site, or an incentive to remember a brand name
when it is time to put together a list of suppliers to invite to make a proposal.
Premium merchandise, something of limited but noticeable value, is provided, and some
reciprocal action is expected or hoped for. Premium merchandise is given away at trade shows
with the most interesting and unique items encouraging a lot of visits to booths. Sellers give out
premium merchandise on customer calls as they make excellent leave-behind items. The incen-
tive is for remembering the company and the seller and for establishing positive feelings about
either or both. Often, a small premium is sent with a direct mail piece, providing incentive for the
recipient to call for more information or to set up an appointment with a seller.
Premium merchandise that is unique should be chosen in order to get attention and memory.
However, the nature of the premium should, if possible, be related to the product or service offered
and should provide value to the customers in their role in the buying center. This is often difficult to
do and might require very different kinds of merchandise for, say, engineers and managers. More
often, the marketer finds it necessary to simply find merchandise that is unique and valuable and
has a clever use of the brand logo emblazoned on the merchandise.
PUBLIC RELATIONS, TRADE SHOWS, CONFERENCES,

AND CORPORATE POSITIONING
Trade shows and conferences, usually considered short-term sales promotions, are great oppor-
tunities to initiate and reinforce the positioning of a firm relative to other industry participants.
In this section, we examine how these promotional methods are used in an overall integrated
marketing communications plan (IMC). First, let us review the basics of trade shows and
participation in them.
Trade Shows and Conferences

Trade shows are considered by some to be a great excuse to travel to a major city at the company’s
expense. They are much more than that. Anyone who thinks that is all that trade shows are has
never worked in a show booth or tried to absorb all that is going on at the show. Attendance at
industry trade shows is expected of any serious player in the market segment. Also, all but the
smallest companies are expected to exhibit. This is important. Without visibility at the industry
show, it is far more difficult to build awareness among potential customers.
At times, it may be difficult to decide which trade shows to attend. In some industries, par-
ticularly if the industry is doing well financially, several shows spring up, each claiming to be
“the” show to attend. Many large shows divide into regional shows, lowering travel expenses,
making it possible for more people to attend. This, of course, means more shows for exhibitors
who then experience increased costs. The process of selecting shows to attend and/or participate
in includes but is not limited to an analysis of the following:
• What shows are considered important by customers in their markets.
• What shows are considered notable by industry and financial analysts who track the
industry or firm of the marketer.
• What shows are likely to have the best audience for announcements, conference presenta-
tions, and technical sessions.
• What shows are likely to be attended by customer or industry luminaries who are part of
the target audience of the firm.
If a marketer’s customers have trade shows, the marketer should also attend. The opportu-
nity to see what the marketer’s customers consider to be important, not only to their customers
but also among their competitors, should not be passed up. If the marketer’s customers in differ-
ent segments have shows, he should attend and, maybe, exhibit. This sounds like a lot of trade
shows. However, with all of the marketer’s potential customers in one place, why wouldn’t he
attend and, possibly, exhibit?
WHO SHOULD ATTEND The trade show is not a party for marketing and sales staff but is an
opportunity to educate members of the firm about the business, particularly the new employees.
Everyone that the organization can afford to send should attend the show. This includes support staff,
technical staff, production staff, marketing and sales, and senior executives. Firms that operate under
the marketing or societal marketing concept recognize the importance of all team members contex-
tually understanding the markets in which the firm competes. Of course, attendance at the show
helps cement relationships among the staff and with customers and distributors as well.
Individuals should have a plan of attendance that includes learning as much as possible
about what impacts their role in the organization. Technical conferences or seminars usually
occur simultaneously with trade shows. Advanced programs are available such that attendance at
appropriate events can be scheduled. Traditional with many trade shows, particularly in the high-
technology or consumer products arena, are press conferences about new product introductions
or new business alliances. While the information presented at these events is not likely to be star-
tling or reveal any proprietary information, the spin placed on the presentation can be telling.
HAVING AN EXHIBIT Why would anyone actually want to spend hours at a show booth at a
trade show? As stated in the last paragraph, there will not be any new information that a well-
informed marketer does not already know. However, in the industry trade show, current and
potential customers visit the show to learn about suppliers and their offerings. If the trade show
in question is the marketer’s customers’ industry trade show, the marketer’s presence is noted as
support and commitment to the segment. Besides, not all of the marketer’s horizontal com-
petitors recognize the importance of attending shows other than those in their own industry. The
marketer’s effort may be rewarded by having his customer base all to himself, avoiding com-
parisons with his competition!
Having exhibits at the customers’ trade shows provides an opportunity to identify and start
relationships with customers that may be new to the market, as well as to reinforce relationships
with existing customers. If the marketer’s company is entering a new market, an exhibit at that
market’s show is a good way to begin the market development efforts.
If the marketer’s firm is about to announce a new product for a particular market segment
or collaboration with a major customer that will result in a new offering, it makes more sense to
do this at the customer’s show. Consider that all of the potential customers will be there with an
interest in what the marketer’s company has to offer and what value it can contribute. This may
make more sense than using the marketer’s industry’s trade show when all of his horizontal com-
petitors will be present looking for potential weaknesses to exploit.
STAGING THE EXHIBIT Technically competent people who can explain offerings without
relying on jargon should be at the booth. The booth staff should be well coached so that they are
aware of the goals of the exhibit and aware of what not to do—or reveal! Sales and marketing
staff are naturally gregarious and enjoy engaging people in conversation, while technical staff
may not be fully aware of the strategic importance of certain information. It is sometimes star-
tling how much proprietary information can be obtained in a conversation with a poorly trained
or poorly briefed person at a trade show.
In a well-attended, lively trade show, marketers find it difficult to obtain customers’ attention
and memory. This is a good place to consider well-done publicity events as part of the booth activ-
ities. Trade shows are a place where a good deal of silliness and drama can be staged to obtain
attention. Marketers need to be mindful of the company’s image and the positioning of its products.
Too much silliness or the wrong kind can convey the wrong message if a marketer is not careful.
Whenever possible, products or applications of the company’s technology or capabilities
should be available to touch and feel in the booth. Just as with print advertisements in trade
journals, featuring customer applications (with their concurrence) can be very effective. If the
marketer’s firm is the market owner in a segment, the product trade name should be prominently
displayed and reinforced in conversation. However, if the marketer’s company is not the market
owner, use of the generic name for the offering may be more appropriate even if the firm has its
own brand name. If there is little chance of establishing the marketer’s brand, there is no reason
to help with the reinforcement of the competitor’s brand name.
WHEN THE SHOW IS OVER, CAPITALIZE ON THE EFFORT When the show is
over, everyone goes home, proud of a job well done; but, the effort is really only Fulfillment firms
starting. The show will have generated many inquiries about the company’s specialize in timely
products and capabilities. These leads should be made available as soon as response to customer
inquiries. Requests for
possible to field teams for appropriate follow-up. Unless contacts specify other- product literature and any
wise, “as soon as possible” should be measured in days, not weeks or months. other follow-up that can
As with any promotional effort that creates customer expectations, failure to be handled through the
respond to inquiries in a timely manner is more damaging than not accepting the use of printed materials or
inquiry itself. If the marketer’s firm is unable to respond quickly due to antici- premiums are requests
that can be appropriately
pated inquiry volume of other planned events (i.e., the company’s national sales contracted to fulfillment
meeting, etc.), individuals who have made inquiries should be advised of the firms. Should a recall or
delay. Those who cannot wait should get immediate attention. product advisory become
To improve response time, many firms hire fulfillment firms. These necessary, fulfillment firms
organizations specialize in responding to inquiries. A direct mail or Internet can be called on to handle
the increased number of
response immediately after the show, handled by the fulfillment organization inquiries placed to
“buys some time,” as well as serving as a reminder to keep the firm and its company phones, e-mail,
offering uppermost in the customer’s mind until the field team can respond. and Web sites.
Shortly after the show is over, an evaluation of the costs per lead generated should be
made. This evaluation should be performed again six months later, or at least before the next
show. With the day-to-day pressures in many business environments, the six-month review of
cost per legitimate lead may never happen. This is unfortunate, as this evaluation can provide
guidance as to what to do, or what not to do, with the next show. If there were many leads, but
very few proved legitimate, then an in-booth screening method may be appropriate. If the
company is giving away a popular premium, the marketer may want to qualify recipients—but
without denying the premium to someone who may not appear qualified.
Public Relations and Positioning

Press conferences and technical conferences coincident with trade shows are an excellent tool to
build the positioning of the firm and the offering. Many of the promotional methods described
here may seem focused at large, financially capable firms well positioned to take advantage of
the trade show environment. While that is not strictly the case, what alternatives are there for the
small firm that is not yet established in the market or does not have the financial ability or the
existing positioning to attract interest at a trade show? The careful use of publicity can help to
overcome these limitations. First, management in the small firm must recognize that the firm
cannot directly take on large competitors and develop appropriate strategy. A market niche must
be developed in which the capabilities of the firm can be demonstrated. This can be particularly
challenging for a small, high-technology company.
High-technology companies do not become high-technology companies by accident. Most
start-up organizations believe they have a unique product. The challenge is to remake the
positioning of the firm from one of offering a unique technology product to one that is known for
applying technology to customer needs. Publicity and a good PR consultant are the tools to
accomplish this. Consider the assets of the high-tech company. What are they? The founders of
the organization have—or at least believe they have and are able to convince investors that they
have—a distinctive competence in their field. Usually, this competence is put to work developing
the technology of the product. While this is necessary, it is not usually sufficient to position the
firm as a leader in the market. Let us again consider the Sensacon example.
SENSACON APPLICATIONS OF PUBLIC RELATIONS, TRADE SHOWS, AND POSITIONING

Prior to winning the InflationGuard business, Sensacon engineers and developers spent years
developing the application in collaboration with customers. In the selection stage of the buying
decision process (see Exhibit 15-3), manufacturers of SUVs had to find sources with the cap-
abilities to solve the tire pressure monitor problem. These capabilities had to be not only in
technology, but also in the ability to support the SUV unit volume requirements and to work with
the culture of a mass production-oriented customer—not something for which high-technology
companies are known. SUV manufacturers had to believe that Sensacon was capable of meeting
the standard. Among other factors, Sensacon management used publicity and corporate posi-
tioning to establish its positioning in the market.
Shortly after becoming established, it became apparent to Sensacon management that the
company competency was in the application of very precise micromachining technology to
large-volume applications. However, large customers were not likely to trust this capability
without some tangible evidence. To support the business needs of the firm, management focused
on two low-volume but technically complex target markets—SCUBA equipment and medical
devices. In both markets, Sensacon could prove the technology without investing in high-volume
manufacturing. With the assistance of a PR consultant, Sensacon developed a strategy to position

the company as the technology leader in the market.
First, the founders of the company and a select set of technical employees were supported
in active membership in all related professional societies. This support included both financial
incentives and time commitments; the active membership became part of the job description for
these individuals. Soon, Sensacon representatives were chairing technical committees and con-
ferences. This was only the start. Technical papers were written for presentation at conferences
focusing on Sensacon technology and its potential in the marketplace. Hypothetical examples
of high-volume applications of the technology were demonstrated at associated trade shows.
(A delicate balance was necessary between revealing proprietary information and presenting
technically enlightening information.) Through the relationships of the PR consultant,
Sensacon was able to get mentioned as an up-and-coming organization by editors of trade jour-
nals and magazines. Technical papers authored by Sensacon employees were accepted for
publication in peer-reviewed professional journals. As momentum developed, Sensacon experts
were asked to contribute signed articles about pressure sensor developments to trade journals
in that market segment. In reprint form, the signed articles were used as leave-behind sales sup-
port items. After approximately two years, Sensacon was the technology icon in the pressure
sensor industry.
TECHNICAL PAPERS A comment about the use of technical papers for publicity and corporate
positioning is appropriate. Creating technical papers implies writing ability, speaking ability (if
the paper is to be presented at a conference), and technical capability. Without all three capabili-
ties, the effort is not likely to create the intended results. Strategically, selection of authors to
represent the firm in these endeavors must consider the capabilities of the individuals. The firm
must provide adequate support or coaching of individuals, and the individuals must be willing to
be coached. As we maintain from Chapter 1, in a market-driven firm, everyone is part of the
marketing effort. Here are some simple guidelines for successful use of technical writing and
presentations under the circumstances described here:
• As author or coauthor, the exposure within the company and the industry is a good career-
enhancing opportunity. Give it the best effort possible.
• Recognize that conference presentations are not only about the technology. Keeping the
audience awake and interested is also important. Also, be aware that the paper may be used
as a leave-behind brochure or a signed article in a trade journal—more good career
exposure, if it is done right.
• Avoid product claims that cannot be verified or accomplished within the parameters of the
claim. Again, never create an expectation that cannot be delivered.
• Make the technical papers accessible on your Web site. For less technical audiences, create
summary papers that get across the key features and differentiating benefits.
• Do not present the paper if any of the following circumstances exist:
1. The product is still not ready for market.

2. You do not want to stimulate the competition.
3. The product is in joint development with a customer who considers the effort proprietary.
4. The strategy is to target a small number of selected accounts.
5. You cannot handle the volume of inquiries that may be generated.
6. You are not a good speaker.
INTERNET AND WEB COMMUNICATIONS

IN BUSINESS-TO-BUSINESS MARKETING
In Chapter 14, we discussed the transactional use of the Web in business-to-business marketing—
how the Internet is being used to facilitate product sales and channel functions. Business
marketers also make use of the Web for communicating with customers and channel members:
this is the other major use of the Web. Even though many Web-only businesses failed or were
acquired during 2000 and 2001, the Internet and Web still have appeal for these two uses.
Many companies—both new Internet-oriented companies and established “brick-and-mortar”
companies—make extensive use of the Internet and Web for these two purposes. Usage and
importance of these methods are increasing, as evidenced in a survey by MarketingProfs and
Forrester Research in 2007.8 Respondents to the survey indicated that e-mail marketing would be
the most commonly used communications method in 2008 (84 percent of respondents would use9)
and over half would use such methods as search marketing and Webinars.10
At this point, we need to make a distinction between Web communications and Internet
communications. Web communications are communications messages and methods used
through Web sites. Internet communications include not only Web communications, but
also include e-mail and some other less-used Internet tools. Consequently, unless we are
being more specific, we use the term Internet communications to include Web and e-mail
communications.
For communicating with business customers, the biggest advantage the Internet offers is low-
cost interactivity. Unlike other nonpersonal communications methods, Web sites and e-mail
messages can quickly convey messages back and forth between sender and receiver. While not
always as rich a communication medium as personal selling, Web sites and e-mail messages can
address large portions of the customer’s buying decision process for a lot less cost. In many
instances, the buying decision process requires interaction with a seller, but Internet communi-
cations can effectively address other portions of the process at far lower cost than would have been
incurred without the site. After the dotcom bust of 2000 and 2001, the businesses and technologies
that survived have grown much more sophisticated. Web sites and complex online business
processes can be constructed and launched for about one-tenth of the cost of less capable processes
that were proffered pre-2001. Today’s business-to-business communications over the Web are more
interactive, more esthetically pleasing, and much more closely attuned to customers’ buying
decision processes than before.
Internet communications must be approached the same way as any kind of marketing com-
munications (contrary to some common wisdom, the Internet has not changed the basic rules).
The marketer needs to understand buyers, the buying center, and how decisions
A server log is a are made. The role of Internet communications can then be determined in assist-
computer file that ing buyers in moving through the decision process. Internet methods must then
records every action
be coordinated with other communications methods. Messages, most of all,
taken by every visitor to
a Web site. Analysis of must be coordinated so that target audiences receive the messages that inform
a log file can tell the and prompt the appropriate action. Marketers should also track the relative
marketer what parts of effectiveness of the multiple Internet communications methods used so that the
the site get the most marketer can tell what methods are working and what ones are not. The Web,
traffic, how long visitors
through the use of software for analysis of server logs, affords the ability to run
stay on a page, and what
patterns are evident in experiments with alternative messages and presentations. After only a short
visitors’ interaction with period of time, the alternative that is most effective can be determined and fully
the site. deployed.
Web Site
Almost all business-to-business marketers use a Web site in their marketing efforts and indeed
most now have fairly complex sites. For many, it has become their core communication method.
It has become standard practice in information search for customers to view material on suppli-
ers’ Web sites. Companies learned very early that the Web was an efficient way to display and
distribute brochures and product data sheets without incurring printing and mailing costs. Web
sites today have far greater communicative abilities than this, though. A good Web site can
address most all the purposes and objectives we have discussed for nonpersonal communications
in a business-to-business setting. By providing concise information about customer problems
and solutions that are provided by the supplier, a Web site can help members of the customer
buying center do the following:
• 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; and
• easily and quickly obtain such things as training materials, user manuals, and trouble-
shooting guides for use during the installation, testing, and use of the supplier’s product
or service.
Many marketers have added product configurators to their sites over the past few years.
A configurator is an interactive program that lets the prospective customer choose from among
product attribute alternatives to configure a product that the customer believes will best meet his
needs. The configurator then provides supporting information, such as system requirements and
quotes a price. For products that are relatively inexpensive, such as a laptop computer or a data
router, the Web site often has a feature that lets the customer place an order for the product the
customer just configured.
Marketers find it most difficult to provide value for different market segments. The
promise of Web site design is to provide a uniquely defined user experience. Even though a great
deal of progress has been made in this regard, this is still difficult to do. Two ways to distinguish
market segments are by the viewer’s industry or by the type of product that interests the viewer.
Many Web sites do these quite well already. Most companies do less well in trying to segment by
type of buying center member or by the stage of the buying decision process in which they find
themselves. Companies have often done well to distinguish types of customers by existing versus
prospective customers, allowing access to a secured extranet that has more detailed information
pertaining to their particular account. Prospective customers may be divided into segments by
level of interest: site visitors with a higher level of interest sign up for a free “membership”
which gives them access to a portion of the site that is for “members only.” Another way of
segmenting by level of interest is to have visitors that are more interested sign up for free e-mail
newsletters or even free “Webinars”—Web seminars. These methods of addressing segments still
do not distinguish by type of role in the buying center or situation in the decision process. A Web
site that is truly customer centric in its design would allow a visitor to enter a portion of the site
based on his role or situation. For a hypothetical description of how this might work, see the
sidebar entitled “A Website Tailored for Buying Center Roles.”
In addition to targeting, other considerations must be kept in mind when designing Web
communications. The Web site should be attractive without requiring annoyingly long download
times. Many business-to-business Web sites are built with eye-popping graphics and animation,
but the value of this is questionable for most companies. With broadband connections, these gen-
erally load quickly enough, but are still distracting for someone who wants usable information
quickly. Interactivity should be designed at appropriate levels. Too often, Web sites are designed
around the supplier’s organization and offerings rather than around the customers’ needs and
buying behavior.
Attracting Visitors to a Web Site

A Web site will have little impact if existing and prospective customers do not visit it.
Consequently, a sizable effort must be made to bring the right kind of visitors to the Web site.
These efforts usually require the marketer to combine and coordinate marketing communications
efforts that include both online and off-line methods.
This is one area that has undergone considerable change over the last several years.
The marketer has several communications techniques that can be used to contact and attract
visitors to the Web site. With Google and Yahoo! dominating the search processes of prospective cus-
tomers, “search engine optimization” has become a necessity for any marketer who relies on the Web
to draw new prospects. Search engine optimization (SEO) involves designing the site so that search
engines find the Web site and associate it with key words and phrases. So when someone searches for
these key words or phases, the marketer’s website is listed very high on the search results list.
SEO requires the home page and other high traffic pages in the site to present concise
content that reflects benefits, products, or services sought by the prospective customer. It is
A Website Tailored for Buying Center Roles
For instance, suppose a vice president of the systems and to get customer references. The
customer service is exploring options for CRM “Partners” section lists various software, hardware,
systems. The vice president or his delegated integration, and consulting partners; but in most
manager looking for options has a different circumstances, he has to read between the lines in
agenda in looking for information on CRM this section and the “Customer Cases” section to
system providers than does the IT project manager really understand which partners provide what
who is involved in choosing and implementing pieces of the system that can best fit his situation.
a system. The VP wants to know about impro- The IT manager probably finds a fair amount of
vement in customer care; the IT manager will technical information under the “Products” section
want to know about compatibility with existing of the project, but also needs to examine the
systems and IT overhead costs. Both are con- “Partners” and “Customer Cases” sections to
cerned about ease of use and price—classic buy- obtain a sense of what an implementation project
ing center interests as a result of each member’s will involve in his case.
professional focus. If the site asks whether the visitor is a service
In searching for information, the vice presi- executive, service manager, IT project manager, IT
dent has to wander through several sections of executive, or someone filling some other role in the
each supplier’s Web site. He has to look in the buying center, then prepackaged groups of Web
“Company” section of a Web site for information pages can be presented. In addition, the marketer
about the strengths of the supplier. He has to look can use a form to ask what else the visitor would
through the “Products” section for a listing of like to see. A service rep can follow up with e-mail.
features and maybe a description of specific bene- The marketer can also collect these requests and
fits. He has to look at the “Customer Cases” build new pages in the site that can provide the
section to see how other customers have deployed commonly asked-for information.
a good idea to understand how the search engines try to give users the best results for
their searches, and then adapt the design and programming of the marketer’s site accord-
ingly. For instance, some search engines will include image content in their results scoring
if the image is provided in the jpeg format. So, if the marketer wants the search engines to
recognize the product pictures he has included in his site, he will make sure the images are
in jpeg.
Banner advertising also provides a means to get a message in front of prospective buyers
and draws them to the marketer’s website. The ad itself is a link to the website, usually to a por-
tion of the site that is related to the offer in the ad. The problem with banner advertising is that
“click-through rates”—the proportion of viewers who see the ad who actually click through to
the Web site—have declined to levels where banner advertising’s effectiveness is questioned.
Targeting, when done carefully, can increase banner click-through rates. Too often, though, the
targeting is too broad to be effective. Other means are usually required. One of the advantages of
purchasing advertising on large sites or through online advertising agencies is that they usually
are members of large advertising networks. Through complex analysis of data from across mul-
tiple sites, they can serve the purchased advertising to specific Web users to coincide, at least
somewhat, with their interests. This is much better than the inaccuracy of segmenting audiences
through print and broadcast media, but there are still many users who either are not actively
involved in the buying decision process or who do not pay attention to banner ads.
A marketer can also purchase key words on search engines, usually through a bidding
process. The marketer selects key words that he believes prospective customers will use when
looking for the kinds of products or services he offers. When a user searches on a word or phrase
that the marketer has purchased, his banner ad will display on the results page or a short ad with
a link will appear in a “paid results” box. By tracking the results of click-throughs and purchases,
the marketer can refine and update his list of purchased words and increase his return on invest-
ment in search engine ads.
Search engine marketing is one of the most important marketing aspects of managing a
website. Prospective buyers use search engines in the early stages of the buying decision process.
Since they are already in search mode, getting a targeted message in front of them at the right
time can be very effective—much more effective than placing an ad in a trade magazine for
which the audience is mostly not in the buying decision process.
Opt-in E-mail
E-mail has proven to be one of the most useful methods of Internet marketing communications
in business-to-business marketing. When e-mail is unsolicited, it is called spam. Because the
Internet and e-mail grew up as a communications medium with a strong anti-commercial
culture, spam is viewed as annoying by most recipients (perhaps more so than is direct “junk
mail”). E-mail is best used when an interested person gives permission—opts in—to the mar-
keter to send e-mail messages. Once permission is obtained, e-mail messages are sent often
enough to be noticeable but not so often that they are annoying. The key is to have something of
interest to say each time.
E-mail can then be used to provide product notices, notices of special events, or other short
messages of interest. E-mail is attractive because it is quick, inexpensive to produce, and almost
costless to add people to the audience. The downside of e-mail is that it can wear thin quickly.
The marketer must truly have value for the customer in mind. Otherwise, it is too easy to turn
good customers into sour ex-customers.
Newsletters
Closely related to opt-in e-mail is the use of e-mail newsletters. These are specialized content
news briefs, usually with links to full news stories located on a Web site. The reader signs up for
a subscription, usually for free, and receives the newsletter in his e-mail mailbox periodically.
Newsletters have proven to be very useful marketing tools for business-to-business marketers
for several reasons. First, the content is valuable to the user—as long as the writer/editor is
doing a good job of finding stories and reporting them well. Second, good newsletters usually
are short enough to keep the reader’s interest—they get read. Third, the newsletter is a good
branding tool for the supplier. It keeps the supplier’s name in front of prospective customers on
a periodic basis.
Online Seminars
Just as seminars can be useful in educating prospective customers and generating sales leads
from the audience, business-to-business marketers can use online seminars to great effect. The
Internet communications methods we have mentioned have, as their primary objective, attract-
ing a prospective customer to a Web site. Online seminars, webinars, though, seek to accom-
plish more: the establishment of a relationship with a prospective customer who is already
very interested in the company’s products or services. Seminars can be done in combination
with a conference telephone call or can be done solely on the Web. They can involve self-
paced Web presentations or elaborate combinations of broadcast video and audio delivered via
the Web. The audience can range from one to thousands. The best Web seminars have relevant
content that is well designed for Web delivery. The marketer has to be careful not to be too
technologically adventurous. Many audience members may not have the latest software and
hardware available and the company’s server must be able to handle the interaction. There are
now a number of companies that will provide webinars as a service for marketers. These com-
panies provide a lot of functional capability that is relatively easy to customize for the
marketer. The webinar attendees only need to access a website through their browser and login
to the temporary webinar website with a prearranged login code.
Social Networking and New Media

The general-purpose online environment has changed drastically since the dotcom bust.
Marketers have many new tools with the advent of blogs, pod casts, online video, social
networks, and variations of these techniques. While the media available—and the media that
people prefer to access—have evolved dramatically, the general rules of communication are still
the same. People respond to messages; buyers seek solutions to their problems. So communica-
tions must deliver messages that are crafted to buyers going through decision processes.
Marketers must understand their customers and customer segments, and craft effective messages
and deliver them through appropriate media.
Having said this, the new media change the context of communications. Marketing contact
with prospects and customers has come to resemble a conversation more than it looks like tradi-
tional broadcast, one-way communications.
“Blog” is a shortened name for Web log, which, as we’ve noted earlier, is a running com-
mentary on some series of events. A blog can be simple running commentary newsletter.
However, if the blog allows readers to post their own entries, the blog becomes a running
conversation or even a running series of conversations. Marketers have used blogs to provide
commentary on industry trends, communicate with customers about usage and service issues,
maintain discussions with channel members, and conduct all sorts of other interactions with
various stakeholders.11
A more recent development, social networking, is still in its early stages of usage innova-
tion. Sites like Facebook and LinkedIn are providing marketers with a rich new medium whose
uses are not yet fully appreciated or discovered. Among the more creative uses so far is the
posting of video on the company’s social media site, or providing a link to a YouTube video that
presents product or service stories. The Ford Modeling Agency has become a leader in providing
product discussions in video segments featuring models talking about fashion and style tips.
These videos have become very popular among young women who share them through their own
social networks or link back to their original postings on the Ford YouTube site.12 These creative
early efforts suggest that social networking may evolve into a combination of service and cus-
tomer participation that we are just now beginning to glimpse.
Effective Internet Communications

As we mentioned at the beginning of this section, good online marketing requires integration
of Internet communication with other forms of communication. This is not as easy to do as it
sounds. Companies typically have initiated their Web and e-mail marketing by launching
semi-autonomous organizational units with dedicated budgets. Due to the specialized techni-
cal nature of Web site development, the differences between interactive communication and
other kinds of nonpersonal communications, and the necessity of the unit manager to follow
the dictates of his own budget, many Internet or Web marketing units have a tendency to
maintain their autonomy and may create messages that do not reinforce the other messages
promulgated by the company.
Internet communications can be more timely than other marketing communications. It is
relatively easy to change messages and to experiment with new presentations. Trade advertising,
publicity events, trade show booths, and the like do not lend themselves well to fast design and
extensive testing. Designs take longer, and opportunities for testing are limited, if they exist at
all. There is a natural difference in outlook between the people who work in either camp. A
marketing manager who has responsibility for Internet marketing, as well as other kinds of
marketing, needs to recognize these differences and keep the two camps talking to each other.
PROMOTION AND THE IMPACT OF TRENDS

IN BUSINESS-TO-BUSINESS MARKETS
The two general trends affecting business-to-business marketing, time compression and hyper-
competition, influence both the purposes and the requirements for competent execution in
promotion. Overcoming the problems that are caused relies upon recognition of these problems
and adjusting, rather than on adopting new techniques intended to address the problems.
Promotion and Time Compression

The principal problem arising from time compression is the tendency to create “hype” to deal
with short time horizons.13 One source of this problem is the inability to rapidly achieve an
understanding of customers. When the marketer does not have time to understand and develop
appropriate communications, the temptation is to communicate in superlatives just to be sure that

the offering is perceived as good enough. A second source of the problem arises from the time it
takes to achieve the purposes of business-to-business nonpersonal promotion. Too often, the
marketer is faced with the task of trying to establish trust and assurance of quality when the
customer has little time to arrive at these states of mind. The tendency here is to try to come
across as the best—again the tendency to create hype—and to create memorability by using
multiple kinds of media and a high number of repetitions.
To address time-compression, marketers need to understand the limits of what can be
accomplished in a short period of time. The fact that it takes time to build trust and it takes time
to build a business should not be lost on the marketer or his hired agency. The problems created
by the Internet companies’ recent efforts to build businesses too fast should convince most
marketers to consider building their own businesses for the long term. Perhaps a bit more
emphasis on corporate image advertising would be useful to help set the stage for entry into new
markets, but marketers should resist the temptation to rush into ridiculously misguided pro-
motional excesses.
Promotion and Hypercompetition

As we have noted in prior chapters, hypercompetition and time compression often are related. In
this case, time compression has induced marketers to increase their promotion efforts. In the
recent past, the excess of investment money available to many companies created a lot of com-
petitors with a lot of marketing money trying to obtain awareness and brand associations. All of
this promotional activity created a lot of clutter—a lot of messages bombarding target audiences.
This made it more difficult for marketers to get the attention of target audiences, so they resp-
onded with more repetitions and messages that got more shrill or “edgier.” Many marketers
found themselves with campaigns that were so “edgy” that the message and the purpose of the
ads were lost in the angst or weirdness.
When hypercompetition has this result, the marketer needs to focus on purpose, benefits of
the offering, the buying decision process, and the segment, that is, get back to basics. The way to
compete is not by being louder, stranger, or more ubiquitous. The best way is to understand the
needs and decision process of the buying center. The marketer and his agency can then create and
deliver messages that address the customers’ needs that are most important in ways that help
them through the decision process.

This chapter has discussed communicating with the market as part of a well-planned, purposeful
effort. Communications, whether through personal selling or through nonpersonal promotion,
begin with an understanding of stakeholders—most importantly, the buying center members,
their roles in the buying decision process, and their individual motivations. The marketer must
start by crafting a message that is intended to address specific kinds of people and to achieve
some reaction from them. If the target audience is members of the buying center, usually the pur-
pose is to help them progress through the decision process. Different variables in the promotion
mix are best suited for different communication intentions. Just having an advertisement is not
necessarily the answer, even though it may be the path of least resistance because it is what has
been done before. Rather than focus on the process of promotion, this focus has been on the out-
comes that serve the overall marketing plan.
In the development of promotional plans, consider questions like: What function will the
promotional materials perform? How complex is the product? Does complexity prevent any
brochure or advertisement from being successful? Is the promotional material consistent with the
language and customs of the target audience? What combinations of promotion tools, in a fully
integrated approach, are necessary to achieve the results desired?
Looking forward to Chapter 16, the role of promotion in a crisis is discussed. The funda-
mentals of promotion still apply, though with a sense of urgency not previously addressed. Also
discussed are ethical issues that, beyond promotion, really involve the corporation as a citizen, a
member of society, and a respected resource to customers. As you conclude this chapter, it is our
hope that, with the foundation of the prior chapters, the ethical issues addressed will be a natural
part of your approach to business-to-business marketing.
Key Terms
advertising 367 nonpersonal communications 369 RFP 380
blog 394 opt-in e-mail 393 RFQ 380
direct response requests 372 premium merchandise 385 SEO 392
fulfillment firms 387 product configurator 391 sales promotion 367
guerrilla marketing 376 promotion mix 367 selective attention 372
jargon 371 public relations 367 selective exposure 372
leave-behind materials 383 public stakeholders 376 selective retention 372
media buy 374 publics 376 server log 390
noise 372 RFB 380 social networking 395

1. Compare the relative importance of the promotion 7. What types of promotion are most appropriate at
mix variables in consumer markets versus business- the different stages of the buying decision
to-business markets. Why do these differences exist? process?
2. When would the use of industry-specific jargon be 8. What are the promotional goals most desired
acceptable in the communication process? at each stage of the buying decision process?
3. What is the importance of the encoding-decoding How well does this relate to your answer to
process in message accuracy? How do individuals Question 7?
attach meaning to messages? 9. Trade shows have usually been classified as sales
4. How will the communication capabilities of the promotions. The text makes the case that trade
Internet impact the ability of business customers to shows are excellent publicity and public relations
receive feedback from customers? tools. Which is it: Are trade shows sales pro-
5. Explain what promotion can do and what it can- motion or publicity? Does it matter? Why or
not do. why not?
6. How are the promotion mix variables interrelated? 10. What communication purposes can be addressed in
Why is it necessary to coordinate efforts between a business-to-business Web site? What purposes
the variables? can be addressed by e-mail?
Endnotes
1. Based on H.M. Fattah, “A Giant’s Rebirth,” eighteen months of the beginning of the col-
Technology Marketing, 21(6) (June 2001), lapse; Business 2.0 hung on for several years,
pp. 44–47. but it too closed shop in 2005.
2. Regis McKenna, “Marketing Is Everything,” 7. Phillip Kotler, Marketing Management, 8th ed.
Harvard Business Review (January–February, (Upper Saddle River, N.J.: Prentice-Hall, 1996).
1991). 8. MarketingProfs and Forrester Research, Inc.,
3. Norman Govoni, Robert Eng, and Morton B-to-B Marketing in 2008: Trends in Strategies
Galper, Promotional Management (Upper and Spending, MarketingProfs Research
Saddle River, N.J.: Prentice-Hall, 1986), p. 53. Insights, 2007.
4. Ibid., p. 384. 9. Ibid., p. 9.
5. Recall that the Sensacon example is a compos- 10. Ibid., p. 9.
ite of the experiences of more than one compa- 11. Stephen Baker and Heather Green, “Beyond
ny in this market. Simplifications have been Blogs,” Business Week (June 2, 2008),
made for clarity and care has been taken to pp. 44–50.
prevent any direct relationship with any single 12. Freedman, David, “A Digital Makeover for the
market participant. Modeling Business,” Inc. Magazine (February
6. Incidentally, both of these trade journals went 2008), pp. 82–86.
out of print after the dotcom bubble burst. The 13. Lou Hoffman, “Haste Makes Hype,” Technology
Industry Standard was out of business within Marketing, 21(6) (June 2001), p. 56.
Chapter 16
Business Ethics and Crisis

Management
OVERVIEW
This chapter discusses ethics in business-to-business marketing, followed by a
discussion of crisis management. The second is often necessary when there is a
lack of the first.
This chapter follows the chapter about publicity and public relations as these
promotion tools play a major role in crisis management. To fully understand ethical
concerns in business-to-business marketing, an understanding of the many facets
of these tools is necessary. Our discussions with associates and practitioners lead
us to suspect an underlying sense of skepticism about business ethics. We do not
agree with this; the term business ethics is not an oxymoron, notwithstanding highly
publicized examples.
Business-to-business managers make many day-to-day decisions—some
routine, some significant—that include application of an ethical standard. That
ethical standard can be a compilation of many inputs. Organizations may define and
hold employees to a high ethical standard, professional associations contribute
policy statements about what is (and is not) ethical behavior, and individual lifestyle
and beliefs weigh in with distinctive influences.
In the first part of this chapter we discuss different influences in ethical
business decision making and examine the societal marketing concept that defines
the “citizenship” of a firm. In the second part of the chapter, we discuss how, in the
long-run, ethical standards improve the chances of successful crisis management
and organizational as well as individual success.
TWA Flight 800 Revisited: Crisis Management and Ethical Concerns

On July 17, 1996, TWA Flight 800 took off from New York bound for Paris. Thirteen minutes after
take off, the Boeing 747 exploded, plunging into Long Island Sound, killing all 230 people on board.
With the crash of TWA 800 there began an unprecedented investigation into the cause of the explosion
that involved TWA and its suppliers, Boeing (the aircraft manufacturer) and its suppliers, at least three
government investigative bodies, and international safety advisory groups.
399
400 Chapter 16 • Business Ethics and Crisis Management
While airline travel is statistically safe, crashes happen. As terrible and unthinkable as any airline
tragedy is, airlines must not ignore their possibility. Airlines have crisis response teams that are trained
to deal with the complex personal, legal, and emotional issues surrounding such an event. They are
expected to cope with such a tragedy in a professional and compassionate way. Anything less would not
be acceptable.
Effective management of the crisis is not the only behind the scenes story of TWA 800.
Travelers expect that whatever caused this mishap will be investigated and resolved quickly. In the
United States, the National Transportation Safety Board (NTSB) has the responsibility to determine
causes and recommend corrective actions to the Federal Aviation Administration (FAA). In December
1996, five months after the crash, the FAA received NTSB’s initial recommendations. The NTSB
found that a combination of events, not any one single factor, likely related to the center wing tank
(CWT) caused the explosion aboard TWA 800. The recommendations included participation by many
stakeholders:
• engineering design modifications to fuel tanks, air conditioning insulation, and wiring (which
would need to be addressed by Boeing);
• upgrading of fuel quantity indicating systems (to be addressed by Boeing and Honeywell);
• changes in refueling procedures and equipment to fill the area above the fuel level in tanks with
inert gas (a process called “inerting,” to be addressed by various ground facilities management
and crews);
• changes in fuel composition (to be addressed by petroleum refining companies); and
• changes in flight procedures (to be addressed by airlines and pilots).
• The recommendations raised several issues and before acting on them, in February 1997, the
FAA took the unusual step of seeking public comment.1,2
The recommendation to fill the empty portions of fuel tanks with an inert gas was the most
controversial and caused the most comment. While used on many military aircraft, the procedure is con-
sidered by the commercial air industry to be cumbersome and costly. By mid-1998, two years after the
crash, the FAA issued directives regarding the inspection of wiring systems on existing aircraft and
design changes in fuel quantity indicating systems, addressing the first two of the four concerns. Further
investigation into the fuel vapor problem was ordered.
In October 1999, after more than three years of investigation and deliberation, it was revealed that
Boeing knew about CWT overheating as far back as 1980. At that time, Boeing had been investigating
problems with the military version of the 747. NTSB was not informed of the results of that investiga-
tion at that time, nor after the TWA 800 explosion. Ironically, key findings of the Boeing study in 1980
are similar to those eventually determined by NTSB following the TWA 800 crash—that hot runways
and air-conditioning equipment can overheat fuel tanks. The Boeing study recommended that addi-
tional insulation be used to stop the heat from reaching the tanks. Boeing was somewhat embarrassed
that the report did not make it to NTSB, but a Boeing official claimed that the study was about military
fuel pump problems, different from those used in commercial aircraft.3
In March 2001, five years after TWA 800 and more than twenty years after the Boeing study for
the military version of the 747, a Thai Airways Boeing 737 burst into flames on the tarmac in Bangkok,
Thailand. One crew member was killed, seven others were injured. The NTSB study said that the CWT,
located adjacent to the air conditioning system that had been running continuously, exploded.
On August 8, 2001, a special task force of an Aviation Rulemaking Advisory Committee (ARAC)
submitted its final report to the FAA regarding fuel tank flammability. An ARAC is a committee of air-
line industry professionals, FAA representatives, and often, their international counterparts—many
stakeholders with a global reach. The report cites the benefits of work already underway to improve fuel
tank safety (safer designs, better inspections, upgraded wiring systems), estimating that these steps had
already eliminated approximately 75 percent of the potential risk through 2020. Without additional
Chapter 16 • Business Ethics and Crisis Management 401
regulations, the remaining 25 percent risk is likely to result in two additional fuel tank explosions over
the period between 2001 and 2020. Contrary to the NTSB recommendations, the task force did not
recommend inerting. In fact, the report stated that none of the additional safety alternatives produced
“reasonably balanced” results—they are not cost effective.4 (Based on projected costs of $10–12 billion
each over the next fifteen years, yielding an estimated economic benefit of only $250–440 million.)
Airline manufacturers, airlines, and European regulators strongly opposed any further unnecessary and
expensive action.
Here are excerpts from the statement issued by acting NTSB Chairman Carol Carmody after the
ARAC report was submitted:
The . . . report clearly demonstrates the significant benefits to . . . safety . . . provided by

inerting. I am disappointed that their cost-benefit analysis leads them to not recommend
inerting systems. . . . I am pleased that the ARAC Executive Committee appears to share
our concerns and has requested a further clarification of that analysis.
The recent destruction of a Boeing 737 in Thailand shows that center fuel tank
explosions continue to occur, and likely will occur again in the future. This problem must
be addressed if we are to maintain the confidence of the traveling public.5
The end of the story? Not quite. In July 2008, after twelve years of deliberation, negotiation, and
battle between stakeholders, Transportation Secretary Mary Peters announced the final rules.6
• Within two years of the 2008 announcement, new airliners will be required to have inerting
systems that use nitrogen to prevent ignition of the hot vapors in the fuel tanks.
• Airlines will have nine years to retrofit older aircraft.
• Cargo planes and charter aircraft are not required to have the inerting systems.
Initially, Boeing strongly resisted the inerting of tanks, but toward the end of deliberations
accepted the concept and has voluntarily begun installing inerting systems on new aircraft. Airbus,
which also resisted, is expected to comply.
• How many ethical lapses or questions can you count?
• What is an ethical lapse? Does the definition change with circumstances?
• 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 twelve years to act on what was recommended after only five months of investigation?
• When lives are involved, cost-benefit analysis usually relies on the belief that “it will never happen.”
LEARNING OBJECTIVES
䊏 Understand that a good ethical foundation is a good business foundation.
䊏 Recognize that ethics are, ultimately, an individual decision.

䊏 Understand the source of ethics, both organizational and personal.
䊏 Develop an appreciation for how differences in personal ethical standards versus
organizational standards can lead to an uncomfortable environment.
䊏 Recognize the role of publicity and public relations in crisis management.
䊏 Become familiar with the elements of good crisis management.
INTRODUCTION
Many students and business professionals are skeptical about the value and sincerity of business
ethics. Claiming that for-profit organizations have only one overriding goal—to maximize profit—
the inexperienced or uninitiated give business ethics little regard. For whatever reason, stories
about “bad” business behavior attract more attention than stories about “good” business
behavior. Is this because “good” behavior is common and not as newsworthy as “bad” behavior?
Perhaps. Mass news media often report about a firm producing defective products and then
resisting recalls, dumping hazardous wastes inappropriately, or conspiring with competitors to
fix prices. Combined with reports of individuals engaged in stock fraud, swindles, and scams, it
is not surprising that many people are skeptical.
Most consumers form beliefs—individualized truths—based on information from the
news media, word of mouth, and personal experiences. These beliefs, or perceptions, form
the public impression or value image of the firm much like product position-
Value image, as ing attempts to create a product image. Once established, these “truths” can
described in Chapter 3,
be changed only with an overwhelming amount of information, often involv-
is the total of all
impressions that the ing personal experience. Value image, when positive, grants forgiveness
public will have of the in times of crisis or, when negative, will lead to a guilty verdict before trial.
firm. An individual’s The importance of value image, then, cannot be measured, at least in the
beliefs about a firm, short term.
situation, or occurrence
Several factors contribute to value image. The attitude of a company
are based on many inputs.
The public reception a toward its customers, suppliers, and employees and its approach to living
firm will receive can be in the community are major elements of the reputation of the firm.
impacted by the value Employees who treat customers well and speak highly of the firm are good-
image of that firm. will ambassadors. Suppliers not only take more interest in working with
customers who recognize the value of the relationship but will likely make
judgments about resource commitments based in part on this recognition. How the firm
addresses controversial issues and problems in its markets is also a major influence. The
corporate “attitude” portrayed in these circumstances can be a reflection of the philosophy or
culture of the company.
ETHICAL ISSUES AND THE MARKETING CONCEPT

The marketing concept, discussed in Chapter 1, says that the successful firm, while meeting cor-
porate goals, should be market sensitive, understand customer needs, and meet those needs in a
coordinated way that provides value to the customer. In a truly market-driven firm, all employees
recognize that they contribute to the marketing effort. The marketing concept fosters competition
and maximizes choice in the marketplace.
Consider the example of the McDonald’s switch from plastic to paper packaging, cited in
Chapter 2. McDonald’s switched from plastic to wax-coated paper for its products because its
customers perceived paper as an environmentally friendlier packaging material. A Florida state
senator asked, “For a hamburger that lasts a few minutes, why do we need a package that lasts as
long as the pyramids?”7 Was McDonald’s following the marketing concept in delivering the
greatest value as perceived by its market? What other choices did McDonald’s have? Well, they
could have implemented a customer education program about the intricacies of recycling.
However, they had some experience in this area—customers at its restaurants had not done a
good job of separating plastics from paper in collection containers. If the consumers, who are
ultimately responsible for their actions, did not respond well to the request to keep waste mater-
ial separated, what responsibility does McDonald’s have? Note that McDonald’s is not alone in
this quandary. Many organizations face the situation where customers’ actions are not as envi-
ronmentally committed (or ethically, or legally, or socially committed) as its own organization,
but still expect the highest standards from the organization. What place does the supplier have in
imposing standards on customers that the customers would not voluntarily adopt?
THE SOCIETAL MARKETING CONCEPT

Is the marketing concept a philosophy that is compatible with the complexity of the business
environment? Throughout this book, we have endorsed the marketing concept and value creation
as the criteria for success for business-to-business organizations. Critics of the concept say that
(1) the marketing concept is unrealistic as it imposes ethical constraints on an organization that
reduces its competitiveness—other firms will see an opportunity and exploit it; or (2) the market-
ing concept is inappropriate as it often allows satisfying customer needs without acting in the
best interests of society. With today’s resource limitations, degrading environment, world
hunger, and neglected (or failed) social services, the marketing concept does not go far enough.
Obviously, the same critic does not hold these two views.
We believe that marketers have a responsibility, as the defining function of a modern
organization, to include society’s interests in decision making. Perhaps the place to start the
development of a greater view of marketing is with one of the tenets of the American Marketing
Association (AMA) Code of Ethics and a basic paradigm of professional ethics—not knowingly
to do harm.8 The AMA Code of Ethics says that “marketers must accept responsibility for the
consequences of their activities and make every effort . . . to identify, serve and satisfy all rele-
vant publics: customers, organizations, and society.” [Italics added for emphasis.] This
expansion of the responsibilities of the marketing function leads to the societal
marketing concept.9 The societal marketing concept states that, in addition to Organizations operating
being market sensitive, understanding customer needs, and meeting organiza- under the societal
tional goals, marketers must deliver satisfaction more effectively than competi- marketing concept meet
organizational goals by
tors and in a way that considers the well-being of society. Operating under the understanding customer
concept requires that social, ethical, and community considerations are built in, needs and delivering
rather than added on, to every marketing plan. The goal of the societal market- customer satisfaction
ing concept is quality of life. more effectively than
Critics of the societal marketing concept say that it blurs the separation of competitors and in a way
that considers the well-
business, government, and individual responsibilities. How far should a firm be being of society—not
allowed to influence the quality of life of its customers, employees, and suppli- knowingly doing harm.
ers, beyond what is required to perform a narrowly defined business function? Firms operating under
At what point does the good citizenship of the firm become advocacy for the this concept have several
agenda of the leaders of the firm? While much of the in-depth discussion is constituencies—
stockholders and
beyond the focus of this text, we believe that the marketplace answers many of investors, customers and
these questions. As customers and customers’ customers demand greater appli- suppliers, and employees
cation of responsible and sustainable business practices, firms have little choice and community.
but to meet the standard.
Events of the 1990s serve as excellent examples of firms paying heavy prices for ignoring
or denying the societal responsibility of the organization. Tobacco companies became the focus
of consumers—not just smokers or former smokers—who were no longer willing to tolerate the
marketing of tobacco products. Restrictions were placed on promotion of tobacco products,
particularly those promotions that seemed aimed at children and teens. Local community groups
placed initiatives on ballots to ban smoking from public-access facilities. As a result, many states
now ban smoking altogether in enclosed facilities. The popular movement led to government
action to recover health-care costs allegedly attributed to smoking. Whether you agree with these
actions or not, whether you are a smoker or not, it must be recognized that tobacco companies
have paid a very high price for ignoring the potential hazards of their products.
The same type of grassroots effort and application of law that led to the tobacco companies’
reduced market access are often considered as tools to approach the makers of alcoholic beverages
and handguns and rifles. In narrower instances, manufacturers have been forced to answer for the
performance of their products through product recalls and class action damage suits. Whether
baby strollers, appliances, or tires for SUVs, product recalls are ever more frequent than many
years ago. We suggest that the increased number of recalls is not a sign of lower product quality
but a sign of increased awareness on the part of manufacturers as to how society will hold the
manufacturer responsible for the outcomes of the use (or in some cases, misuse) of its products.
The organization that operates from the societal marketing concept will be proactive in ensuring
the reliable and safe use of its products. We suggest that, in fact, the demands of the marketplace
have led to products of greater quality, safety, and reliability for all consumers.
Societal Marketing as an Ethical Base

The societal marketing concept touches every part of the organization—recruiting, hiring,
training, and retaining of personnel; contractual relationships with suppliers and service
providers; and environmentally sound decisions regarding the use of natural resources.
Many of these elements are visible to the marketplace, in part at least, in many organiza-
tions. The challenge—often called a dilemma—for an organization is to be at the forefront
of societal marketing in every part of the firm. This level of effort starts with a well-defined
and communicated mission statement that should encourage individual ownership at every
level of the organization. Herein lie some problems. First, management that creates the mis-
sion statement (or its corporate culture substitute), either through ignorance or intention,
may not define ethics as they are viewed at all levels of the organization (or the market, for
that matter). It is a challenge to develop ethical standards for an organization that will fit
contextually with the standards of the many individuals who will work together toward com-
mon goals. This creates a gap between what is perceived as ethical by different members of
the organization.
Second, reward systems must in fact support ethical behavior. Management that rewards
short-term results and then advocates that those goals be met “at any cost” immediately widens the
gap between the individuals’ view of what is ethical and what is required to succeed. Employees
may have personal economic needs, such as continued employment or meeting sales quotas, which
dictate behavior inconsistent with what might be considered ethical.10 What may begin as “minor”
ethical discrepancies can bloom into major causes of stress and friction among participants.
A CLASH OF ETHICAL STANDARDS

The previous section hinted at a clash between the ethical standards of the individual and the
performance standards of the organization. The clash also occurs between ethical standards at
different levels in the organization and among different stakeholders in the situation. Let us
consider the last clash first.
Ethical Standards Among Different Stakeholders
Suppose you are the marketing manager charged with deciding the fate of certain products in
the product line. The line has been expanded, and several earlier variations of the product are
no longer competitive. The firm has successfully crossed the chasm with this product line, and
the success of the product line has led to increased competition. As is its nature, competition
“improves the breed” and your product is no exception. Improvements in your products have
been encouraged by the desire to maintain a competitive edge—your goal has always been
ownership of this market segment. Competitors have, of course, been able to use your product
as a starting point and have added innovative product attributes to the mix. As the market has
grown, competitors have relied on the low costs of offshore manufacturing facilities. While this
has been a challenge, your product is recognized as the leader and has maintained the number
one position in the segment, though not by the same lead as earlier in the product life cycle.
When your firm started large-volume production of the first-generation product (the
one you are now considering eliminating), dedicated manufacturing facilities were built in a
relatively rural section of the state. Because of high unemployment resulting from the
decline of agricultural interests in the area, the region was more than willing to help with tax
breaks, infrastructure improvements, and code variances in construction of the new manu-
facturing facility. The community has embraced the company, and the area has prospered
compared to its previous economic climate.
Manufacturing management has informed you that the new products planned to replace
the products to be discontinued must be manufactured offshore to meet cost targets. The
facility built for the original product is not capable, with its existing equipment, of meeting
productivity goals. Without replacement for the discontinued product, the workers will be
let go and the facility idled. The alternative would be to increase the production of the old
product at the facility to create a stockpile to meet customer needs then shut down the faci-
lity for six months while upgrading its equipment. You like this idea, but it will delay the
introduction of the new product by four months.
Who are the stakeholders in this situation? Of course, there is the community and its workers
who will be impacted, directly and indirectly, by the shutdown. Manufacturing management, who
are also stakeholders, want the lowest-cost, quickest way to produce product. Marketing and sales
management are not very receptive to losing four months in the market, particularly since competi-
tion is increasing. The board of directors, made up of members from inside and outside of the com-
pany, question the ability to maintain continuously improving quarterly sales and profits by “losing”
four months of sales. The media in the community where the facility is located have heard of the
dilemma and are being critical of the company and its facility engineers. The media are saying the
company and engineers did not plan with enough flexibility in the building of the plant in the first
place. Further, they are raising the issues of the company commitment to the community while
workers are talking of forming a union. From their individual perspectives, particularly in relation
to their job requirements, do any of these stakeholders appear to be acting in an unethical manner?
Ethical Standards at Different Levels in the Organization

Frontline employees should not be asked to accept ethical standards different from those embraced
by executive management; and, of course, no firm’s executive management would create such an
ethical standard. But, as the saying goes, actions speak louder than words. The existence of a
common ethical standard does not ensure that all levels of an organization regard it equally.
Behavior of individuals in organizations is best influenced by leadership rather than by

control. Executive management sets the context—the example or defining paradigm—for the
rest of the organization by the standards it demonstrates. It is difficult for a regional sales man-
ager to strictly enforce written policies regarding legitimate business expense account deductions
with her sales team if she knows that the vice president of the organization has had his home
landscaped at company expense or has committed price-fixing or some other antitrust violation.
Similarly, it will be difficult for the field seller to take seriously corporate policies related to
bribery or collusion with unscrupulous buyers if she knows the firm is paying market access fees
(read: bribes) to foreign officials.11 The immediate management of the department or workgroup
often defines what is acceptable in an organization, compared to what is written as acceptable.
This institutionalized definition of what is acceptable moves through the organization and prob-
ably takes on different properties at different levels. Maintaining consistency throughout the
organization then becomes an individual responsibility of managers and those they manage.
Another way that standards can mutate through levels of the organization is when executive
management leads in a way that corresponds with the corporate standard but places performance
demands on subordinates that may not be realistic. Individuals will work in their best economic
interest. A corporate mantra of obtaining goals “at any cost” can encourage expedient but ques-
tionable practices. This scenario has often been accompanied by executive denial of any knowledge
of a questionable practice occurring at lower levels in the organization. In large organizations, the
CEO cannot know the details of every transaction.12 However, goal setting without knowledge of
the markets, followed by rewarding the attainment of the goals without concern for how it was
done, is, at best, conveniently naïve.
Consider the situation where a member of a marketing team succeeds with a major target
customer.
The team member, who we will call Jim, a field market development specialist13 (FMD),
has accomplished a very difficult task, one that means a lot to the organization. The result-
ing business is significant in the short term as the new business was wrestled from a major
competitor, and significant in the long term as this target customer will be an excellent
development partner for translation of several new opportunities. It appears Jim has been
able to capitalize on the relationship he has developed with the customer. Management is
ecstatic as, of course, this success contributes to its performance goals. A party is planned
(marketers are really good at finding reasons to party!), not only to celebrate the new business,
but also to acknowledge the contributions of Jim. The party is announced, and the corporate
rumor mill has the newly anointed Jim on a prominent career path. There is, however, a cloud
on the horizon.
Other members of the team are aware of the circumstances of the success. Jim may
have gone beyond what other members of the team considered appropriate. The team
knows that it is likely that not only may there have been questionable practices as defined by
the Robinson-Patman Act (see Chapter 4), but corporate as well as their personal ethical
standards have been, at best, stretched. Management is unaware of these issues.
The party takes place; Jim is rewarded with a substantial bonus, and definitely app-
ears to have the inside track on the next headquarters marketing position, particularly as it
is now obvious that management is beginning the grooming process. The method of Jim’s
success becomes the “unofficial” way to get ahead.
After a short period of time, management becomes aware of the details of “The Jim
Method.” They cannot let this stand. Not only is this serious ethical breach, it conveys a poor
example and dangerous precedent to members of the organization. However, this is a very
lucrative piece of business, one whose accomplishment will be noted positively by higher
echelons of management.
What should be done? Any abrupt action against Jim will likely also involve the
customer and place a very important business relationship in jeopardy. But this conduct can-
not continue to be rewarded. What about Jim’s upcoming promotion? Certainly, knowing this
information, the promotion cannot happen as it would appear to reward unethical behavior.
Additionally, steps must be taken to overcome the office gossip about how to get ahead.
In a low-keyed manner, Jim is sidelined, and after a few months, finds other employ-
ment opportunities.
The implications of the preceding examples are that executives and managers should be
clear and consistent as to what standards apply for everyone in the organization. Also, employees
need to have a good sense of what degree of ambiguity they themselves can tolerate. If the orga-
nization creates more ambiguity than they would want, they must either work to obtain more
clarity or decide that they need to work for a different organization.
Ethical Standards of the Individual and Performance

Standards of the Organization
Individuals develop moral and ethical standards by which they make day-to-day Natural law is a term
decisions. While there is much debate over how and where these standards applied to the theory of
ethics that holds that
originate, the actual development of a personal standard probably varies. individual moral
Natural law, developed or positive law, and religious beliefs are possible standards are derived
sources that contribute to the formation of a personal moral or ethical standard. from a higher, universal
For some, these standards are absolute; for others, they may be flexible. source. This is contrasted
Generally, ethical behavior can be said to be the degree to which others’ well- to man-made, created, or
positive law standard of
being and success is accommodated in our decision making.14 We expect this moral or ethical behavior.
consideration from others. To manage our own ethical base, we must manage Ethical standards derived
the tension between virtue and self-interest, and short- versus long-term goals, from positive law are said
as well as recognize “self-interest considered upon the whole” (please see the to be determined simply
definition box). There is an inherent assumption here that individuals can sub- by what is legal.
ordinate their short-term goals and immediate satisfactions to a higher end.15
Self-interest considered
Individuals can have acceptable levels of application of their own standards upon the whole is
depending on the demands of the circumstances. Sometimes this flexibility is a extending decision-
convenience, and sometimes it may be viewed as a necessity. When the mission of making efforts to what is
an organization or the context under which a firm operates sets an ethical tone often referred to as “the
greater good”—a
different from that which an individual accepts or believes, the individual may
decision-making culture
develop a level of anxiety or unease with her participation in the operation of the that sustains principled
firm.16 Note that we have said different; no judgment is offered at this point as to behavior. This culture
the relative good or bad of the individual or organizational ethical standard. As an requires leadership to
alternative, the individual may choose to set flexible standards that allow departure create it and reward to
those who follow it. In
from personal ethical levels in order to survive within the organization. Establishing
business, this often
standards based on the circumstances is often called situational ethics. becomes a balancing
act—and individuals will
SITUATIONAL ETHICS Day-to-day events provide many examples of flexi- implement their own
ble ethical standards. Often justified by “the greater good”—or maybe just scale to measure this
convenience—situational ethics use ad-hoc standards influenced by the balance.
How many times have you heard these justifications for less than exacting ethical behavior?
• But everybody else does it. This implies that statistics are a valid basis for ethical decisions.
• This is the way we’ve always done it. Either “it” was not previously significant or nobody has been
caught yet. Compare this to the substantiality test cited in Chapter 4.
• I was just following orders. Often heard in military trials, this implies that the individual does not
have the power of free choice or an internal ethical standard. Being told to do something illegal or
unethical does not make it okay to do it.
• It is considered standard practice in that market. Often a rationalization for bribes, questionable
gratuities, or other attempts to inappropriately influence a situation.
EXHIBIT 16-1 Situational Ethics, Ethical Lapse or Convenience? Note: Jennings discusses similar and
additional phrases as early warning signs of ethical rationalization in Chapter 2 of Business: Its Legal,
Ethical, and Global Environment (Cincinnati: South-Western College Publishing, 2000)
circumstances of the dilemma. Small ethical choices are made on a daily basis; it is okay to
speed—you’re late for an important meeting. It would be truly difficult to find anyone who
could positively say she had never exceeded the speed limit. Sometimes individuals justify
ethical choices with larger consequences based on some consideration of relative right or
wrong; it’s OK to cheat on income taxes because everybody does it and you probably will not
get caught. Exhibit 16-1 lists some circumstances in business in which situational ethics, per-
haps better called ethical lapses, occur. In all of these examples, the ethical standard is low-
ered to accept a situation that may lead to a short-term gain. Depending on the extent of the
ethical lapse, individuals in these situations can feel conflicted and uncomfortable. With the
added pressure of creating results in the organization, employment can evolve into an unsat-
isfactory experience.
Often a situation arises in which ethics stand in opposition to costs or convenience. For
instance, after two previous errors on a customer’s orders, for which the customer’s purchasing
manager has rebuked the sales team, the marketer’s company makes a minor mistake in the next
order. There is a reasonable chance that the error will not be noticed, but if it is, the purchasing
manager undoubtedly will be furious. While the marketer’s company will not likely lose the
account, even if the mistake is found out, the customer will have so much bargaining leverage
that the account may not be profitable for some time to come. The marketer is tempted to pretend
she had no knowledge of the mistake, hoping that the customer does not notice the mistake, and
face the consequences only if the customer does find it and complains.
In practical reality, most ethical marketers will have occasional instances in which they take
the easy route—usually when the trauma of doing the absolute right thing is substantially greater
than the ethical price of not doing it. Caution should be exercised if occasional instances develop
into ethical rationalizations—standard ways of doing business. Some indicators are listed in
Exhibit 16-1.
On the other hand, some organizations have a culture in which little decisions continuously
strive toward “seeing how much can be gotten away with,” and the larger ethical decisions are
made based on whether the organization can win in a court of law (or even based on whether a
settlement after-the-fact is likely to be within a tolerable dollar range). These are organizations
for which it is difficult for an ethical person to work. It is also difficult for an ethical company to
do business with such an organization, except at an arm’s length. Consider some of the following
situations that occur often enough that questions of ethics may not be immediately recognized.
ETHICS IN PRODUCT ANNOUNCEMENTS Failure to meet preannounced dates for product intro-
ductions may not, at first, seem like an ethical problem. Most common in consumer markets,
these delays are acceptable only when there are no large investments relying on the availability
of the delayed product. Consumers may be frustrated by waiting longer than expected for the lat-
est version of that game software, but there is seldom any financial investment by the consumer
that is put at risk by the delay. However, in business-to-business markets, many firms assess
penalties for late delivery. In the extreme, some firms—particularly those that rely on closely
monitored inventories and continuous production methods, such as the automotive industry—
may assess fines by the minute or hour whenever a supplier fails to meet a shipping commitment
and shuts down an assembly facility.
A more obvious ethical dilemma is preannouncing a new product, even though you know the
product will be late or underfeatured. In markets where being “first” is important, preannouncing
might be done to match the timing of competitors’ new products. Is it ethical to promise an offering to
a customer within a certain time frame, knowing that the timing cannot be met, the real goal being to
prevent the competitor from being successful (if I can’t win, maybe I can keep them from winning)?
ETHICS IN PRODUCT CAPABILITY CLAIMS It is a fundamental principle in marketing that you

never promise more than you can deliver. How is this reconciled with advertising claims that are
unsupportable? Again, many consumers are skeptical of any advertising claims. In business-to-
business marketing, exaggerated or false claims just won’t work. Customers will test the offering
for its suitability to their needs before committing to large purchases. The most that the supplier
can gain with exaggerated product claims is short term––early consideration in the decision
process. When the exaggerations are discovered, the value image of the firm and the individual
may be damaged and future dealings will be heavily scrutinized.
ETHICS IN OBTAINING COMPETITIVE INFORMATION What is ethical when obtaining compet-

itive information? While many firms zealously guard proprietary or competitive information
from the marketplace, many opportunities exist for companies to obtain competitive information.
Misrepresentation, taking the form of employees posing as customers of competitors or as
student interns, among other circumstances, can abuse the good intentions of customer service
organizations and the willingness of companies to support academic efforts. Two interesting cir-
cumstances come to mind. First, many firms will offer internships to students from local univer-
sities, ostensibly to provide a real-world experience in the student’s area of study. As an intern,
the student is compensated for her effort, either by earning money from the firm or credits from
the school. Once she is compensated for her efforts, is the student still a student or is she an
employee? What position should she take if asked to identify herself as a student working on a
project while calling competitors to obtain competitive information?
The second circumstance is probably one cause for the increase in sales of paper shredders
and carbonless forms in recent years. Consider this scenario:
Newly hired into a field sales position, you complete the company’s training program and
are assigned to a field territory working with a senior seller for some on-the-job training.
You feel really lucky because the senior seller you are working with has an outstanding
reputation not only for meeting sales quotas but for having a thorough understanding of the
territory and the competitive environment. This will be a great learning opportunity.
After a couple of weeks in the field, the senior seller tells you to meet her at a near-
by office complex in the evening—“wear old clothes.” When you arrive, she asks you to
join her in some “dumpster diving”—explaining that your major competitor has offices in
the complex and tosses out the carbon paper from computer output showing territory sales
and targeted business activity. You participate, but are uncomfortable as you think about it
later. Was this ethical?
Basically, any information available to the public is fair game in a competitive investi-
gation. Any discomfort felt regarding the preceding examples should be a tip-off of an ethical
lapse. In either example, the uninitiated or inexperienced person can use the situation as a
pattern for future acceptable behavior, or, if uncomfortable with the circumstances, take a
stand to overcome the discomfort—avoid the ethical lapse. The choice is one the individual
must make.
OTHER QUESTIONABLE ETHICAL CHOICES AND OPPORTUNITIES As you ponder your degree
of discomfort with the examples you have just read, examine the following ethics dilemmas.
Should you, or shouldn’t you? Would you, . . . or wouldn’t you?
• Paying bribes to foreign officials (or to government officials in the United States) by having a
consultant pay the bribe and reimbursing the consultant for “miscellaneous marketing costs”
• Charging an exorbitant price for your product at a time when your product is in a tempo-
rary state of shortage
• Taking marketing allowances or promotional money even though there is little likelihood
you will perform the marketing activities required to receive such bonuses
• Posing as a prospective customer to obtain competitive information
• Favoring one distributor over another; creating an unfair advantage through sales promo-
tions and incentives designed for one of your distributors, knowing that your other distrib-
utor in the same territory is not likely to participate as effectively
Many of these behaviors are justified as “what’s best for all stakeholders”—the “greater good”
defense. The higher in an organization, the more often the greater good is offered as a defense, until,
eventually, the reasoning offered is “pressure from stockholders.” Read the box, “They Did What?”
If asked ahead of time, do you think stockholders would have approved of these actions?
INDIVIDUAL ETHICAL BEHAVIOR

Students will often ask for advice when faced with these and similar situations, as they occur in
group study projects, their careers, and life in general. The advice we usually give is that ethics
are a self-realized code of behavior. Our experience is that many business students, operating
from the skepticism fostered by media reports, are apprehensive of what they perceive as ques-
tionable ethics in business. We have found that the anticipated standards (or lack of standards)
are actually worse than the reality. This is compounded by the fact that individual ethical stan-
dards are internally generated.
Win–Win, Win–Lose, and Zero-Sum

The need to succeed, to win, is inherent in Western culture. Peer pressure, family responsi-
bilities, and self-centered needs contribute to a win-at-any-cost attitude. When faced with
winning or losing, most people will elect to win. Built into the win–lose paradigm is the idea
that, for there to be a winner, there must be a loser. Business schools go as far as teaching
“zero-sum” management approaches in decision making. The concept of win–win gets lost in
this shuffle.
They Did What?
Do You Think Stakeholders Would Approve?

• Microsoft predatory practices result in U.S. • Firestone betrays largest customer (Ford)
courts declaring it an illegal monopoly. At with shipment of questionable tires; Ford tire
this writing, decision is still pending in recall costs over $3 billion.
Europe. (2001-current) • Enron manipulation of electric power markets,
• Hewlett-Packard board members spy on and eventual loss of entire corporate equity
each other, questioning each other’s loyalty through accounting and finance manipula-
during stressful acquisition of Compaq and tions leads to demise of Arthur Anderson, a
hiring of new CEO. (2005) major public accounting firm.
• Tyco CEO charged with tax evasion, waste of • Qwest Communications CEO resigns, profits
corporate assets, resulting charge of $6 restated, assets cut by 50 percent ($34 billon).
billion to earnings.
• WorldCom: Fraudulent loans to CEO.
• Merrill Lynch conflict of interest settlement Sources: Stephen Young, Moral Capitalism (San Francisco:
results in $100 million settlement, loss of Berret-Koehler Publishers, 2003) “Living in Microsoft’s
half of market capitalization. (2002) Shadow,” Wall Street Journal (July 2, 2001)
How do individuals behave when faced with these choices? Our experience is that many
people will rationalize ethical standards to fit the situation. If the organization cannot win,
actions are taken to ensure that the opponent(s) will not be a winner—keep the playing field level
(lose-lose). This fosters individuals to suspect that others, either individuals or organizations, are
playing to keep them from winning. Instead of “playing to win,” the self-protective approach of
“playing to not lose” becomes the operating posture.
Some More Ethical Dilemmas: What Would You Do in Each Case?
• You have started a new sales job with a suc- your product has been cospecified with a
cessful telemarketing company. Pay is commis- competitor’s product. Closing this piece of
sion based. Your manager is reviewing calling business will put you over the top of your
tactics. She tells you to start each call by asking sales quota. The purchasing agent keeps say-
potential customers if they are willing to ing things like “good sellers know how to
answer some market research questions. The land a big fish—they just use the right bait”
questions are about the discretionary income while talking about a new video camera
and credit cards used in the household. When she’s interested in.
it is determined that the household can afford • A good customer asks you for four tickets
your product, the sales pitch starts; otherwise, to a hockey game for himself, his wife, and
you are instructed to hang up. another couple. You give him the tickets.
• As field marketing manager, you are about to The following week, he asks you for six
hire a new FMD for a major territory. Of the tickets. You respond that you have only
three top applicants, the best is a woman. four and that you would like him and his
You know that, even though it is the twenty- wife to join you and your significant other
first century, some of the customers in the at the game. He reluctantly says yes
territory prefer dealing with men. but then asks you to not mention the previ-
• You are the seller at a contract provider who ous week’s tickets as he was not there with
just landed a big job from an end user where his wife.
Mutually exclusive
A B
EXHIBIT 16-2 Circumstances That Are a

“Win” for A and B: Mutually Exclusive
Consider the preparation for a negotiating session. Good business practice would
have participants learn as much as possible about the other party’s position—strengths, weak-
nesses, likely negotiating strategies. Part of this analysis should include a reasonably good un-
derstanding of what the other party considers “a win.” If, as shown in Exhibit 16-2, there are
no circumstances in which a win for one party is also a win for the other party—each party’s
definition of a successful negotiation excludes the other party—then there is no chance for a
“win–win” scenario. It may even be inadvisable to enter the negotiation process, as one side
must lose for one side to win. If a long-term association is planned, another partner should
be found, as the “loss” on one side may build resentment and a search for an opportunity to
“get even.”
If, as shown in Exhibit 16-3, there are circumstances in which a win for one party is also a
win for the other party—the area labeled as C bounded by the arcs from each circle—then there
is a win–win scenario that should satisfy both parties. This becomes the foundation for future
efforts as well as immediate success. Neither party need succumb to a defensive “playing to not
lose” posture.
Readers ask about the portions of the circles that are considered a win by each party but do
not fall in the mutually inclusive area C. The inference is that these winning positions, A minus C
and B minus C, are lost in the negotiation, the loss a result of a compromise. This is not the case.
They could not be “lost” because they were never in consideration as a positive outcome by both
parties. The winning opportunities represented by the areas that are not overlapped are still win-
ning opportunities, just not immediately between these two parties.
COMPROMISE AND WIN–WIN Recall the box “Now What Did That Really Mean” from Chapter 15.
When students are polled as to the meaning of the word compromise, the most frequent reply is to
give up. Yet, compromise is the outcome of negotiations, area C in Exhibit 16-3, aimed at creating
win–win situations that work for all involved, enabling all parties to commit to an agreed-on
Common Ground
A C B
EXHIBIT 16-3 Circumstances That Are

a “Win” for A and B: Common Ground
direction, goal, or common promise. Commitment to the common promise is important. Alliances
are more likely to generate mutually beneficial outcomes when each party can depend on the other
to work toward mutual benefits.
Markets’ participants have long memories. Before entering into an alliance, each party will
examine the history and reputation of the other party. Actions by individuals can reflect on the entire
organization. Previous behavior by individuals that was other than mutually beneficial or raised
issues of trust and co-operation may exclude the organization from the new alliance. Again, the long-
term positive impact of ethical decisions and actions reflects positively on future opportunities.
ETHICAL BEHAVIOR AND VALUE NETWORKS

In Chapter 2, the concept of the value network was introduced as different combinations of capa-
bilities merged in alliances to serve various sets of customer needs. When a marketer seeks new
customers, value networks may be formed to tailor the offering to specific customer criteria.
Exhibit 2-3 attempted to show graphically the intricate web possible in the creation of a multidi-
mensional value network. When two firms participate in value networks, they are working in an
alliance to serve both firms as well as a specific customer. This is not unlike the relationship
shown in Exhibit 16-3. The common ground, area C, is the offering created to satisfy the needs
of the specific customer. For another customer, Firm A may combine with Firm B again or with
a third firm or create a network of many value providers.
Exhibit 16-4 shows a value network of three providers. Intertwined relationships work in
alliances to create offerings for specific customers. Not all participants engage in each creation.
However, participants in other networks become aware of the reputation (value image) of each
firm as an ally in the network. A, B, and D participate in a value network to create an offering
comprised of the common area, E. A contributor’s respect for proprietary information shared in
each alliance, as well as even-handed, ethical treatment of each partner improves the long-term
outlook for that contributor.
The firms and individuals involved in the preceding scenario that have long-term value net-
work opportunities are those who operate ethically as partners in previous networks. The
Common Ground = E
E C
D
EXHIBIT 16-4 Winning Common Ground for

Three-Party Value Network
win–win scenario, then, is determined not by size, technology, or leverage but through trust and
regard for all members of the team.
Ethical Behavior and Value Image

As previously discussed, the overall attitude toward an organization can be described as its value
image—the sum of all impressions that have been made. An investment in value image is an
investment in the social capital of the organization. As any capital investment, the short-term
benefit may not be immediately obvious, but organizational planning has determined a need for
this capitalization to be successful within the long-term goals of the organization. In the following
section, crisis management is discussed. Consider social capital as one of the resources available
to the organization in a crisis situation.
CRISIS MANAGEMENT
The relationship between ethics and crises is obvious in some situations; the crisis is the result,
in part, of ethical choices made by the organization’s executives, managers, or employees; and
the social capital or value image that has been built long-term (positive or negative) will strong-
ly influence the next steps. Sometimes a crisis may occur because someone took an ethical
stance in dealing with a situation. More often, a crisis related to ethics occurs because someone
in the company has addressed a situation with sub-par ethics. Many crises derive from other
sources, though—technological failure, human error, unanticipated consequences of complex
system elements, or really bad weather, for instance—and ethics are minimally involved in their
creation.
So why should a marketer be concerned about crisis management? First, the marketer
often is asked to manage the external communications with stakeholders. Even if the company
has a corporate communications department, this department is often organizationally within the
marketing organization of the company. Second, in a crisis, the whole company ought to be
involved in dealing with it. Marketers and the sales force are charged with managing relation-
ships with customers and channels during a crisis, just as they are during normal periods. Third,
in preparing for a crisis, the marketers need to represent the needs and concerns of customers and
channels as crisis plans are made.
At its core, effective crisis management depends on ethical attitudes and behavior. The
two most important components of ethical attitude applied to crisis management are a willing-
ness to take an honest look at the organization and the possible consequences of its actions and
a willingness to feel compassion for those who are affected by the organization’s actions. This
means that an ethical company will take the effort to anticipate the negative effects of its actions
just as it anticipates the positives. Some of the negative effects can be prevented or mitigated
with proper safeguards, quality controls, incentives, and so on.17 Crisis preparation can estab-
lish mechanisms for handling incidents and accidents, isolating them, and keeping them from
growing into crises. Some events may become full-blown crises no matter how much prepara-
tion has been done. The ethical organization will have mechanisms in place for assisting those
affected, minimizing the impacts, and learning from the crisis so that future crises can be better
addressed.
Pauchant and Mitroff18 describe four layers of crisis-related systems within an organiza-
tion that must be understood and addressed in specific order to effectively manage crises, as
listed in Exhibit 16-5. At the core are the people—particularly those in leadership roles—in the
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.
EXHIBIT 16-5 Layers of Pauchant and Mitroff’s Crisis Management Model Source: Thierry C.
Pauchant and Ian I. Mitroff, Transforming the Crisis-Prone Organization: Preventing Individual,
Organizational, and Environmental Tragedies (San Francisco: Jossey-Bass, 1992).
organization and their mental and emotional capabilities for addressing crises. The next level is
the culture within which the people operate. The culture must be conducive to introspective and
external learning and planning to avoid and manage crises. The third level is the organizational
structure. The structure must directly address crisis prevention and management if it is to be
effective. The fourth level is the strategic integration of crisis management. The strategy and
mechanisms pursued by the company must recognize negative impacts as possible and directly
address crisis management.
Crisis Preparation
So let us assume that the organization has enlightened, open-minded management, unencumbered by
neurotic defense mechanisms that prevent good crisis management. They have infused this thinking in
the organizational culture (i.e., the first two levels of the crisis management model are successfully
addressed). How should a company then prepare itself for crises, and what are the marketers’ roles?
Four key aspects of crisis preparation are establishing effective structures for planning and
handling crises, assessing the elements of the company’s operations that produce risks and working
to reduce these risks, planning for procedures to follow as events occur to minimize the damage and
isolate the effects, and inoculation against negative public attention that will occur during a crisis.
ORGANIZATIONAL STRUCTURE FOR CRISIS MANAGEMENT An important organizational

structure for crisis preparation and for handling crises when they occur is an established, ongo-
ing crisis management team. The team has representation from inside and outside stakeholders.
In an organization large enough, it may have its own full-time staff. It has the charge of assessing
crisis threats, changing operations or recommending operational changes to head off crises, and
establishing roles and procedures for dealing with crises when they occur. It needs to have top-
level support if it is to succeed.
ASSESSING AND ADDRESSING RISKS Assessing crisis risk involves first asking the question,
“What is the worst that could happen if we continue to do XX?” If the crisis management team
represents the views of the major stakeholder groups, then a fair representation of potential crisis
areas will emerge. For instance, the marketing executive’s concerns that a new product platform
will miss the market when it is introduced, causing major financial problems, will likely be rep-
resented. Concurrently, the concerns of users will also be represented. Let us say that the product
How Remote Are the Chances of the Worst Happening?
Once in a thousand? they had considered every possible reasonable cir-

Once in a million? cumstance to insure the containment of the
Once since the Jurassic period? dinosaurs, Exxon officials apparently underestimated
the likelihood of a major oil spill from a tanker
Small actions can precipitate major situations.
mishap. Only months before the Exxon Valdez
Crisis management teams should ask what series
crash, an Exxon executive suggested that such an
of events and interactions might produce the
incident was a one-in-a-million likelihood event.
worst-case scenario. This exercise helps the team to
understand the negative effects of current systems Source: Thierry C. Pauchant and Ian I. Mitroff, Transforming
and the possibility for worst-case circumstances the Crisis-Prone Organization: Preventing Individual, Organi-
that would otherwise be seen as unlikely. Just as in zational, and Environmental Tragedies (San Francisco:
the novel Jurassic Park, park developers thought Jossey-Bass, 1992).
platform is a new type of programmable manufacturing equipment. Users’ concerns could range
from labor unrest as a result of displaced workers to injury or death caused by machinery mal-
functions. If the crisis management team had included representation of only the company’s
internal perspectives, the users’ concerns about safety might be underemphasized.
PLANNING FOR UNANTICIPATED CRISES Thinking through potential problems is not enough,
though. The nature of complexity and chaos makes it impossible to foresee all potential prob-
lems that may arise. Consequently, the crisis management team must prepare procedures for han-
dling the unanticipated events.
Crises come in stages (Exhibit 16-6).19
• Early on, there is a buildup period in which early signals indicating an impending crisis
usually occurs.
• The second stage depends on whether the organization has received and understood the
signals. If so, the organization can go through a preparation period. If not, the crisis will be
triggered by some event and will arrive on the organization’s doorstep full-blown.
• If the organization has been able to prepare for but not head-off 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. During this period, the organization’s
experience will be made more tolerable if good preparation has occurred.
Event
Precrisis Preparation Intense Crisis

Signals Crisis Aftermath
EXHIBIT 16-6 Stages of a Crisis
• Following the disposition of the crisis, a lower-intensity period occurs in which the organi-
zation and its environment and stakeholders proceed to a new normalcy, which 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.
INOCULATION AGAINST NEGATIVE MEDIA ATTENTION Once a crisis occurs, the analysts
working for the media will present their views on causes for the crisis, how well it is being han-
dled, and what the future implications are likely to be. An existing relationship with the media will
tend to set the context for such scrutiny. In the absence of a good relationship, media analysts may
consider or even impute that unscrupulous motives are at play on the part of the company.
However, if the company has established a good relationship with the media, displaying sincerity
and good citizenship, this will set the context for the media analysis of the crisis. As we suggested in
the discussion of branding, a good public image must be backed by substance; the company must
truly act in the public interest if the public image is to be believed. This must continue during the cri-
sis as well. The company must be co-operative and open to the media, providing useful, accurate,
and timely information. The media will eventually see through the efforts of a company that tries to
project an image of openness and sincerity, when it really does not possess these characteristics. The
negative media attention that will ensue will only exacerbate the crisis—and rightly so!
Media Relations During a Crisis

When the inevitable occurs (and it has been planned for), there are standard methods for han-
dling the public exposure that will occur. The organization acting ethically will follow a few
basic rules: give the media access, tell the truth, be proactive, and stay calm.
With these principles in mind, media relations should be managed a little differently in
each stage of a crisis. In the precrisis stage, the organization is still unsure what early signals
mean and has a good chance of heading off a crisis if it can be identified and addressed. The
organization’s crisis spokesperson will not want to be proactive with the media. Rather, if a
reporter asks about a potential crisis, then the spokesperson can respond that the organization is
paying attention and will take actions to avoid problems.
In the preparation stage, the media may be contacted to demonstrate how the organization
is preparing for certain kinds of emergencies—those caused by sudden outside forces, such as
natural disasters and so on. This may have some news value and help to establish relationships
with the media. Other than this, the company’s preparation efforts should remain mostly private
and media relations should be reactive.
When a triggering event occurs and a true crisis begins to erupt, the crisis team will need
to determine whether a response is actually needed. In some cases, the company may consider
not responding to accusations of wrongdoing, figuring that a response would validate the legit-
imacy of the accusation. However, in most cases, a quick response is better than no response. If
accusations are unfounded, a quick display of overwhelming facts should quell the problem.
This means that the company’s spokesperson should have access to executive management to
learn what the company’s latest information and decisions are. It also means that the company’s
information-gathering mechanisms need to activate at the first sign of a problem.
Early on, the crisis team and company executives should begin deciding what messages the
company will communicate. The message may change as events proceed and as new information
becomes available. The crisis management team should take steps to ensure that all messages
emanating from the company are consistent with the current core message coming from the
crisis management team. All communications efforts need to be sensitive to the needs of the
audience. If the company is running an emergency hotline, the people answering the 800-number
calls should be knowledgeable and helpful and have authority to make appropriate decisions for
individual callers. If callers are likely to speak different languages, company representatives who
speak all the major languages that callers are likely to speak should be available. Mechanisms for
doing all this should have been established as part of general crisis planning.
In many crises, the company may come under fire for its practices or ways of doing busi-
ness. When appropriate, the company might ask for support (though not through coercion) from
customers and partners. This may help sway public opinion and media attention. These partners
may be waiting to be asked or may not want to interfere until the company has indicated a need
for help.
In some circumstances, it becomes obvious that the company will not be able to “win”
even though the company may be right in its position. The company may have to accept blame,
apologize, and move on to the next stage. In such cases, the company may decide it is better to
“lose” quickly than to get involved in a protracted public battle. It becomes difficult to make this
decision, though, when the costs of “losing quickly” are not known and could potentially be cat-
astrophic.
In the aftermath stage, the impact on the company’s public image will already have been
done. Any repair that needs to be done to the image of the company or the brand will take time
and effort. If the relationship with the media has been fostered throughout the intense portion of
the crisis, and the company has been sincere in its efforts to address stakeholders’ needs and con-
cerns, it will be easier for the company to do the image repairs necessary. As we have stressed all
along, though, this means providing value for customers and behaving ethically in the company’s
relationships with partners and the community in general.
MINOR CRISES: PREPARATION FOR AND HANDLING OF INCIDENTS While the high-profile
crises get all the attention, they only occur infrequently. Most companies deal much more with
crises that are not going to kill or seriously impair the company (at least any time soon). These
are minor crises, incidents, or fast-occurring problems that merely erode confidence among the
company’s stakeholders and reduce the company’s financial performance. Some of these inci-
dents may be quite public, but they usually do not last long in the public eye. The effect on cus-
tomers and channels may be much longer lasting, or the effects combine with other minor crises
to add up to major problems for the company. These minor crises range from handling the media
attention when the company announces poor performance in its most recent quarter to dealing
with the public attention associated with a major lawsuit or arrest of one of the company’s exec-
utives for violating trade laws. If the company has several of these accumulate, then it has long-
term credibility or even viability problems. If these occur infrequently and they are handled well,
then the company will face temporary embarrassment and perhaps some extra costs, but viability
is never in question.
Just as with major crises, avoiding problems is preferable to having to deal with them.
Early detection, diagnosis, and corrective action are important. Some nasty surprises will always
occur, and they must be handled appropriately. In such instances, it is better to have policies and
mechanisms in place to deal with the everyday nasty surprises than it is to address them com-
pletely in an ad hoc fashion.
What would you do?
Assume you are the marketing manager in the fol- Competitors are using the supposed prob-
lowing circumstances. What kind of crisis planning lems as a competitive lever in their advertis-
would help you prepare for these examples of ing and their sales presentations.
crises, both minor and major? • An industrial accident occurs at the plant
of one of your customers. Several of their
• An industrial accident occurs at one of your
employees are severely injured. The cause
production plants. Several of your employees
of the accident is traced back to a defec-
are severely injured. Community leaders call
tive part in equipment that you sold to the
for safer working conditions.
customer.
• A competitor openly accuses your company
• Your company is the target of a hostile
of unethical behavior in obtaining competi-
takeover attempt. Your customers are con-
tive information. There is internal evidence
cerned because the company attempting the
that some of your marketing people have in-
takeover is famous for dismantling acquisi-
deed gotten some sensitive information
tions in such a way that old relationships
through illicit means.
with customers are often torn asunder.
• An industry trade journal reports deteriora-
tion in your company’s service quality. The In each of these cases, suppose the crisis
data reported in the article are open to inter- occurs despite your best preparation efforts. How
pretation, but customers are beginning to might you, as the marketing manager, handle
question the value of your company’s offering. your role?
HANDLING MINOR CRISES IN A YOUNG COMPANY If the company is doing a good job of
inoculation—preparing for a major crisis—it will generally be in good shape to handle minor
crises as well. Crisis plans and mechanisms will be in place. Roles will be defined and people
will understand how to act.
There is one set of circumstances in which an ethical company will probably not be in a
good position to handle minor crises. This is when the company is new. A young company
may not have had the resources available for crisis planning. It is important, then, for the
young company to retain a good public relations firm as soon as it reaches a size sufficient to
be able to pay the retainer. Whether it is the same agency that handles promotion campaigns or
a different one, the job is different from proactive marketing publicity. The crisis-related job
for the agency should be to manage ongoing relationships with the media to begin the inocula-
tion process we mentioned in the prior section. This is just as important for minor crises as it
is for major ones.
The company should pay particular attention in the selection process to the public relations
firm’s track record in dealing with negative public attention. Also, the company should be certain
to try to find an agency with ethical values closely aligned to its own. The company’s executives
do not want to be in the position of arguing with their public relations agency on what to say to
the public media and how to say it in the middle of a crisis.
To facilitate clear understanding between the company and its public relations agency, as
well as between the company and its management and employees, the management of the young
company should set out a policy of how it deals with public adversity. This written policy should
reflect the company’s core values and ethics. This policy will then form the basis for the company’s
attitude in addressing public adversity in a major crisis, as well.
MAINTAINING VIGILANCE WHILE MARKETING ENTREPRENEURIALLY Monitoring threats

and anticipating crises would seem to contradict and undermine the entrepreneurial efforts we
espoused in Chapter 9. This is a real concern. The role of crisis planning and crisis management
efforts needs to be couched within an entrepreneurial context and not allowed to overwhelm it.
The key to attaining balance between the two kinds of efforts is to first realize where the two
coincide and then to co-ordinate the purposes of the two efforts.
The marketing organization with an entrepreneurial orientation should be willing to accept
some risk of poor financial performance. Crisis management people can raise questions that can
halt a marketing strategy or require substantial change when the strategy appears to create other
kinds of risks, such as risks of harm to customers or other stakeholders. Entrepreneurial market-
ing does not mean that new ventures will be pursued when they create moderate non-financial
risks for stakeholders or for the community at large.
THOUGHTS TO TAKE WITH YOU AS YOU FINISH THIS CHAPTER

In this chapter, we have presented the societal marketing concept and its relationship to business
ethics and crisis management. We hope that you recognize that the societal marketing concept can
significantly reduce the need for crisis management. We also hope that the material presented in
this chapter demonstrates the dilemma many people face, both as professionals and as individuals
in society. Ideal conditions do not exist, yet this is neither an excuse for less than ethical individ-
ual behavior nor less than an organizational commitment to ethical standards. Situational ethics
(or ethics of convenience) permit a spiraling down of standards that lower the image and esteem of
the people who make up the organization. Ethics are an individual choice. We hope that this chap-
ter has given you some things to consider as you make choices in the professional world.
An ethical approach to marketing and to doing business in general also obliges the compa-
ny to prepare for the crises that it cannot anticipate and avoid. The societal marketing concept
requires businesses to prepare for times when they have negative impacts on society, mitigate the
problems that arise, communicate with all stakeholders honestly, and to take responsibility for
the company’s actions and their impacts. The marketer’s role in crisis management is to manage
the relationship with channels and customers even during these periods of stress.
This is the last chapter in the book but what we hope will be the beginning of your contin-
ued interest in business-to-business marketing. The differences between business-to-business
marketing and consumer marketing have been discussed. The creation of the total offering based
on customer perceptions of need and value has been strongly advocated. Process and methods to
influence business buying decisions have been described, based on the establishment of long-
term relationships, partners, and value networks. Revisit these concepts after you obtain more
experience in business-to-business marketing. We think you will recognize the real value of what
you have learned when you apply it “in the real world.”
Key Terms
natural law 407 situational ethics 407 value image 402
positive law 407 societal marketing concept 403
self-interest considered upon
the whole 407

1. Discuss consumer attitudes toward business ethics. 8. Can all crises be averted with good crisis planning?
Why are so many people willing to accept business Why, or why not?
ethics as an inconsistency in terms? 9. What should an organization look for in a public
2. Are ethical marketing practices more important at relations agency to handle the company’s public
the business-to-business level or at the consumer crises? When should the public relations agency be
level? Is there a difference? hired? Why?
3. Should a company respond (or “go along with”) 10. Think about the emotions experienced by TWA’s
customers that want something because it is best stakeholders (both internal and external to the
for them, but not aligned with what may be benefi- organization) during the Flight 800 crisis. If you
cial for society? were the spokesperson for TWA, whose emotions
4. Considering the nature of relationships in busi- would you be expected to address? How might
ness-to-business marketing versus consumer mar- you, in your role as spokesperson, address these
keting, are ethical lapses more likely to occur in emotions?
consumer markets or in business-to-business 11. Go to the Web site for the American Marketing
markets? Association, www.ama.org, and review the AMA
5. Select a recent crisis faced by a prominent member Code of Ethics. Consider how difficult it would be
of society—politician, statesman, community for you to adhere to it, in the examples described
leader, and so on—how well was the crisis handled here and from your personal experience.
with regard to the principles discussed in this 12. How can a business-to-business marketing organi-
chapter? zation be watching for the sources of minor crises
6. What ethical factors can contribute to individual without becoming too conservative in its strate-
discomfort in a position in an organization? gies and actions? How can marketers stay entre-
7. Do all crises, big and small, involve ethics? Briefly preneurial while still proactively managing
explain. crises?
Endnotes
1. Federal Aviation Administration, “Summary of 7. Moira Marx Nir, Implications of Post-Consumer
FAA Actions on TWA 800/747s,” FAA News Plastic Waste (Society of Plastics Engineers,
(December 8, 1997). Inc.), An article from Plastics Engineering,
2. Robert Davis, “FAA to Review Safety of Fuel 46(9) (September 1990).
Tanks,” USA Today (December 16, 1996), www. 8. American Marketing Association, AMA Code of
usatoday.com. Ethics, http://www.ama.org/about/ama/fulleth.asp
3. Deborah Feyerick, “Boeing Delayed Handing 9. Philip Kotler, Marketing Management, 10th ed.
Over Study of Fuel Tanks to TWA 800 (Upper Saddle River, N.J.: Prentice Hall, 2000),
Investigators,” CNN.com (October 30, 1999). p. 25.
4. Andy Pasztor, “Plans to Avert Fuel-Tank 10. Betsy Cummings, “Slowdown Effect: Lack of
Explosions Tied to ’96 Jet Crash Called Too Ethics,” Sales and Marketing Management (June
Costly,” Wall Street Journal (August 8, 2001), 2001), p. 13.
p. A2. 11. The Foreign Corrupt Practices Act (FCPA),
5. National Transportation Safety Board, “NTSB passed in 1977 makes it a crime for a U.S. cor-
Advisory” (August 8, 2001), www.ntsb.gov. poration to bribe officials of another government
6. Christopher Conkey and Andy Pasxtor, “U.S. to obtain favorable business decisions. However,
Set to Toughen Jet Fuel-Tank Rules,” Wall Street under the FCPA, gratuities are permitted. The
Journal (July 16, 2008), http://online.wsj.com/ dilemma is in defining the difference.
article_print/SB121616726397856251.html.
12. Vernon R. Loucks, Jr., “A CEO Looks at Ethics,” 17. Steven Fink, Crisis Management: Planning for
originally published in Business Horizons the Inevitable (New York: AMACOM, 1986).
(March–April 1987), pp. 2–6. 18. Thierry C. Pauchant and Ian I. Mitroff,
13. FMDs and the role they play in the marketing or- Transforming the Crisis-Prone Organization:
ganization are discussed in Chapter 11. Preventing Individual, Organizational, and
14. Stephen Young, Moral Capitalism (San Environmental Tragedies (San Francisco:
Francisco: Berret-Koehler Publishers, 2003), Jossey-Bass, 1992).
p. 11. 19. Ibid.; Fink, Crisis Management.
15. Ibid, p. 17.
16. Marianne Jennings, Business: Its Legal, Ethical,
and Global Environment (Cincinnati: South-
Western College Publishing, 2000).
CASE I
LastMile Corporation II: Choosing a Development Partner
Overview struggle. The effort paid off and the company,
on its own in its own facilities for two years,
In this hypothetical case, LastMile’s CEO is was a pioneer in technology for wireless broad-
faced with a decision on who to partner with for band access. They were very proud of their
development and launch of LastMile’s new achievements.
product. LastMile has two offers on the table However, Tom realized that now, in 2005,
and is trying to decide how to proceed. the company might do better with closer ties to a
In this case, you will be asked to determine larger company with more resources and com-
the best approach, given the company’s situation. plementary technology products. The business
environment is fast changing and new techno-
LastMile’s Dilemma logies are coming up much faster than in the
Stepping out from a meeting that had just earlier years. The gestation period for new tech-
ended, Tom Sherman, the president and CEO nology has been rapidly cut down. The market
of LastMile Corporation, was reviewing the environment was promising, with money pouring
main points discussed. This was a meeting with into new ventures. New companies were spring-
internal LastMile directors and executives, ing up and more and more players were entering
discussing alternatives for LastMile’s strategy. the wireless communications industry. Being a
LastMile had two proposals on the table for privately held, small company, LastMile did not
strategic partnerships. One was a proposed have the financial resources to invest enough in
technology licensing agreement from Midwest its future technological developments. LastMile
Technologies, Inc., a large defense contractor was “at the chasm,” the company unable to respond
and advanced technology supplier to many as rapidly as the market growth opportunities.
industries. The second offer was an acquisi- The company was facing financial problems,
tion proposal by ANZ Investment Group, a which needed to be addressed immediately.
medium-sized venture capital firm and incuba- Industry analysts predicted that the broad-
tor, who offered LastMile substantial funding band wireless communication industry would
in exchange for a significant ownership share experience a growth rate in the next couple of
of LastMile. The meeting had reached no con- years that would be four times the present rate.
clusions but raised a number of issues pertinent This was largely attributed to the exponential
to the decision the whole board of directors growth of the Internet and e-business. The
would have to make. Tom, who as CEO was a broadband wireless communication technology
member of the board, was trying to make up his is relatively inexpensive and quick to install,
mind on the position he would take tomorrow with a high data transmission rate, more than
when the entire board would next meet in a 2,700 times faster that the fastest dial-up
videoconference session. modem used in personal computers. The trans-
Tom still remembers the early days of ceiver technologies for broadband access
LastMile when he and seven others, working in systems are also used for wireless infrastructure
rented cubicles in a technology incubator, had connectivity in cellular networks. As the density
given an idea a definite shape, which resulted in of cellular users continues to increase, broad-
what the company is today. They had come a band wireless communications promises to be a
long way since those endless hours of constant strong growth area.
423
424 Case I • LastMile Corporation II: Choosing a Development Partner
The Internet has revolutionized the way contract electronics component provider to other
businesses communicate and exchange infor- companies in telecommunications.
mation, becoming a crucial factor in the success LastMile Corporation is a privately held
of any business. The products that LastMile company, founded in 1998 with its head-
Corporation manufactures will help businesses quarters in Santa Clara, California. LastMile’s
overcome problems that are encountered when core competency is based on its innovative
trying to connect to the local switching office or efforts in transceiver systems design and inte-
Internet access point at broadband frequencies. gration. This expertise has been used to develop
Midwest Technologies, Inc., provides low-cost microwave transceivers based on
advanced technology products and services to revolutionary MMIC design. It has over a
the automotive, aerospace, and information dozen patents covering the core technology in
technology markets worldwide. Having annual its line of products. LastMile sells its sub-
sales of about $20 billion, the company systems directly to telecom equipment makers
employs more than 115,000 employees with pri- like Hughes Electronics, Nokia, and Nortel
mary locations in more than thirty-five Networks. They in turn, refine and sell the
countries. Founded early in the 20th century, it broadband wireless systems to the actual
has been at the forefront of some of the signi- communication service providers. LastMile
ficant technologies of the last hundred years. serves as a core building block vendor in the
The mission of Midwest Technologies is to broadband wireless arena and is a crucial
accomplish a leadership position in the auto- player in the build-out of the widely anticipated
motive, aerospace, and information technology third-generation cellular networks. With the
markets by serving the needs of its customers explosive growth that this industry is antici-
in innovative ways—by being the best in pating, the company faces competition from
everything it does. One of the strategies that companies like Infineon Technologies, Raytheon
the company has adopted is to create value for and Andrew Corporation. New competitors
its customers, through the execution of alli- like Telaxis Communications and MTI Techno-
ances, new ventures and mergers that bring an logy are also vying for a slice of the broad-
array of communication technologies to the band wireless equipment market pie. Tom was
marketplace. thinking about what needs to be done, so that
Micro Manufac- the company will be able to ride the tide. The
Monolithic microwave turing, a fully owned primary need was for cash that could be used to
integrated circuit (MMIC)
is a generic technology
subsidiary, is Midwest’s support the rapid growth in response to
that is used in the telecommunications sys- customer demand.
amplification of microwave tems development and ANZ Investment Group provides invest-
frequencies. It is a low manufacturing unit. It ment to companies to realize their financial
power consumption device, develops and produces goals and objectives. Established in 1983, it
which is used in all high
frequency transmission
telecommunications equ- has its headquarters in Torrance, California. It
devices like cell phones. ipment, including MMIC emphasizes quality service and long-term client
modules, for Midwest’s relationships. In its portfolio of investment
contract customers. Midwest customers include companies are several young companies with
many telecommunications service providers, such technology related to LastMile. There was the
as AT&T and Comcast, who often contract to possibility that, with the cooperation of all
Micro to produce devices tailored to service parties, the ANZ companies together could
provider’s systems. Micro is both a captive supplier approach the telecom equipment vendors with a
to Midwest for Midwest-branded products and a fuller line of products, but these would still have
Case I • LastMile Corporation II: Choosing a Development Partner 425
to be made compatible with the products of narrowing its market to Midwest Technologies
other technology suppliers. only. Tom was wondering whether this might
Since the end of December, Micro not be too large a hurdle in LastMile’s progress
Manufacturing has been showing an active and development of its new technologies. If and
interest in LastMile and, together with Midwest’s when LastMile decided to approach the market-
technology licensing group, had recently put place directly with next-generation technology,
forth the proposal to Tom Sherman. Micro the licensing agreement may have created a
Manufacturing is a leader in the manufacture formidable competitor.
of the kinds of transceiver modules made by ANZ Investment Group had proposed a
LastMile, but has only a rudimentary develop- direct investment option. This would provide
ment capability itself in this area. It is looking LastMile with the much-needed cash for fur-
for an increasing involvement in the broadband ther development that would help the company
telecommunications marketplace. The vice keep competition at bay. A direct investment
president of business development for Micro would give ANZ Investment Group a genuine
Manufacturing sees LastMile products and interest in the future of LastMile Corporation.
capabilities as a perfect fit with Micro Manu- LastMile would also have total control over its
facturing’s products and their future plans. products and will be free to choose which
Additionally, Micro capabilities as a low-cost markets it would like to pursue.
manufacturer of electronic components could Tom Sherman was leaning toward the
provide LastMile, as volume expands, with an offer from Midwest Technologies. It offered
efficient producer of products. better access to the markets he wanted to
The Midwest–Micro proposal is for a address. It also would be easier to co-develop
licensing agreement with LastMile. Midwest compatible products with Micro Manufacturing,
Technologies has an interest in and has hinted at thereby reducing development costs and time.
financial support for LastMile’s technical His principal concern was the loss of flexibility
research and development. The agreement in pursuing technology directions, particularly
would require LastMile to supply its technology if the market moved away from Micro
to Micro Manufacturing. Micro Manufacturing Manufacturing’s architectures. He wasn’t too
would be able to provide this technology to its fond of the situation once the license period
customers. At the end of the term of the license was over, either. The ANZ option, on the other
agreement, both Micro Manufacturing and hand, provided money with few strings attached.
LastMile could go their own way. Tom’s concern, though, was that this option did
Some of the terms of the license con- little to improve LastMile’s marketing punch,
cerned Tom. As Micro Manufacturing used and he was not convinced that cooperation
LastMile technology as its own at customers, with other ANZ companies would be easy or
Micro would have an opportunity to co-develop useful. Tom was wondering whether Midwest
the next-generation offering with direct Technologies would be willing to consider an
customer input, using the LastMile technology alternative proposal.
to establish a beachhead in the market segment.
This could provide Micro with a strong pre-
Questions for Discussion
sence with customers, as it would be the
defending source. The agreement also implied 1. What are the other alternatives that
that LastMile would modify the technology LastMile could look at that would create
to suit the needs of Micro Manufacturing a working relationship between Midwest
customers, which would result in LastMile Technologies and LastMile?
426 Case I • LastMile Corporation II: Choosing a Development Partner
2. What are the advantages and disadvan- Note: Though based on real situations, individual
tages of these alternatives? and company names are fictional and several simpli-
3. What are the objectives that LastMile fications have been made, in the interest of academic
would like to accomplish out of such a clarity, to product and market information. For this
reason, specific situations and factors mentioned
partnership?
herein may not recreate the actual circumstances
4. What counter proposal(s) would you
experienced.
recommend? Explain.
CASE II
B2B E-Commerce in China: The Story of Alibaba.com
In 2008 China had the most Internet users in “gurus” during the period of the Internet bubble
the world; 253 million users were online, in the late 1990s.2 So much pressure was placed
looking for information, sending e-mail, and on business leaders to adopt B2B e-commerce
doing business electronically. E-business is solutions that near panic often ensued in the
defined as “any economic transaction where rush to set up thousands of online marketplaces
the buyer and seller come together through the (e-marketplaces). However, when the Internet
electronic media of the Internet, form a con- bubble finally burst, these e-marketplaces and
tractual agreement concerning the pricing and all the money invested in them disappeared as
delivery of particular goods and services, fast as they had once appeared. This incident
and complete the transaction through the served to cast a dark shadow over the future of
delivery of payments and good or services as B2B e-commerce, and it has only been in the
contracted.” Business-to-business (B2B) last few years that a strong resurgence in its usage
e-commerce thus involves adding this new has been noticed. (See “Covisint: Illustrating
technology to the “traditional” business set- the Importance of Adapting to Customers’
tings to enable companies to buy and sell Buying Behavior,” in the opening of Chapter 3.)
online between themselves. The rise of B2B e-commerce can be under-
The emergence of B2B e-commerce is stood as a kind of third wave of e-commerce,
relatively new to the business world, since it following the first wave that consisted only of a
was not until the mid-80s with the introduction Web site where the company offered a cata-
of the first desktop operating systems that the logue of its products, and a second wave where
Internet began to finally take shape. By 1990, the consumer could buy those products by a link
Tim Berners-Lee developed the first World established between the Web site and the
Wide Web software and as a result opened up company’s back-end.3 In this third wave the
the Internet to the growing masses of computer company is so focused on the Internet that not
users. It was then just matter of time before only does it offer its services to its clients
businesses all over the world began to see the online, but also it does transactions with its
tremendous opportunity of using the World providers online, too.
Wide Web, and rushed to start finding ways to By separating the physical and infor-
benefit from it. By 1993, over 100 countries mation flows connected with each transaction,
had an online presence, and commercial users the Internet radically changes the ways in
outnumbered academic users for the first time which corporations provide and trade goods
in the history of the technology.1 and services with each other.4 It is the prospect
B2B e-business, or e-commerce, rapidly of such change that motivates companies to
became one of the most talked-about topics by consider B2B, since there are several signi-
leading industry experts and the latest marketing ficant advantages that can be gained.
1
Augusta C. Yrle, Sandra J. Hartman, and Kenneth R. Walsh, “E-business: Linking Available Services and Entrepreneurs’
Needs,” Journal of Small Business and Enterprise Development, 11(3) (2004), pp. 390–399.
2
Alberta Efuture center, “Business to Business E-Commerce Basics”, Pan-Western E-Business Team (2006), p. 1.
3
Augusta et al., “E-Business: Linking Available,” pp. 390–399.
4
Steven N. Kaplan and Luis Garicano, “A Framework for Analyzing B2B E-Commerce,” University of Chicago Graduate
School of Business (November 2000), p. 1.
427
428 Case II • B2B E-Commerce in China: The Story of Alibaba.com
The key effect of B2B e-commerce is to kinds of e-commerce available in China, scattered
change the costs (and benefits) of transacting data suggest that more than 75 percent of trans-
compared to the “traditional” methods. Companies actions are business to business.6
can potentially reduce or even eliminate costly Yet compared to other similarly develop-
tasks that slowed efficiency or used valuable res- ing nations, China’s B2B e-commerce activity
ources. Another advantage of B2B e-commerce has been ranked well below the average score
is that the Internet can provide buyers with better in a recent survey.7 This is partially because of
decision-making information about a product’s difficulties concerning the technology and the
characteristics (including price and availability) political and economic environments for B2B
since this information is less expensive to obtain e-commerce adoption. On the other hand, the
and much easier to find. A third advantage is that impressive annual growth rates of B2B trans-
it can eventually provide better information actions in recent years, as well as the positive
about buyers and sellers themselves, which is forecasts, are pointing to the fact that China is
vital in B2B situations when dealing with issues progressing on gradually working on its
such as credit. business, legal, and cultural barriers while
However, the most widely acclaimed upgrading its technology infrastructure.8
merit of B2B e-commerce is that it has “levelled Statistics from domestic Internet research and
the playing field” for small companies to com- consulting company iResearch predict the
pete with larger ones despite differences in size e-commerce market will grow 50 percent
and scope.5 Allowing small companies global annually, reaching revenues of 7.5 trillion
access to markets that were once only the yuan in 2012, up from 480.9 billion yuan in
playing ground for large multinationals has 2006.9
revolutionized the business landscape and China’s infrastructure for e-commerce
radically changed the old rules of conducting can be characterized by “disparities” among
business transactions. geographic areas, demographics, industrial
Therefore the rise of B2B e-commerce fields, and firm size.10 Large cities and econo-
as witnessed by the worldwide increase in the mically advanced coastal provinces typically
number of virtual marketplaces and more fully enjoy much better infrastructure and many more
integrated and coordinated supply chains has Internet users than remote and economically
given companies big and small new tools for poor provinces. Most Chinese firms have also
them to remain competitive in the increasingly poor internal management information systems
competitive globalized business environment. that lag far behind that of their counterparts in
developed countries.
Difficulties of B2B E-Commerce Along with the poor technical infra-
in China structure, there are many other barriers to B2B
The proliferation of B2B e-commerce has e-commerce in China. The most significant
taken different paths in different nations. barriers include lack of security, lack of a
Although there is no precise breakdown of the system to monitor and guarantee buyer and
5
T. Friedman, “The World Is Flat,” Farrar, Strauss and Giroux publishing, USA (2006).
6
The Economist Intelligence Unit Limited, “Country Commerce: Ecommerce in China” (2006), p. 124.
7
A. Zixiang and T. Wu Ouyang, “Diffusion and Impacts of the Internet and E-Commerce in China,” School of Information
Studies Syracuse University, USA (February 2004), p. 4.
8
Ibid.
9
D. Qingfen, “E-commerce Evolution,” China Daily (October 10, 2007).
10
Zixiang and Wu Ouyang, “Diffusion and Impacts of the Internet,” p. 4.
Case II • B2B E-Commerce in China: The Story of Alibaba.com 429
seller credibility, and an inefficient delivery developing or buying the technology and the
system.11 In addition, there is no sophisticated relative difficulty of finding and retaining the
legal framework to facilitate e-commerce acti- necessary qualified people to establish and
vities and to protect the interests of both vendors maintain these e-commerce platforms.13
and consumers. Because of these limiting factors, only a
In regards to a deficient legal framework, very small number of firms have actually
domain names are a special area of intellectual moved to the next step to conduct e-commerce
property and they have been a particular activities via their Web sites. A recent report
headache to many companies operating in says that sales from online transactions in
China. So-called cyber-squatters often acquire 2006 accounted for just 16.62 percent of the
the rights to domain names similar to those of nation’s total. The figure was even smaller in
well-known companies and then demand fees to 2005, when 9.85 percent of sales were made
relinquish those rights. There is currently little online.14
legal protection in China offered to companies
who find themselves victims to such practices.
What China Is Doing to Promote
Though not peculiar to China, govern-
B2B E-Commerce
ment censorship poses more difficulties than in
many other countries surveyed. Chen Yun, Mao The official Chinese media had hinted in early
Zedong’s former economic wizard, is well 2001 that comprehensive rules governing the
known in China for his “bird cage” theory.12 Internet would be made available soon.
The bird cage theory posits that the economy However, as of the date of this writing, still
should be allowed to fly free like a bird but only nothing has been officially announced. In the
within the confines of a good strong cage. meantime, the State Council did issue
Hence China’s e-commerce policy seeks to “Proposals on Accelerating the Development
control Internet information, flow, economics, of E-commerce” in March 2005. The document
and key players with albeit varying degrees of called for accelerating the pace of e-commerce
success. development and examined potential regula-
A variety of different Chinese agencies tions on electronic trading, credit management,
have over the years tried their hands at regu- security certification, online payment, and
lating and supervising every aspect of the taxation of e-commerce.
country’s e-commerce. The result has been Some isolated steps already taken by
greater confusion and increasing bureaucratic the Chinese government toward facilitating
hassles for businesses, with the result that the B2B e-commerce include the passage of the
development of B2B e-commerce has been “Law on Electronic Signatures,” which went
curbed significantly. into effect in April 2005 and improved legal
Other major limitations to the adoption of support for e-commerce. The law grants
B2B e-commerce, although again not specific electronic signatures the same legal validity as
to China, include the high start-up costs of handwritten signatures and seals in business
11
Ibid., p. 5.
12
C. Trappey and A. Trappey, “Electronic Commerce in Greater China,” Industrial Management & Data Systems, 101/5
(2001), p. 202.
13
Kaynak Erdener, Ekrem Tatoglu, Veysel Kula, Turkey Afyon, “An Analysis of the Factors Affecting the Adoption of
Electronic Commerce by SMEs Evidence from an Emerging Market”, International Marketing Review, 22(6) (2005),
pp. 623–640.
14
D. Qingfen, “E-commerce Evolution,” China Daily (October 10, 2007).
deals. This is vital for conducting business Company History

online. Along with the law, a market-access
system to certify online signatures began oper- It was in 1995, when Jack Ma, founder and
ating to facilitate the country’s growing online CEO of Alibaba.com (Chinese: ;
trade. pinyin: a- l1̌ ba- ba-) was on a trip to the United
This was in addition to another important States, he touched a computer keyboard for the
measure taken earlier in 2001 by the Chinese first time. When some friends in Seattle showed
government that involved the creation of the him the Internet, he typed “China” and “beer”
China Finance Certification Authority (CFCA). into Yahoo—yielding no results. Ma decided to
The CFCA is responsible for the creation of a start a company to help Chinese firms get on the
certification system for e-commerce and online Net. Returning home, he launched China Pages,
banking, including cross-bank transactions an online directory of Chinese firms which was
among the twelve participating banks. widely believed to be the country’s first com-
Yet despite these early measures, a 2004 mercial Web site. Two years later, Jack Ma
survey by the China Internet Network Infor- headed the first government Web site by the
mation Centre (CNNIC) showed that 62.4 percent Chinese Ministry of Foreign Trade and Economic
of Chinese Internet users cited fears of being Cooperation. In 1999, the core team from the
cheated by fraudulent Web sites as the main ministry followed Ma as he took his quest to
obstacles to online purchases.15 This is because next level by founding Alibaba.com.
the Chinese government is simply unable The Arabian Nights–inspired name was
to fully enforce many of the Internet and chosen because it is meaningful to people
e-commerce regulations it has already estab- around the world. Alibaba opens the door to
lished, and it is also unable to keep up with the doing business, enabling an interactive com-
rapid pace of new technological developments munity of millions to meet, chat, trade, and
and the need to regulate them. work online. The mission is to make doing
business easier.
The main feature of Alibaba.com is a B2B
Alibaba’s Strategy of Online Web site where buyers and sellers, everything
E-commerce from bamboo toothpicks to farm tractors, can
A company that has now become synonymous find each other and trade. The firm sees oppor-
with the Chinese B2B e-commerce industry is tunities from linking China’s small businesses
Alibaba. Since its humble beginnings in 1999, into global supply chains. But Alibaba is
when it was launched by Chinese businessman remarkable in two respects. First, it mostly intro-
Jack Ma, Alibaba.com had, in 2007, become duces not big firms but small companies
the world’s largest online B2B global trading (“shrimps” rather than “whales,” as Ma likes to
marketplace, with 25 million registered users say “there are more shrimps in the ocean than
and 255,000 paying members in its inter- whales”). Second, the shrimps are from all over
national and Chinese domestic marketplaces.16 the world including, crucially, the vast and
Its spectacular rise over the years and the largely uncharted small-business hinterland that
numerous challenges it has faced are a ref- is China. This makes Alibaba different from
lection of the entire Chinese B2B e-commerce most U.S. e-commerce companies who mainly
industry that it has actively helped to shape. focus on big corporations to help the buyer to
15
The Economist Intelligence Unit Limited, “Country Commerce: Ecommerce in China” (2006), p. 131.
16
C. Splinder, “The Alibaba Story,” p. 1.
save time. After several years of experience, peers, he grew up thinking that the outside
Ma found that small- and medium-sized enter- world was a terrible place. This view was
prises (SMEs) are the ones who really need changed only in 1985 when he first traveled
e-commerce. abroad to Australia. The experience turned his
Based in Hangzhou in eastern China, worldview inside out, and he became a fanati-
Alibaba now has sixteen regional sales and service cal xenophile. Back in China, he listened to the
centers across the country, as well as corporate Voice of America and would cycle for almost
offices in Beijing, Hong Kong, the United States, an hour, in any weather, to give free tours to
and Europe. The company had more than 5,000 foreigners in the nearby hotels. With his
full-time employees as of December 31, 2006. English skills, Ma was sent to the United States
Their English-language Web site alibaba.com in 1995 by a Chinese company to collect
specializes in B2B trades, especially for inter- money owed by an American company. That
national buyers trying to get into contact with visit opened his eyes to the Internet. Ma came
Chinese sellers. The Chinese-language chinese. back to China and tried to tell his friends in
alibaba.com focuses on B2B trades within Hangzhou to get aboard this amazing new
China while www.taobao.com is a consumer-to- invention. They thought he was mad but he
consumer (C2C) trade site for Chinese customers. went ahead and founded the first commercial
Yuxin Chen, a marketing professor at New Internet business in China. “I decided to try it
York University’s Stern School of Business, has although I knew nothing about the technology
commented on Alibaba’s three distinct target and had no people. I called myself like a blind
markets and portals (Alibaba.com, Alibaba man riding the back of a blind tiger.” Today, Ma
China, and TaoBao) as a further reason behind has delivered speeches at Harvard Business
Alibaba’s success. Chen sees them as an impor- School and World Economic Forum. As part of
tant source of synergy. “Those [small-business] the Chinese delegation to Sydney Asia-Pacific
sellers who use Alibaba will also use Taobao,” in Economic Cooperation (APEC) Business
much the same way that small-business owners Advisory Council in September 2007, Ma was
who use eBay to sell goods may also buy and described by the Australian papers:
sell items as consumers on eBay.17
Ma is typical of many very successful self-
Meet Jack Ma: “The Jack Who Will made Asian entrepreneurs who approach
change the World” life from a very different point of view than
the more hidebound Western business-
If you don’t have enemies in your heart, people. They don’t bother about defining
nobody is an enemy in your eyes. themselves or acquiring the right skills to
—Jack Ma approach a task. They don’t seek the advice
of high-priced consultants or “experts” or
take years formulating plans. They don’t
Ma is probably the only Chinese Internet entre- worry about pay and bonuses and complex
preneur anyone in the West has heard of. Aged share option deals. They just go and do it.
43, Ma stands barely 5 feet tall, stick-figure And keep on going, riding the blind tiger
thin, especially in his oversized suits. As a child like Ma, on the edge of the China boom.
of the Cultural Revolution, Ma was once a While Western businesses limit their
Mao-loving Red Guard. Along with most of his operations—seeking to concentrate on
17
Knowledge@Wharton, “Open Sesame? Or Could the Doors Slam Shut for Alibaba.com?” (July 27, 2005).
narrowly defined markets—self-made Asian system, AliPay. Alibaba.com also owns and
business people often operate conglo- operates Yahoo! China, which it acquired in
merates, cheerfully moving into a whole October 2005. The Web site www.china.
range of businesses, from trading and alibaba.com is China’s largest online market-
manufacturing to property and restaurants
place for domestic trade among business people.
and travel. In China today, particularly,
With more than 25 million registered users and
there’s a fast-moving open-mindedness and
a freedom from tradition that leaps beyond 255,000 paying members, Alibaba China is a
the thinking of “New World” countries such trusted community of members who regularly
as Australia and America. meet, chat, search for products, and do business
online. The site covers 30 industries and more
than 5,000 product categories. Customers pay
The Supporters an annual subscription fee for membership,
Despite Ma’s history with the Chinese govern- which entitles them to post trade offers and
ment, Alibaba enjoyed no initial support from the products online. The subscription fee also
government. When the initial funding of RMB includes authentication and verification of the
500,000 (approximately US$60,000) from Ma’s member’s identity, which is performed by a
personal savings and loans ran out, Alibaba third-party credit reporting agency.
looked for venture capital investors. The first
group of investors, led by Goldman Sachs, con- TaoBao and eBay
tributed US$5 million. This was followed by
TaoBao (www.taobao.com) is China’ most pop-
Softbank’s commitment of US$20 million in
ular C2C trading site with more than 20 million
January 2000. MA’s personal charms wooed not
registered users. Since its founding in May of
only capital, but admirers from the top of the
2003, TaoBao has risen to become a leader in
corporate world. Peter Sutherland, former WTO
China’s consumer e-commerce market. Com-
director-general and chairman of Goldman
pared with similar services, the Web site has the
Sachs, and Masayoshi Son, CEO of Softbank,
highest number of product listings and the high-
both sit on the board of directors for Alibaba.
est penetration among China’s 160 million
Ma’s admirers are especially important to the
Internet users.
success to Alibaba. Softbank, the world’s largest
Ma’s greatest adversary had always been
investor in cyberspace, owns stakes in Yahoo!
U.S.-based eBay. Watching the U.S. Internet
and E*Trade as well as hundreds of other com-
auction company’s increasing China presence
panies. Softbank’s support provides Alibaba with
in early 2003, Ma secretly moved a group of his
both quality advice and credibility in the corpo-
most trusted employees into an apartment in his
rate world. With strong backing from the corpo-
native Hangzhou where he had founded
rate world, Ma was able to attract Web stars such
Alibaba in 1998. Holed up in the apartment for
as John Wu, the chief designer of the Yahoo!
several months, the executives drafted plans for
Search Engine, as his chief technology officer.
TaoBao.com, Alibaba’s consumer auction site.
Launched in July of that year, TaoBao
Alibaba Today
quickly snared market share from eBay in
Today Alibaba.com Corporation is China’s China. Ma had pledged not to charge TaoBao
leading e-commerce company, operating the customers, and as the site had no conventional
world’s largest online marketplaces for both advertising, the company brought in no revenue
international and domestic China trade, as well and relied on loans and venture capital.
as China’s most popular online payment Since 2004, TaoBao was engaged in a massive
winner-takes-all battle with eBay, believing membership to Alibaba as being very helpful
that in the long run businesses and consumers and cost efficient.18 These ranged from free
only want to deal with one market, one auction membership to paying members who obtain a
house, and one payment system. quality certification. Companies use Alibaba.
After a year of fierce competition, eBay com to primarily find contacts. The business
was forced by Alibaba’s policy of offering transaction itself, including order taking and
auction services for free to change tack in China, receiving payment, is usually handled using
scrapping all sellers’ transaction fees. In 2005, traditional methods. For Morgan Nylander,
eBay committed a further 100 million, which it CEO of a micro SME in the pulp and paper
announced as “a sign of an unmistakable com- industry located in Sweden, being a member of
mitment and an unstoppable determination to be Alibaba complements their traditional ways of
number one in China.” However shortly after, doing business. “For us it is a useful tool to
eBay announced in December 2006 that it would market our products. Even if your company
close its main online auction Web site in China sells products that have a very low value it
and replace it with a minority-invested joint doesn’t take many additional sales to recoup
venture with Beijing-based portal and telecom the initial investment.”
service provider Tom Online. Industry analysts The only problem apparently with
widely believed eBay’s move reflected wider Alibaba has been the fear that using e-markets
failures among foreign Internet companies to is so easy that a company runs the risk of beco-
adjust quickly enough to consumer demand and ming too lazy and complacent. The reality of
challenges from local rivals, and in maintaining the business world continues to be that to do
good relations with Beijing regulators. business you have to meet in person, as you
Jack Ma has told local media that can’t expect customers to automatically come
TaoBao.com has already taken 67 percent of the rushing.
market share of online auction sites in China
and has left eBay far behind. TaoBao.com has Cultural Differences
26 million goods online and its Web pages are The success of Alibaba over eBay is the result
browsed 110 million times each month. Jack of deep national understanding. Online com-
Ma aims to make the online auction site volume merce was completely foreign to the Chinese
of TaoBao.com reach US$450 million in each culture, where buyers like to inspect the merch-
quarter of 2008, and the total transaction andise in person then haggle over the price. But
volume of the whole year will increase to the dynamic of online commerce is precisely
US$1.8 billion from the previous year’s US$1 the opposite: Buyers agree to buy something
billion. At the same time, he estimates that the based on a picture, and the auction drives the
total registered users of TaoBao.com will price up. To the Chinese, the whole arrange-
exceed that of eBay. ment smelled fishy at best. Further, sellers
worry about non-paying buyers, and buyers
Feedback from Alibaba’s worry they would never see the goods they paid
B2B Customers for. To tailor to such cultural requirements,
Regardless of whether they traded consumer TaoBao prices start high, and buyers haggle to
goods or sold second-hand paper processing get them down. TaoBao also offers an escrow
machinery through the e-market, the com- service to ensure the buyer is happy with
panies polled in a recent survey viewed their the goods before payment goes through; and
18
eMarket Services, “Feedback from Alibaba Customers” (2004).
people can buy in groups. This means friends dollars, Japanese yen, and euros. This means
usually get together to form group purchases. Alipay could open up China for e-commerce
This is desirable to the sellers because of the giants such as Amazon and global businesses
volume, and likewise to buyers as they obtain a lacking the scale and manpower to set up retail
discount. operations on the ground in China. As foreign
companies often have trouble getting licenses to
Innovation sell online in China, Alipay provides foreign
companies the alternative of piggybacking on
Behind each of Alibaba’s battles with its com-
Alibaba’s license rather than to acquire their own.
petitors, user-friendly innovations seemed to
be key to success. Long before eBay acquired
Skype, TaoBao had allowed buyers to send instant - Alibaba Enters Strategic
messages to sellers. In fact, it is widely believed Cooperation with China Post
amongst Alibaba executives that Meg Whitman,
Previously, Alibaba.com Group, operator of
CEO of eBay, acquired Skype after she was
China’s largest online marketplace Alibaba.com
introduced to TaoBao during her trip to China.
and the country’s biggest auction site TaoBao.
Despite Google’s reputation as “the inno-
com, just recommended on its sites several pri-
vative company,” Ma believes the Chinese
vately run express delivery companies whose
Internet market will change the direction and pave
networks don’t cover the whole country. Traders
the way for new types of progress in the search
complained about damages to and even losses of
market. “If you follow Google’s way, you will
their goods during transport, for which they
always be a follower,” Ma explained, “so we have
would only be compensated at most three times
to make the Yahoo! search engine more human,
the delivery fee based on the express delivery
more interactive, something for the 1.3 billion
companies’ rules.
people in China who aren’t technology-oriented,
Alibaba and China Post, the postal service
who don’t know how to ask the right questions to
of the People’s Republic of China, have signed a
a search engine—for people who are like me.”
long-term strategic cooperation agreement to
further develop China’s e-commerce infra-
AliPay Online Payment Solution
structure and make it easier for Chinese con-
Completing China’s e-commerce transaction sumers to shop online. Under the agreement, the
chain, Alibaba operates AliPay (www.alipay. two organizations will cooperate in parcel deliv-
com) which enables any individuals and busi- ery and money remittance services. In the short
nesses to securely, easily, and quickly send and term, China Post and Alibaba.com’s online
receive payments online. To provide AliPay, payment platform, Alipay, will launch a new
Alibaba has partnered with China’s leading banks, economical parcel service for online purchases
including China Merchants Bank, China Constr- called “e-Youbao” and allow customers to fund
uction Bank, Agricultural Bank of China, and the their Alipay account at any of China Post’s
Industrial and Commercial Bank of China. 66,000 locations across mainland China, with-
AliPay now has 48 million users, compared to out the need for a debit card or bank account.
only 33 million credit card users in China. AliPay China Post’s Green Card debit service will also
was born out of necessity; given the poor financial become a new partner for Alipay’s online pay-
infrastructure in China, Alibaba had to leapfrog ment service. China Post, one of China’s most
the technology in order to attract SMEs. trusted brands, will enhance traders’ confidence
In October 2007, AliPay facilitated transac- in e-commerce and they have also worked out a
tions in 12 foreign currencies, including U.S. mechanism to offer full compensation for
traders in case of commodity damage and loss company to take itself public. By all accounts,
during transport, further contributing to cus- Yahoo was struggling in China against the
tomers confidence and trust. market leader in search, Baidu, and against the
The organizations say the partnership will advances of Google.
leverage China Post’s unmatched geographic As Yahoo! forecasts the company’s rev-
coverage and strong brand name with Alibaba. enue at about US$200 million for 2006, most of
com’s leading e-commerce platform and online that money has been generated by Alibaba’s
community of more than 160 million businesses business-to-business ventures in a bid to steal
and consumers. China Post’s Postal Savings market share from eBay. Although Ma realized
Bank also operates China’s fifth-largest dep- that search technique from Yahoo is also essen-
ository institution after the big four banks, tial to his e-commerce strategy, he admits that
making it an important partner for Alipay. the acquisition had been a pain. “For the first
China Post and Alipay have already six months, I wanted to give the money back!”
begun to test “e-Youbao” in China. The parcel Ma was reported to have said, “but a good dish
delivery service, developed specifically for takes time to cook.”
online purchases, is cheaper than China Post’s
standard mail service. On November 1, 2006,
China Post also opened its first online postal Future for Alibaba and
shop on TaoBao.com selling stamps and books. B2B E-Commerce
This agreement paves the way for further coop- A lingering question in the minds of many
eration of this sort in the future. The partnership business experts has been whether Alibaba’s
will help Alibaba to penetrate underdeveloped business model is sustainable. Being located in
e-commerce regions like the rural areas using the middle of the world’s largest collection of
China Post’s most extensive parcel delivery and factories, near hundreds of thousands of sup-
money remittance network. It’s the most impor- pliers, and being able to speak the language and
tant strategic partnership they have ever entered understand the culture are all very valuable.
since the establishment of Alibaba. But, according to Wharton operations professor
Ravi Aron, other companies can still come in
and beat Alibaba at its own game.
Alibaba Acquired Yahoo! China The challenge for Ma, who has had to
On August 11, 2005, Yahoo! announced that it defend himself against charges that his business
would purchase a 40 percent stake in the com- model is fragile, is to help his company bridge
pany for US$1billion plus Yahoo!’s Chinese the gap from a company that was initially
assets (worth about US$700M). Alibaba took responsive to the B2B e-commerce’s early
charge of Yahoo! China, and Alibaba’s founder growth needs to the now new rapidly maturing
Jack Ma continued to run the company. That needs for higher value-added services.
deal was heating up the race to dominate As a result of this reflection, Ma hopes in
China’s fledgling online auctions industry. the future to derive Alibaba’s revenue and
That deal gave Alibaba access to Yahoo’s ultimately its profits from add-on features.
search technology to help it fend off expected Shipping, trade financing, on-site inspections,
competition from Google, which was then just quality control services, and insurance are a
starting a big push into the Chinese market. few of the services that could earn money for
In addition, it gave Alibaba the cash it needed the site. Ma also hopes to make money by
to buy out the shares of venture-capital backers, offering a premium service to members and
easing pressure on the Hangzhou, China, through advertising and promotions. He plans
to start sharing in the revenues made by the profitability, arguing that if Alibaba was as prof-
insurers, shippers, and others who benefit from itable as Ma claims, it would have gone public
the trade generated on his site, and to charge long ago. Others argue Alibaba lacks depth, that
members for online advertising and fancy it is nothing more than a user-friendly bulletin
services. “Alibaba has made a big step forward board, offering too many product segments and
in how business is done in Asia,” says Hong too few services.
Kong–based IDC Internet analyst Matthew
McGarvey. “Sites like Alibaba are injecting IPO: Alibaba Aims for 1.3 Billion
transparency into the trading process.” in Listing
Elsewhere, however, it faces lots of
Ma wants Alibaba, which is set to list its B2B
competition. Ma isn’t the only one targeting
business on the Hong Kong Stock Exchange, to
this enormous market. Some are trying to
become the world’s largest Internet company and
aggregate big buyers across industries, mostly
a member of the Fortune 500. On October 2007,
in the United States and Europe, as Commerce
Alibaba raised 1.33 billion HKD in an initial
One and Ariba have tried. Others are verticals
public offering in Hong Kong. Alibaba sold
for a single industry, such as e-Steel for the
858.9 million shares, or 17 percent of its enlarged
metals industry and Covisint for autos.
share capital, at a price of US$12, according to
Alibaba has grander ambitions. Ma wants
its preliminary prospectus. Alibaba.com used
the site to be both global and horizontal across
roughly 60 percent of the proceeds from its share
all products. But he may well have picked the
offering “for strategic acquisitions” and other
best starting point: Asia, by some estimates, is
business development initiatives. The remainder
home to about 70 percent of all the world’s
of the proceeds was used to fund organic growth
exporting companies. There are about 400,000
and to develop new technologies. In 2009, in the
exporters in China alone and more on the way.
midst of the global financial recession, Alibaba
Ma believed in the next ten years, of the top
expanded its offering heavily in the United
three Internet companies in the World, one will
States.19
be from China—and the company has to be
Alibaba.
China’s B2B E-Commerce Industry
Certainly the potential market is enormous.
and Alibaba
FORBES figures that about US$470 billion a
year is spent just servicing world trade—phone The Chinese B2B e-commerce industry owes
bills, invoicing, sales calls, overseas travel. If much to Alibaba’s CEO Jack Ma. Ma, however,
Web sites like Alibaba can cut that bill by even does not necessarily think so, since for him
20 percent—and that may be conservative—there B2B has various formats and there are many
is a potential savings pool of nearly US$100 billion ways to establish a big marketplace to help
from which it can draw revenues as profits. medium- and small-sized companies succeed
Similarly, in the consumer market, there and make money. So according to Jack Ma,
are currently 253 million Internet users in China, “B2B would exist even without us, but it would
exceeding the population of Internet users of likely be a B2B different from Alibaba.20”
United States (220 million) in July 2008. How different? It is unlikely B2B
Despite the success of Alibaba, the company e-commerce in China could have developed so
was not without its critics. Many doubt Alibaba’s rapidly from its infancy if it was not for Alibaba’s
19
Alibaba Group planned to increase its current workforce of 12,000 by more than 4,000.
20
Knowledge@Wharton, “Open Sesame?”
CEO’s continuous efforts to create and educate what has worked well in the past will continue
new users, and to relentlessly push the Chinese to be relevant for businesses such as Alibaba in
government for greater Internet reforms to spur the future, and so Jack Ma will need to look for
the growth of the entire Chinese B2B industry. new ways to once again shape and control the
Hence it has been Ma’s vision that has ultimately direction of the Chinese B2B industry in order
shaped the evolution of B2B in China. As Ma to survive in the increasingly globalized busi-
states: “we don’t know theories, but we are the ness environment. Yet the fickle nature of new
ones who came in from the bloody battlefield, technology development means that the next
and we know which way to go. It’s not investors’ step in the B2B evolution may not necessarily
money that will take us there, and it’s not money come from today’s industry leader; but perhaps
that forces us to go. It’s our mission: to help from the basement of a house in some distant
China’s suppliers.”21 In fact this belief is so suburban town no one has yet heard about.
important to Alibaba and the company’s future
direction that every new employee must go Questions for Discussion
through a six-month training program to learn
about the company’s mission, vision, and values. 1. Does the “bird cage” theory when applied
There can be no doubt that Jack Ma has to China’s Internet policy constitute a
accomplished a lot, and many view his company serious threat to the development of the
as the B2B standard in China and maybe the B2B e-commerce industry?
world.22 After all, Jack Ma can be credited with 2. What is the focus of Alibaba’s business
being responsible for many “firsts” in China. It and what makes it so different from some
was Jack Ma who was the first entrepreneur to U.S. e-commerce companies?
develop e-commerce in China. He founded the 3. Would Alibaba have been as successful
first Internet commercial Web site in China, and today without the leadership of someone
created a B2B marketplace platform to help all like Jack Ma?
small- and medium-sized enterprises in Asia and 4. What are the benefits of the strategic
around the world. He promoted the “Trust Pass” cooperation with China Post?
plan on the Web site, which created the world’s 5. What are the current and future benefits
first online credit platform for companies. of the cooperation with Yahoo?
Yet being the first has also meant that 6. Is there room for Alibaba in the global
Alibaba had to always frustratingly lead the race for online supremacy, and what
way through the uncertainties of the Chinese would you do to secure the future for the
B2B industry, something that late-comers were company?
glad to have been spared. However, in hind-
sight, obtaining a unique first-mover advantage Appendices
has made the hard work well worthwhile for
1. Key Development Milestones for Alibaba
Alibaba and its associates.
The question remains whether the • At the end of 1998, Jack Ma and his team
Alibaba business model is sustainable as the of 18 founders created www.alibaba.com.
B2B e-commerce industry in China in particular • March 10, 1999, the day when team
continues to grow and mature. It is unlikely that leader Jack Ma came back to Hangzhou,
21
Sumie Kawakami, “China’s Visionary B2B: Who Says the dot-com Era Is Over? Company Profile,” Japan, Inc.
(May 2003).
22
Knowledge@Wharton, “Open Sesame?”
is considered the Web site’s founding Alibaba to continue its rapid expansion and
date. to consolidate its position as China’s largest
• July 9, 1999, and September 9, 1999: e-commerce company.
Alibaba (China) Technology Co., Ltd • July 2004: Chinese online marketplace
established in Hong Kong and Hangzhou. TaoBao.com received US$42 million in
• October 1999: Goldman Sachs, the new funding.
world’s largest investment bank, invested • October 2004: Alibaba distinguished itself
US$5 million in Alibaba. as the only import–export Web site ever
• January 2000: Alibaba was selected as to win Forbes “Best of the Web” Award,
an excellent Chinese business Web site five years in a row.
by China Internet match organization • March 10 2004: Alibaba China launched
committee. its keywords bidding service.
• June 2000: Alibaba was honored as one • March 31 2004: Alibaba China launched
of China’s Yearly Best Top 100 Web sites its excess products auction service.
and was chosen by Forbes Magazine as • March 2005: Alibaba E-business Forum
“Best of the web: B2B.” began in Guangdong Province.
• November 2000: Alibaba was elected • October 2005: Alibaba formed a strategic
as most popular global B2B Web site partnership with Yahoo! Inc. and took
by readers of Far Eastern Economic over the operation of Yahoo! China.
Review. • January 2007: Business software services
• December 27, 2001: Alibaba became company Alisoft is launched
the world’s best B2B e-commerce Web • October 2007: Alibaba is approved for IPO
site with more than 1 million registered
members. Source: C. Splinder, “The Alibaba Story.”
• March 10, 2002: Alibaba China promoted
“TrustPass” plan, which made Alibaba 2. The Companies
the world’s first online credit business
community. Alibaba International (www.alibaba.
• December 2002: Alibaba began to make com) is the world’s largest online B2B
a profit. marketplace for global trade, and the
• May 2003: The goal of 1 million RMB in number one destination for sourcing pro-
daily income was realized. fessionals and entrepreneurs. More than
• May 10, 2003: Invested 10 million RMB 500,000 people visit the site every day,
to launch TaoBao.com, a C2C Web site. most of them global buyers and importers
• October 18, 2003: AliPay was launched. looking to find and trade with sellers in
• November 28, 2003: Business real-time China, and other major manufacturing
communication service “Ali Talk” was countries. Alibaba International has more
issued. than three million registered users from
• December 31, 2003: Annual profit over 200 countries and territories.
exceeded 10 million RMB. Alibaba China (www.china.alibaba.com)
• February 17, 2004: Alibaba.com Corpo- is the largest Chinese-language B2B
ration raised US$82 million from insti- marketplace for domestic China trade.
tutional investors in the largest private With more than 16 million registered
equity commitment ever in the Chinese users, Alibaba China is a trusted online
Internet sector. The funds will allow and off-line community of SMEs who
regularly meet, chat, search for products, Alipay (www.alipay.com) is China’s lea-
and do business. ding online payment service by both num-
Alisoft (www.alisoft.com) is a leading ber of users and total transaction volume. It
provider of easy-to-use, Web-based busi- enables individuals and businesses to sec-
ness software services for SMEs in China. urely, easily, and quickly send and receive
It allows customers to access and manage payments online. To provide Alipay,
their CRM, inventory, sales, finance and Alibaba has partnered with all the leading
marketing information, and communica- banks in China, including Bank of China,
tions tools anytime they need via a simple China Construction Bank, Agricultural
Web site. Alisoft serves Chinese SMEs Bank of China, and the Industrial and
by seamlessly connecting e-commerce to Commercial Bank of China, as well as
their back-end business services. other financial institutions. Alipay works
like an escrow service, solving the issue of
Yahoo! China (www.yahoo.com.cn) is a settlement risk in China. As of October
leading Internet search engine and portal 2007, Alipay has more than 47 million
serving China’s consumers and busi- users and daily transaction volumes
nesses. It plays a valuable role in powering exceeding US$20 million (RMB150 mil-
e-commerce in China and is a leading lion), through as many as 78,000 daily
advertising platform for China’s SMEs. transactions. More than 80,000 new users
Alexa.com ranks it in the top 20 most register each day. Very few companies
popular global Web sites. Yahoo! China have realized AliPay is a very big deal, as
combines global technology with local Chinese can now buy foreign products on-
know-how to give Chinese Internet users line for the first time. Current international
the best local search engine. In October partners include Sa Sa International
2005, the Alibaba Group acquired Yahoo! Holdings, discount beauty-products seller
China and formed a long-term strategic StrawbenyNet and J Shoppers, a subsidiary
partnership with Yahoo! Inc. Under the of Japan mail-order company Nissen
agreement, Alibaba owns and operates Online.
Yahoo! China, with exclusive rights to the
use of the Yahoo! brand and technologies 3. Chinese Auction Market Share
in China.
Other 3.6%
TaoBao (www.taobao.com) is the largest
consumer e-commerce Web site in Asia eBay China 29.1%
with more than 30 million registered users. TaoBao 67.3%
Alexa.com ranks it in the top twenty-five
most popular global Web sites. Since its 4. Chinese Search Market Share
launch in May 2003, TaoBao has become
Other 12.6%
China’s leading C2C and B2C marketplace,
surpassing competitors on all key metrics, Sohu 9.2%
including Web site traffic, active users, Google 13.2%
product listings, and transaction volume. In Yahoo China 21.1%
2006, TaoBao’s transaction volume, or
gross merchandise volume (GMV), reached Baidu 43.9%
US$2.18 billion (RMB16.9 billion), up 110 Sources: Analysis; China Internet Network Information
percent from 2005. Center.
5. Chinese Internet Giants become a part of online culture. In fact, the

strength of its virtual currency, ‘QQ coins,’
Baidu
has became so sought after it threatens to
Core business: Search (founded by Robin
undermine the renminbi.
Li in 2001)
Tencent has capitalized on that popularity
Other services: Bulletin board system (BBS),
by aligning itself with major brands such
a collaborative encyclopedia, an answers
as Coca-Cola, and it has just launched
service, voice search (by telephone)
MIND, an online marketing solutions
China’s leading search engine has only one strategy for advertisers, media agencies,
real rival: Google. To date it has relied on and brokers.
its loyal base and advantage in Chinese-
language and MP3 search to stay ahead of Sina
the American behemoth, though it also Core business: Portal (created after 1999
offers a strong forum service, Tieba. Baidu merger of SinaNet.com and Stone Rich
is a mainstay for online community. Technology)
Online community—BBS and blogs—is Other services: E-commerce, search,
such an important part of Internet in China. mobile VAS
Baidu is also not shy of trumpeting a
nationalist tune. Baidu want to be more Sina claims more than 230 million regis-
Chinese than anyone else on the Internet. tered users and 700 million daily page
To date they have succeeded, but the risk is views. A lot of that punch comes from
that Baidu might get too complacent, the company’s popular celebrity blogs.
which is the one thing they can not afford Sina has the stickiness factor because of
to do with Google on their backs. its blogging communities but, because it
is more media based, it lacks the ‘cool’
factor of Tencent’s QQ. Sina is also per-
Tencent ceived as less innovative than QQ or
Core business: Instant messaging (founded NetEase—something which contributes
by Pony Ma in Shenzhen, 1998) to high management turnover in the last
Other services: Online games, communities, four years.
e-commerce, search, a product innovation In spite of that, Sina and rival Sohu are
platform, online video, music player, micro- must-haves in any large-scale advertising
blogging campaign and they are dominant forces in
Tencent is one of the best-run companies in China’s Internet landscape. To Chinese
China. Tencent understands Chinese online users, they’ve become places you
Internet users and has moved beyond its go to every day as sites of habit.
core QQ instant messaging product—home
to 273 million accounts—into blogs and Sohu
online games. Almost all Chinese Internet Core business: Portal (founded in 1996 by
users use QQ, and Tencent also has very Internet pioneer Charles Zliatig)
powerful BBS communities. By providing Other services: Search, mobile VAS
a central communication platform, they’ve provider, online games, online mapping
No sooner had Sohu secured the rights as Tom

the official Web site of the 2008 Beijing Core business: Wireless Internet portal
Olympics, Tencent, Sina, and NetEase (founded in 1999 as a joint venture in
combined their might in a resource-sharing Hong Kong)
alliance to neuter Sohus power position. Other services: Short message service
Sohu can be seen as a “lifestyle company” (SMS), Multimedia messaging service
but suffers from a lack of clear brand posi- (MMS), Wireless application protocol
tioning. Sohu is not a market leader in (WAP), search, and classifieds
games, search, or blogs.
Tom is one of China’s leading wireless
NetEase Internet services and a substantial portal
Core business: Online games and enter- in its own right. It understands community
tainment portal (founded by Ding Lei and the logistics involved with selling
in 1997) online, but it faces tough times ahead.
Many believe it would be hard for Tom to
Other services: Mobile VAS, search,
be number one or number two in search
e-commerce
or portal. Their opportunities would be
With an aging stable of games, NetEase’s trying to beat NetEase on entertainment
prospects, many analysts believed, rested and to go after Alibaba on commerce and
on the success of its new title, Tian Xia II. auctions. Despite Tom’s intention to
When that received less than enthusiastic revive eBay, critics are skeptical of its
reviews in beta testing, NetEase’s stocks chances as it hasn’t yet demonstrated an
slumped. However, many believed NetEase understanding of why eBay failed in the
will bounce back, being perceived as the first place.
definitive leaders in games but currently
lacking a clarity of vision.
CASE III
Dow Corning Success in China
Tom Cook, the president of Dow Corning Dow Corning
Greater China, was overlooking his clean empty
Established in 1943, Dow Corning is a joint
desk facing the People Square in Shanghai.
venture between The Dow Chemical Co. and
He was ready to take up his new tasks in
Corning, Inc. (formerly Corning Glass Works),
this current position. He joined Dow Corning
and it is equally owned by both companies.
in 1985 as a member of the Information
With a mission to explore the potential of
Technology (IT) group. After working in vari-
silicone, Dow Corning provides performance-
ous positions he was promoted to assume his
enhancing materials and solutions to serve the
current vice president and general manager
diverse needs of more than 20,000 customers
responsibilities in 2006. In 2007 he also
worldwide with more than 7,000 products and
became the president of the Greater China
services. With gross sales of $4.94 billion in
region. Tom played a major role in strategy
2007, Dow Corning is a global leader in
development for the innovative and highly
silicones and silicon-based technology and
successful XIAMETER® brand offering—a
innovation, and it provides a wide range of
Web-based business model for large-volume
products to diversifying industries, from
users of commonly used high-quality products
shampoos to cables, as well as in semicon-
for customers who do not require personalized
ductors, transportation vehicles, and electronics.
service. He was also instrumental in the trans-
(Refer to Exhibit III-1.) With half of its sales
formation of Dow Corning from a product-
outside the United States, Dow Corning is in
focused supplier to a solution provider. He had
the process of building China’s largest siloxane
a long track record within the company to make
manufacturing facility in Zhangjiagang, China.
challenging work triumph. But his current task
The company was also expanding in India,
is a particularly demanding one.
Russia, Turkey, Vietnam, and Brazil.
In an extremely short time, Xiameter, a
brand of Dow Corning, was developed and
implemented in 2002. This project helped the
The Birth of Xiameter Model
company to address the price seekers for silicones In the late 1990s and early this decade, Dow
and foster explosive growth. During the intro- Corning had been facing significant external
duction of Xiameter model, Tom was in charge pressure. Historically, Dow Corning has been
of improving the value proposition offering positioned as a company capable of providing
for Dow Corning. With the combined efforts of the highest levels of support and value-added
both the Dow Corning® and XIAMETER® brand, service to its customers with its innovative
sales for the company nearly doubled from 2002 research and design. It was perceived to be a
to 2007. high-price supplier. However, competition in
But now he is leading the Dow Corning the global marketplace, rising costs of raw
and Xiameter Brand in a booming market like material, commoditization of mature products,
China, where the competitors are fighting and downward pressures on pricing converged
fiercely and the local Chinese customers were to create a complex business environment for
asking for even lower prices. This was not only the industry. At the same time, the manage-
the dilemma of the day, but a question of ment team in Dow Corning found that they
survival in the global arena. needed new ways to meet changing customer
442
Case III • Dow Corning Success in China 443
Key Figures Note: Approximate Numbers as of December 31, 2007

2007 sales $4.94 billion
2007 net income $690.1 million
Employees worldwide 10,000
Manufacturing and warehouses locations worldwide 45
Number of products and services offered 7,000
Number of customers 20,000
Active patents in the United States 1,080
Active patents worldwide 4,400
Percentage of sales invested in R&D 4–5%
Industry Expertise
Automotive Moldmaking
Aviation & Aerospace Oil & Gas
Beauty & Personal Care Paints & Inks
Chemical Manufacturing Photonics
Compound Semiconductor Plasma
Construction Plastics
Electronics Power & Utilities
Food & Beverage Pulp & Paper
Healthcare Pressure Sensitive
Household & Cleaning Rubber Fabrication
Imaging Solar
Industrial Lubrication Textile, Leather, Nonwoven
EXHIBIT III-1 Dow Corning Fast Fact Source: Dow Corning Web site
demands and the needs of different customer Corning has also invested heavily in market
segments. research which revealed some unexpected
“Dow Corning has spent the past five years results: a strong need in the marketplace
transforming Dow Corning into a customer- among “price-seeker” customers who knew
centric organization,” explained Gary Anderson, what products they needed and didn’t want to
the former chairman, president, and chief exe- pay for the added services that traditionally
cutive officer of Dow Corning in 2002. “This came together with Dow Corning’s products.
introduction (Xiameter model) is the culmination In order to stay competitive, Dow Corning
of extensive research into customers’ varying came up with the new business model to serve
needs, detailed segmentation based on product this market segment by introducing an entirely
lifecycles, and a complete redesign of our services new brand, named XIAMETER ®. In 2002,
to support each.”1 The effort has involved Dow Corning launched the Xiameter brand
significant investments: more than $100 million and became the first in the chemical industry
in its global IT platform (SAP) in its e-business to introduce a product-only, Web-enabled
capabilities with the redesign of dowcorning.com business model. (Refer to Exhibit III-2.)
to support this choice-based strategy. Xiameter predominantly supports products in
To understand needs of each customer the mature stage of the life cycle and it
segment and their product life cycles, Dow operates almost exclusively via the Web,
1
Corporate press release: DOW CORNING LAUNCHES NEW CORPORATE STRATEGY: Emphasizes Customer-Centric
Approach (March 5, 2002).
444 Case III • Dow Corning Success in China
When it comes to buying silicone in bulk, there are three things that matter. Quality, reliability, and price.
At Xiameter, you can get them all. That’s because we’ve simplified the entire buying process to make it
easier to purchase fluids, sealants, and rubber online. By working directly with us, you eliminate the
added cost of sales and technical support.
The result? High quality products at market-driven prices.
So how do you know if Xiameter is right for you? Ask yourself the following questions.
• Do you generally buy materials in large quantities?
• Can you meet your own technical service needs?
• Can you plan your material needs two to four weeks in advance?
If you answered yes to these questions, Xiameter may be right for you. Still unsure? Contact us
for additional questions you may have.
DON’T PAY FOR WHAT YOU DON’T NEED.
With Most Companies Your

Silicone Dollars Pay for:
Tech
Product Support
& Sales
No Sales or Tech Support

Means Lower Prices Across
the Board.
EXHIBIT III-2 Xiameter’s Value Proposition Source: http://www.xiameter.com/content/bxmeet/

meet_us.asp
offers limited services, and requires high- Xiameter model defines clear, straightforward
volume purchases. These features allow business rules to ensure reliable shipping dates,
Xiameter to offer market-driven prices for confirmation of order, and inventory through its
silicone materials. Web site:
Although the Xiameter brand is a separate
brand and sales organization, it manufactures • Transparent, dynamic, and “real
and sells the same high-quality products from time” pricing—Xiameter displays the
the same manufacturing sites as the full-service pricing of four of the most commonly
(total offering) priced Dow Corning brand. purchased materials on the Web site
The differentiation is in the market model, the homepage. Prices are subject to change
levels of service and support, and the price. The at any time.
• Minimum orders—Customers must competitive pricing. Fortunately, Dow Corning

purchase a minimum-order quantity. This successfully communicated the differences
quantity is set by the manufacturing loca- between the two brands to customers and most
tion and is based on what is considered customers valued the services offered by Dow
large volume by the marketplace. Orders Corning. Cannibalization has been minimal.
could range from full truckloads to sever- The two brands complement each other,
al pallets of material depending on the and the Xiameter brand provides another choice
product. for the customers. The model is designed for
• Strict business rules—Required lead time customers who already know what they need
for product deliveries drives customers to and don’t require additional services or tech-
plan their forecast two to four weeks in nical support. This online business addressed
advance and follow strict business rules the needs of price-seekers who can follow
such as standard payment terms (standard straightforward business rules. From their pers-
terms of net thirty days from the date of pective, the Xiameter brand offered a conve-
invoice) and conditions of cancellation. nient way to purchase silicone materials.
At the same time, the corporate brand, Dow
Cannibalization? Corning, was further enhanced with the intro-
With the launch of this online business, the duction of a wide range of solutions and services.
Xiameter model has been regarded to be a bold This additional emphasis on the brand clarified
step both internally and externally. The biggest its brand promise and reinforced its added
risk Dow Corning could have faced was the value offer: expertise, technical support, and a
possibility that the Xiameter model would can- wide range of solutions and services. Some cus-
nibalize Dow Corning’s existing business. tomers purchase from both of these businesses
Current customers might move to the new because of different benefits provided by the two
offering because of its online convenience and business models. (Refer to Exhibits III-3,–III-5.)
One Company: Two Business

Models, With Multiple Choices
One company Dow Corning
Two models
Dow Corning® XIAMETER®
Brand Brand
Materials + service packages Product only
Innovative Proven Cost-effective Market-driven

Solutions Solutions Solutions price
Value propositions based on customer

needs-based segmentation for value
EXHIBIT III-3 Two Brands under Dow Corning Source: Dow Corning
High DOW CORNING

XIAMETER High
Sales Volume
Service
& Cost
Support
Unit Cost
Added Value Offering Market Offering Base Level Offering Low

Low
Volume
EXHIBIT III-4 Brand Differentiation between Dow Corning & Xiameter
Source: Customer Value Discovery by Ron Shulman & Phil Allen (http:www.
csiforprofit.com). Applied to Dow Corning’s brand position
The Xiameter model has been enor- Corning could utilize the high-volume busi-
mously successful for Dow Corning since it ness to reduce costs across the whole value
allows the company to keep competence in a chain and improve productivity and profit-
high-cost market segment as well as to take a ability not just for Xiameter brand, but the
stake in the low-cost segment. Besides, Dow Dow Corning brand as well.
Dow Corning Xiameter

Flexible ship dates Reliable shipping dates
Materials delivered in all sizes and quantities Lead time requirements, average 7–20 days
Extensive services and solutions No technical service
E-commerce services Large volume orders
Innovative, proven & cost effective solutions Web-enabled business
Technology and R&D Commonly used silicones
Personal customer service Market-driven prices
Dedicated Traders
Dow Corning® and XIAMETER® brands share the same
• Global manufacturing sites
• High quality products
• Reliable global supply
• SAP infrastructure
• Both brands are part of Dow Corning Corporation
Dow Corning creates customer value through choice. Customers can purchase both Dow
Corning® and/or XIAMETER® brands.
EXHIBIT III-5 Customer Value Proposition of the Two brands Source: Dow Corning
Innovative Brand Strategy Leads Online sales for the company (both Dow
to Growth Corning and Xiameter brands) grew from virtu-
ally zero in 2000 to 30 percent of sales in 2006.
Dow Corning Corporation has experienced According to a benchmark study conducted by
double-digit sales growth (Exhibit III-6) every the American Chemistry Council, on average,
year since it launched the two-brand strategy. U.S. chemical companies conducted 12.8 percent
The investment in the Xiameter business paid off of their sales online in 2005. Xiameter has also
quickly. It only took three months for Dow supported geographic expansion. Originally
Corning to achieve investment payback. In its offered in fifty countries, Xiameter is now avail-
first year, Xiameter logistics costs were reduced able in eighty four countries, several of which
by an estimated 60 percent when compared to were new to Dow Corning.3
the Dow Corning channel, saving approximately
$3.5 million, primarily due to the elimination Dow Corning’s Footprint in China
of warehousing costs and more efficient ship-
ping based on larger loads.2 The “made to order” Dow Corning expanded into the China market
policy, which required minimum lead times, in 1973, and since then has established offices
contributes to significant reduction in inventory in Shanghai, Beijing, Guangzhou, Shenzhen,
and frees up the company’s working capital. Chengdu, and Hong Kong, providing compre-
Therefore, online sales have increased and hensive products and services to its clients all
surpassed the industry average. over the country. Through 2007, the company
5,000 800
4,500 700
4,000
600
3,500
3,000 500
Sales
2,500 400
Net Income
2,000 300
1,500
200
1,000
500 100
0 0
2003 2004 2005 2006 2007
(USD$MM) 2003 2004 2005 2006 2007
Sales 2,872.5 3,372.6 3,878.7 4,391.6 4,940
Net Income 176.6 238.3 506.5 668.4 690.1
EXHIBIT III-6 Dow Corning Financial Result 2003–2007 (USDMM) Source: Dow Corning
Corporate finance data
2
Dow Corning press release “Two-Brand Strategy Spells Success for Dow Corning” (March 7, 2007).
3
Ibid.
Dow Corning expanded into the China market in 1973, and since then has established offices in
Shanghai, Beijing, Guangzhou, Shenzhen, Chengdu, and Hong Kong, providing comprehensive
products and services to its clients all over the country.
• 1973 Established Asia regional office in Hong Kong and has begun to supply silicone materials
and technical services to China
• 1991 Set up office in Shanghai, started to expand their business in Mainland China, covering the
eastern and central regions of China
• 1995 Dow Corning (Shanghai) Co., Ltd. was established as Dow Corning’s first wholly owned
enterprise, responsible for building and operating its site in Shanghai’s Songjiang Industrial Zone.
• 1996 Established Dow Corning Beijing Office, which was responsible for pioneering company’s
sales in Northern and Northeastern China.
• 1997 Opened Songjiang site, Dow Corning’s first manufacturing site in China, and provided
products and services serving China’s electronics, textiles, construction, personal and home care
products, rubber, plastics, and other industries
• 1998 In response to Chinese Government’s “Western China Development” policy, Dow Corning
established its office in Chengdu, pioneering the rapid development of the central and western
markets.
• 1999 Dow Corning set up Construction Analytical Lab in Songjiang site, providing service for
China’s construction projects. At the same time, Dow Corning expanded the plant and
increased emulsion production there to meet growing demand of personal care products and
the textile industry.
• 2001 Dow Corning set up its office in Guangzhou for the sales development in Southern China.
• 2002 Dow Corning China Application Center was officially established. The center has six
specialized laboratories with world-class technology and equipment.
• 2003 Dow Corning China Applied Technology Center was expanded to double the technical
services and development capability.
• 2004 Set up Dow Corning China Technology Information Centre which provides technical advice
hotline and Web site for real-time help system for customers with convenient and efficient
information technology services.
• 2006 Ground Breaking Ceremony was jointly held by Dow Corning and Wacker Chemie AG
(Munich, Germany) to establish China’s largest siloxane plant in Zhangjiagang
• 2007 Established strategic partnership with CEIBS
• 2008 Opened Silicone Rubber Plant in Zhangjiagang
EXHIBIT III-7 Dow Corning’s Expansion and Development in China Source: Dow Corning Chinese
Web site
has invested over $470 million in China to (Zhangjiagang) Co, Ltd. received official
build and improve its infrastructure to serve approval from the Chinese government to
customers locally (refer to Exhibit III-7). In jointly build a world-class siloxanes4 manufac-
2006, Dow Corning and Wacker Chemie AG turing facility in China.
(Munich, Germany) announced that their man- Dow Corning broke ground for an inte-
ufacturing joint venture company Dow Corning grated silicone manufacturing site in the Jiangsu
4
Siloxane is a key starting material for the production of silicones. Major silicone application industries include: construction,
chemicals, cosmetics, textiles, automotive, paper, and electronics. Fumed silica is used as an active filler in silicone elas-
tomers, as a viscosity-adjusting agent in coatings, printing inks, adhesives, unsaturated polyester resins, and plastisols or as a
flow aid, for example, in the cosmetics, pharmaceutical, and food-processing industries. Source: Dow Corning.
Yangtze River Chemical Industrial Park, commercial teams committed to satisfying cus-
Zhangjiagang City, Jiangsu Province, in tomer needs in a variety of vertical markets
September 2006. Completion is expected dur- including consumer, transportation, image rep-
ing 2010. This integrated site includes China’s roduction, and power and utility. “The intro-
largest facility to manufacture siloxane (basic duction of Dow Corning Silicone Rubber
silicone materials) with an investment of $600 signals the company’s continuing commitment
million, as well as downstream finishing plants, to meeting customer needs in China as they
which support the vigorous growth and demand expand to new geographical markets or aspire to
for silicone materials in China and throughout upgrade their product and service offerings,”
Asia.5 In April 2008, Dow Corning opened its said Diane Kelly, Asia commercial director for
new rubber plant in Zhangjiagang. The new Dow Corning Engineered Elastomers.7
6,000 square meter building at the site manu-
factures high consistency rubber (HCR) and Drivers for Future Growth:
liquid silicone rubber (LSR) for a full spectrum Differentiation and B2B E-Commerce
of industrial and consumer applications.
Differentiation—Building a Stronger China
The chemical park in Zhangjiagang pro-
and Meeting Consumer’s Demand
vides distinct advantages, especially superb
port facilities, and access to high-quality local Dow Corning’s innovative and quality products
talent. This will be the biggest integrated have led its way to China’s major public con-
production site of silicones in China and is struction projects. For example, Shanghai
expected to produce over 200,000 tons of Oriental Arts Center features a unique façade
silicone products annually, reaching full pro- that resembles a butterfly orchid in bloom. Dow
duction by 2010.6 Corning weatherproofing sealant was success-
“China is one of the priority markets for fully used to protect the curtain wall façade
Dow Corning and an engine for our future from glass delamination. Furthermore, Beijing’s
growth,” said Tom Cook, Dow Corning Greater new Poly Building is protected against Northern
China president and Asia area vice president. China’s harsh weather with the use of two Dow
“We are excited about the new silicone rubber Corning sealants—one for surface enhancement
plant, which plays a strategic role in our global and one for waterproofing. A more astonishing
manufacturing network. The opening of the example is that Dow Corning’s silicone rubber
rubber plant underscores our continued long- also contributes to the robustness of power
term commitment to China and our confidence cables for China’s Qingzang railway (the high-
in the huge potential of the entire Asia region.” est railway in the world) in harsh weather
Dow Corning also established Dow conditions. With Dow Corning’s silicone
Corning Silicone Rubber (Shanghai)—a wholly rubber, which could function throughout wide
owned subsidiary in 2007 to offer an expanded temperature ranges and have long-term stability,
range of Dow Corning-branded silicone rubber China’s Qingzang railway can keep running
products and solutions in China. This company under snowstorms, sandstorms, and low tem-
provides customers in China a wide range of peratures at an average altitude of 12,000 feet.
quality silicone rubber products formulated to Featuring excellent weather resistance
Dow Corning-brand quality standards. Further- ability, a high level of stability to extreme
more, customers will have access to tailor-made temperatures, good fluid resistance and water-
service support from dedicated Dow Corning repellency, Dow Corning’s silicone rubber is
5
PR Newswire. New York (April 24, 2008).
6
Dow Corning Overview Source: Dow Corning.
7
Dow Corning Corporate press release, Shanghai, China (February 12, 2007).
increasingly used in industries ranging from developing culturally specific products. In

consumer electronics and construction to auto- 2005 alone, more than sixty such products were
mobiles and power distribution. Notable is launched across the Asia-Pacific region.10
China’s spending boom in the power distribu-
tion sector, providing a potentially large market
B2B E-Commerce in China’s Market
for its products. The silicone rubber demand
from China’s electric utility sector rose more For small and medium enterprises, or SMEs,
than 30 percent over the prior three years,8 and price has been a key criterion in their procure-
it is expected that the demand will rise even ment system. In addition, the growing usage of
more rapidly in the upcoming years accom- the Internet for e-commerce activities among
panying the double digit GDP growth of China. SMEs in China has also contributed to the
Besides serving public construction and opportunities for Xiameter. According to
enterprises, Dow Corning also found the key to China’s Statistics Bureau, in 2004, SMEs and
the door of China’s cosmetics market.9 Dow other private sector companies contributed
Corning saw opportunities in the large demand about 58 percent of China’s GDP and 48 percent
that exists for cosmetics and shampoos in of China’s tax revenue. According to the PRC
China’s huge population. The research firm National Development and Reform Com-
Euromonitor International forecast China’s mission, there were over 42 million SMEs and
personal-care industry growth rate, including other private sector organizations in China by
skin-care and hair-care products, to be approxi- 2006.11 As the Internet continues to gain accep-
mately 14.6 percent in 2008. Dow Corning was tance in China, the number of SMEs using the
working to seize the opportunity behind the Internet to conduct B2B e-commerce has also
trends such as using natural ingredients and increased dramatically. (Refer to Exhibit III-8.)
8,000 7544 140%

127%
7,000 120%
106%
6,000
97% 100%
4951
5,000
83% 80%
4,000 63%
3248.2 60%
3,000
55% 52% 52% 40%
2090.2
2,000
1280
1,000 650 20%
76 139 316
0 0%
2002e 2003e 2004e 2005e 2006e 2007e 2008e 2009e 2010e
Amount ( in RMB billion) Growth Rate
EXHIBIT III-8 China B2B E-Commerce Amount 2002–2010 Source: iResearch 2006
Note: Chinese B2B industry comprised nearly 95 percent of the e-commerce market.
Chinese B2C and C2C comprised less than 5 percent of e-commerce market
8
Shanghai Daily (April 23, 2008).
9
China Knowledge (March 4, 2008).
10
“White, bright outlook for Dow Corning”, ShangHai Daily, by Fu Chenghao (March 4, 2008).
11
Alibaba.com Limited Prospectus (October 2007).
By 2006, the percentage of combined industry characteristics. This might be a direction

Dow Corning and Xiameter sales conducted for Dow Corning to focus but there are still some
online had risen to 30 percent—significantly challenges. On top of the severe competition
higher than the industry average. Dow Corning among current online B2B giants, Alibaba.com
is expecting that the potential B2B online market dominates the B2B online market and Dow
in China will further contribute to its growth. In Corning products are also available on Alibaba.
the current Chinese B2B online market, there are com. How does Dow Corning differentiate itself
several major players: Alibaba (see the Alibaba from those B2B giants to exploit the fast-growing
case in this text) continued to lead the market for B2B market in China?
online B2B service and accounted for over
50 percent; Global Sources and HC360 also
How to Map Out Dow Corning’s B2B
made improvements in online B2B business
Marketing Strategy in China?
after their cooperation in June 2006, which
together represented over 10 percent of the China, a country with a double-digit economic
whole B2B total sales income.12 (Refer to growth rate, seems to provide a stage for Dow
Exhibit III-9—HC360 was the fourth ranked, by Corning to pursue aggressive growth. Building
share, in the industry.) New players continued to up a strong brand is very critical for the
enter the market, such as the launch by success of B2B companies in this dynamic
china.com.cn of “China Suppliers,” and Yaphon, market. Even if Tom could attribute Dow
which launched its TQS (that stands for total Corning’s recent success to the Xiameter
quality sourcing) service into this industry. model, however, the evolving market, especi-
Dow Corning plans to continue to develop ally a fast-growing market like China, would
its online transaction platform, setting the market not guarantee a sustainable success if Dow
standard for e-commerce in silicone products. As Corning only maintains the status quo. Tom
a result of the somewhat “generic” nature of the wondered what role the Xiameter brand would
B2B online paradigm, industry B2B sites must play in Dow Corning Greater China’s future
significantly differentiate services and target competitive positioning.
China market: Market share breakdown of leading Web

portals of B2B services by transaction value
Company Market share (%)
Alibaba (Chinese) 54.30
Global Sources 8.70
Made-in-China (Chinese) 8.10
HC360 (Chinese) 3.40
EmedChina (Chinese) 2.60
MainOne (Chinese) 2.60
315.com.cn (Chinese) 2.60
Toocle (Chinese) 2.10
Others 15.60
EXHIBIT III-9 China B2B Online Service Market Share 2008

Source: Analysis International, compiled by Digitimes (May 2008)
12
Analysis International, China B2B Market.
Questions for Discussion 3. With the expanding market for personal

care in China, will this increase in sales
The upcoming challenge for Tom Cook would of consumer products provide Dow
include the following issues: Corning another growth opportunity?
1. How should Dow Corning make good 4. With increasing Internet users and fast-
use of its two brands to grasp the China growing online market, what could
market to sustain its long-term growth? Dow Corning do to stand out among
2. If the target companies in China cover a those major B2B online service
broad range of industries—transportation, providers?
construction, power and utilities, elec- 5. How can Dow Corning prevent channel
tronics, personal care, textiles, solar, conflict if its products are available both
manufacturing—how should Dow Corning in its own Xiameter site as well as in
map out its brand strategies and commu- other major Chinese B2B e-commerce
nication activities? sites?
CASE IV
Marketing Plastic Resins: GE and BW II
Overview The term injection refers to the method of
manufacturing plastic parts. Most plastics are
Borg Warner Chemicals (BW) and General supplied in pellet form. The pellets are heated
Electric Plastics (GE), prominent suppliers in to a molten state and “injected” by a hydraulic
the engineering plastics markets, were facing ram into a clamshell-like mold, much in the
increased competition and a changing market same way cookie presses squeeze dough to
environment. Value as viewed by customers was make holiday cookies. The mold cools rapidly
evolving, and sales channels and field marketing and is opened, the part is removed, the mold is
organizational structure played a major role in closed, and another “copy” is molded immedi-
the way each company elected to provide ately. Depending on part size and design, this
products and services to its customers. cycle may be repeated several times a minute.
In this case, you will be asked to determine As an example of this process, consider
an optimal channel structure for this market. the design and manufacture of the water reser-
voir for a new home coffee pot. The coffee pot
manufacturer, let us say Black & Decker
Introduction
(B&D) in this case, decides what features the
Consumer awareness of plastics is usually reservoir should have (should it be transparent
limited to the final products manufactured so the water level can be seen inside it, will it
from the plastics. Many consumer products look better with a glossy or satin finish, how
either are enclosed in plastic cases or contain high will the temperature get while the coffee is
component parts manufactured from plastics. brewing, and so on). The engineering staff then
Manufacturers whose products include plastic designs the water reservoir to meet these
components or cases must either manufacture requirements, specifying the type of plastic
the plastic parts themselves or outsource material needed to meet the design standards.
production to a contract provider. A manufac- A custom molder is contracted by B&D to
turer that makes the components itself at its mold the plastic reservoir to the requirements
own plastic manufacturing facilities is said specified by the engineering group—including
to have “captive facilities”—manufacturing the type of plastic materials to be used in the
facilities that produce plastic parts strictly for part. The manufacturer of the coffee pot, B&D,
the manufacturer. When outsourced, plastic is the customer of the molder. The molder will
components are produced to the manufac- purchase the specified plastic raw material
turer’s specifications by custom injection (usually supplied in pellets by a plastics pro-
molders—contract providers that produce ducer) to make the reservoir. The molder is the
plastic parts as designed and specified by the buyer, but not the specifier of the material.
manufacturer. As contract providers, custom From the point of view of the molder or plastics
molders are often independent small busi- material producer, B&D would be the end user,
nesses, engaged in the manufacture of plastic because B&D would be the final decision
components on contract to the company who maker, or specifier, of what type of plastics
will eventually incorporate the components material would be used. B&D retains control of
into its own product. the design and material specifications.
453
454 Case IV • Marketing Plastic Resins: GE and BW II
Purchasing Habits mechanical or structural functions or demon-

strate any long-term durability. Commodity
Plastic materials are generally purchased by plastics are generally inexpensive, available
either very large companies who have captive from several sources, and most often known by
molding facilities (e.g., General Motors, Ford, their generic chemical names. A few of the
IBM, Rubbermaid, etc.) through volume buy- generic names for these plastics are polystyrene
ing agreements or by smaller custom molders (PS), polypropylene (PP), polyethylene (PE),
whose volume, as contract manufacturers, is and polyester (PET). Typical examples of
significantly less. To take full advantage of the products made from these materials are deter-
economies of scale, larger purchasers usually gent and fabric softener bottles (PE); throw-
process very high volumes of just a few away cups, forks, and so on (PS); and soft drink
material types, in bulk quantities shipped in bottles (PET). The price range for commodity
tank trucks (approximately 40,000 pounds) or plastics—also known as commodity resins—is
railcars (approximately 250,000 pounds). typically $0.60—$1.00 per pound. Commodity
Custom molders will manufacture a plastics, generic in nature, are considered to be
variety of parts for several different customers, in the mature phase of their product life cycle.
often from several different types of materials, Little brand loyalty exists—selection is by
making large volume purchases of any one generic type, with greatest attention paid to
material unlikely. Thus, they buy a larger price and availability.
assortment of both engineering and commodity Engineering plastics: These plastics are
materials (see the next section, below, for used for components that are generally required
explanations of these two material categories) to perform one or several mechanical or struc-
in smaller quantities. Smaller custom molders tural functions and/or meet durability and safety
purchase the specified plastic materials in standards imposed by independent agencies
pellet form, packaged in 50-pound bags or such as Underwriters Laboratories, as well as
1,000-pound boxes. Quantity pricing policies by the specifying end user or manufacturer.
exist, with higher unit prices charged for the A few chemical names for these types of
additional handling and packaging required for plastics are acrylonitrile-butadiene-styrene
smaller purchases. Plastic producers usually (ABS), polybutylene terephthalate (PBT), poly-
suggest quantity-scaled list prices from a full carbonate (PC), and nylon. Many of these
truckload, usually 40,000 pounds, also known products are branded by their manufacturer
as truckload (TL) pricing, down to minimum (such as Lexan® polycarbonate from GE,
purchases of 50 to 1,000 pounds, known as less Cycolac® ABS from Borg Warner, and Zytel®
than truckload (LTL) pricing. Nylon from DuPont) though comparable mate-
rials are usually available from at least one
The Products other source. These materials are considered to
While there are thousands of different plastics be nearing the end of the growth stage of their
in the marketplace, there are two basic cate- product life cycle, with the exception of nylon,
gories of plastic materials: commodity plastics which is a mature product. Typical application
and engineering plastics. These materials are examples are computer cases (ABS & PC,
characterized as follows: with PC used where impact resistance, color
Commodity plastics: These plastics are stability and appearance, or transparency are
used for consumer packaging, fast food and critical), automobile bumpers (PC), plastic
“throw away” items, toys, and items that gears and other mechanical components
generally are not required to perform any (nylon & PBT), kitchen appliances (ABS &
Case IV • Marketing Plastic Resins: GE and BW II 455
PC), and fibers (as in nylon carpets and rope). allow the luxury of significant sales attention to
The price range for engineering resins is small accounts. Like many other products in
$1.50–$3.00 per pound. the chemical industry, pricing was often based
on the addition of a set margin to manufac-
Market History
turing costs. Price was strongly influenced by
One of the first applications of plastic materials competitive supply in the market and the going
was the result of a quest to find a substitute for rate for that particular product. Molders inter-
ivory in billiard balls. In the late 19th century, ested in purchasing these products in LTL
the game had become so popular that hundreds quantities found that they had to pay a signi-
of elephants were killed each day to obtain ficant price penalty (per pound) for their low-
ivory for billiard balls. In 1866, an American volume purchases. Because of the lack of sales
named John Wesley Hyatt discovered celluloid. attention to these smaller customers, product
After some trial (and error—the early prototype information and assistance was often difficult
billiard balls made with the material would dis- to obtain.
integrate when hit), celluloid became the first The major oil and chemical companies
substance molded under heat and pressure to had historically shown little interest in the
retain its shape (and survive the game) after the engineering plastics, originally considering
pressure and heat were removed. So was born them small-volume niche products best
the American Cellulose Chemical Corporation handled by other companies.2 Many of the
(later to become part of Celanese Corporation), engineering materials required additional
a fledgling plastics industry, and greater safety manufacturing and processing steps to create
for elephants.1 “specialized” products. These low-volume
Initially, modern development of com- refining operations neither suited the capabi-
modity plastic materials grew out of the lities of the oil companies, nor were the
improved refinement of petroleum by-products. volumes attractive to them.
Approaches to the marketplace varied by com- Most suppliers of engineering plastics
pany, product, and life cycle. Producers of were not backward integrated in the supply
commodity plastics, usually large chemical or chain for chemicals. Major engineering plas-
petroleum companies such as Dow Chemical, tics suppliers were BW, GE, DuPont,
Arco, Mobil, Amoco, and so on, preferred to Monsanto, Celanese, and Miles Chemical.3
sell in very large quantities (truckload, railcar) (Note that a few companies, notably Dow,
on a contract basis to large molders. Many of DuPont, and Miles participated in both the en-
these suppliers provided very little direct sales gineering and commodity materials market—
coverage, if any, at small custom molders. see Exhibit IV-1.)
Because these products were commodities, With the exception of nylon (which was
profit margins and logistical costs often did not commercially available after World War II),
1
History of Plastics, American Plastics Council, www.americanplasticscouncil.org (September 1, 2001).
2
Ibid. U.S. production of plastics in 2000 totaled 100,093 million pounds, of which only 5,732 million pounds (5.7 percent)
were injection moldable engineering plastics. In the interest of academic clarity, the American Plastics Council classifications
of engineering materials has been modified with the addition of nylon and ABS, more closely reflecting market conditions at
the time of this case.
3
Miles Chemical went through many name changes through the 1980s and 2000, contributing to somewhat of an
identity crisis. In 1980 Miles was known as Mobay Chemical, later as Miles Chemicals, and finally, Bayer Chemicals. For
additional history, see “Makrolon: The High-Tech Material” elsewhere in this book.
Material Types DuPont Miles Celanese Monsanto Arco Amoco Mobil Dow BW GE
Commodity
PS • • •#2 • #1
PP • • #1
PE • • #2 • • #1
PET •#1 • •
Engineering
PBT • • •#2 •#1
ABS •#2 • •#1
PC •#2 • •#1
Nylon •#1 • •#2 •
Note: A “•” indicates that the supplier has a share in that particular material market. A blank indicates that the supplier does
not participate in that material market. A number following the “•” indicates the supplier’s relative market position, based on sales
volume, in that market such that “#2” indicates that the supplier holds the #2 market position. Only 1st or 2nd positions are
shown. As an example, the table shows that Amoco is the largest supplier of polypropylene (PP), the second largest supplier of
polyethylene (PE), participates in the polystyrene (PS) and PET markets (but does not hold the #1 or #2 position), and does not
participate in any engineering materials markets.
EXHIBIT IV-1 Material Suppliers and Their Market Positions
engineering plastics, whose development and By the early1970s, GE had extended the
commercialization followed commodity prod- value-added sales approach through the use of
ucts by several years, did not gain significant field market development (FMD) personnel.
market presence until the mid- to late 1960s. By FMDs, part of the GE Plastics marketing oper-
the end of the decade GE recognized that while ation, complemented the GE field sales force
these advanced materials were capable of suc- by working with plastics specifiers and end
cessfully performing mechanical and structural users (not molders) to encourage the design and
functions, making it possible to replace more development of products that would rely on the
costly materials and processes (e.g., many cast properties of GE plastics. FMDs, as relation-
metals that required a large number of machin- ship builders, kept specifiers/end users up to
ing steps, sheet steel that required corrosion date on new product developments and design
protection, etc.), traditional plastics sales tech- techniques, generally creating goodwill and an
niques used by commodity producers as well as allegiance to GE products. FMDs generally did
the consumer perception of “cheap plastics” not call on custom molders and were not
would hinder the successful communication of responsible for any direct sales, leaving the
these unique benefits. A new approach was direct sales responsibilities to the field sales
needed that more fully informed customers team. A large customer that had its own captive
(designers, end users) of how to take advantage molding facilities would have two GE field
of the benefits of these materials. As a result, representatives calling on them—a field seller
GE began to provide extensive services related worked with purchasing influences, and an
to end-user education, plastic component de- FMD worked with design and specifying influ-
sign, development, and manufacturing as well ences in the buying centers. Smaller end users
as product information intended to maximize that contracted manufacturing to custom mold-
the value potential of its products. The pricing ers might develop a relationship with just the
of engineering materials became based on a FMD. As custom molders usually were the
“value added” strategy, reflecting the premium responsibility of the field sales team, FMDs
performance of engineering materials—what were not involved in the relationship. An
they could do, rather than what they cost to organization chart is shown in Exhibit IV-2.
produce. Plastic material suppliers who relied on a sales
The vice president of sales

and the vice presidents of the
Vice President of Sales product divisions report to a Vice President of Product Division
group vice president.
Marketing Manager
Regional Regional
Sales Sales
Manager Manager
Field Manager
Field Field Field

Sellers Sellers Sellers
Field Marketing Team
Custom Custom
FMD FMD
Molders Molders
Purchasing End Users who have End users who End users who
Influences at captive molding rely on custom rely on custom
Captive Molders facilities molders molders
EXHIBIT IV-2 General Electric Plastics Field Organization
force for both sales and marketing efforts resource commitment were not as broad as
initially viewed this field organization as a very that provided by GE. Other engineering mater-
expensive approach. The GE value-added ial suppliers such as DuPont and Celanese
pricing approach, however, allowed the FMD found it necessary to provide some kind of
system to be margin supportable. design assistance to specifiers, but a formal
The FMD approach was very successful field organization rivaling FMDs was not com-
in the marketplace. GE gained a reputation as pletely developed.
an aggressive innovator in the market and soon Engineering materials suppliers that did
developed sales leadership in all product types not provide some type of coverage at end users
they marketed. Through the FMD effort at the and specifiers (as GE had done with the FMD
specifying influences, GE-branded materials system) soon found their sales efforts at molders
were often preselected when custom molders much more difficult. Field sales personnel from
were contracted to produce plastic parts. This GE’s competitors found they were locked out
success led other engineering plastics suppli- of opportunities to pursue the business because
ers to begin to imitate the GE field structure. designers had already specified the use of
Borg Warner, the leading supplier of ABS, and GE products. Custom molders at times also
Miles, the chief rival to GE in PC, were forced resented the GE value-added approach because
to adopt the FMD approach to the market to it took out of their hands the choice of what
stay competitive, though account coverage and manufacturer they could buy materials from.
Changing Environment other branded materials of like kind and quality,

provided they had met the internal standard.
Though plastics comprise a very small part of While this helped with new designs, it was of
the demand for crude oil (<5%), the energy little value in alleviating the immediate supply
crisis of the 1970s had a major impact on the problem.
plastics industry. Cutbacks in the availability of By the end of the seventies, BW con-
crude oil meant that plastic manufacturers were cluded that a new approach was needed to serve
not able to meet demand from molders for small- and mid-sized customers. Market
materials. Many molders who traditionally research commissioned by BW showed hundreds
purchased their materials in LTL quantities of small- and medium-sized molders who had
found that available supplies had been pur- much in common. They used small quantities
chased by large-volume customers who had of three or more kinds of plastics, required
previously established relationships with plas- short lead times, and had limited cash flows
tics companies. Smaller molders without and other special needs. Because most plastics
consistent buying patterns or high-volume companies’ field sales forces concentrated on
demands found themselves unable to obtain large-volume customers, these smaller users
raw materials and meet the production demands had not consistently been called on by repre-
of their customers. This was a particularly diffi- sentatives from plastics producers.
cult position for molders whose customers (the During this same time period, GE and BW
plastics end user) had specified a particular (as well as other engineering material suppliers)
engineering material, leaving the molder with were facing increased competition. Companies
very little alternative supply flexibility. The that had previously ignored the engineering
customer’s specification limited the molder’s plastics market were now attracted by the higher
ability to find a second source for material. margins available and the expiration of many
To lessen the impact of this situation, U.S. company patents. In addition to competition
some specifiers developed new strategies. As an from U.S. firms, foreign companies, like
example, a specification that once required the Mitsubishi (Japan) and Lucky (Korea), were
use of “Lexan 500” would be modified to beginning to compete in the U.S. market. With-
require “Lexan 500 or equivalent.” This modifi- out established channels in the United States,
cation was time consuming, as the specifier many of these new competitors sold through
would have to certify that the equivalent brokers and independent, regional resellers.
products from competing sources, in this case
other PC suppliers such as Dow or Miles, met
Channel Implications
the originally established standards required by
the application. Where the materials were used Recognizing an increased competitive threat
in critical applications, where failure of the alter- and the need to distinguish themselves from
nate material could lead to injury or other harm, their new competitors, BW established Plastic
specifiers would be cautious about accepting a Service Centers (PSCs) in 1981. Plastic Service
second (though theoretically chemically identi- Centers was a nationwide full-service distribu-
cal) material. This lack of flexibility led many tor catering to LTL customers whose service
large-volume specifiers (e.g., Ford and GM) to needs were not fully addressed by direct repre-
develop internal standards for engineering sentation from major plastics companies.
materials. By using the internal standard, While BW continued to maintain its direct
engineers specifying a material for their designs sales force for its large customers, it turned
would automatically allow the use of generic or over small account responsibility to the new
PSC sales team—some of who moved from one-stop shop for . . . [plastic] material in
BW to be part of the new organization. In the producers’ standard packaging [e.g., fifty
process of developing the PSC assortment, BW pound bags], and at producers’ quantity-
approached other plastics companies whose scaled prices; we ship quickly, typically
product types did not directly compete with its [from local inventory] within 12 hours; we
own. Several of these companies agreed to use give special assistance in emergencies;
PSC as their distributor, turning over their LTL we eliminate the need for processors to
customers to the PSC team. keep large inventories; and we provide
The establishment of PSCs was a signifi- technical advice. The icing on the cake
cant competitive development in the marketing is that we provide the personal touch
channel for plastic resins. Critics of using dis- typical of resin-producer/large-customer
tribution for engineering plastic resins (notably relationships.
GE) responded by saying that using distri- Meanwhile, resin producers them-
bution was an admission by plastics manufac- selves continue to concentrate on volume
turers that they could not handle the needs of accounts that justify the high cost of
their smaller customers. In the February 1986 sales and service calls. It was becoming
edition of a then-major trade publication, a problem for us [BW], and we were
Plastics Industry News,4 GE and BW presented confident other resin producers felt the
their viewpoints on the issue of using distri- same way. For those suppliers, PSCs
bution versus using a direct sales force to meet provide an independent, nationwide dis-
the needs of plastics resin customers. Joseph tribution network for engineering . . .
Sakach, vice president and general manager of and commodity materials with a skilled
Borg Warner Chemicals Inc., and Herb sales staff.5
Rammrath, vice president of General Electric
Plastics’ Plastics Sales Division, represented Many molders in the target segment
their companies. corroborated the BW view of the market. An
In the following passage, Joseph Sakach Oklahoma City PSC customer stated that
described how BW’s approach addressed service from the PSC was much better than that
customer needs: received from large plastics companies such as
Monsanto and Dow, as they were only inte-
Solid customer service had helped establish rested in the larger accounts. The PSC seemed
Borg Warner as an industry leader. . . . Borg to fill a void in customer sales and service.
Warner had the skills and the culture to The advantages of the system were not lost
assemble the kind of service package these on some plastic resin producers who, because of
LTL customers needed and the kind of the high costs involved, did not have extensive
distributorship our fellow resin producers sales coverage at smaller accounts. Use of PSCs
needed. provided an opportunity to reach the smaller
With all this in mind, we mapped accounts and more effectively organize their
out what we wanted the PSCs to be. field sales. Management at one firm noted that
To processors [custom molders], we’re a the market was changing and that, without some
4
The trade publication was Plastics Industry News, which ceased publication several years ago. In this case, some individuals’
names have been changed and market and product conditions have been simplified in the interest of academic clarity.
5
From “How Borg-Warner handles less-than-truckload customers” (sic) by Joseph Sakach, from the February 1986 edition
of Plastics Industry News.
accommodation, small volume purchasers projections of market potential were on

would be increasingly ignored as competitive the mark.
pressures increased. Senior management at For Borg Warner, the PSCs are an
DuPont, a producer of both commodity and important part of our service mix. For LTL
engineering plastics, saw the PSCs as an oppor- customers, Borg Warner, and the PSC’s
tunity to free up some field resources that could other suppliers, the PSC concept is an
now be devoted to end-user assistance and appli- innovative, effective, and cost-efficient
cation development efforts, better enabling them way to address the former’s needs in the
to compete with organizations that had large context of a sound and profitable overall
FMD organizations, such as GE. business strategy.
An initial concern of the resin producers
that would eventually sign up with the PSC to The suitability of using industrial dis-
distribute their products was that the PSCs tributors for engineering resins was not a
might give favorable treatment in sales and universally agreed-upon idea. GE, which had
application development to the BW materials grown to an industry leader through its market
rather than the other product lines. PSCs took development efforts, didn’t necessarily see the fit.
steps to alleviate this concern. Herb Rammrath from GE Plastics
Sakach continues:6 comments:
We [PSCs] offer the same culture and General Electric Plastics has taken a hard
experience that made Borg Warner suc- look at distributors and recognizes the
cessful, yet [PSCs also offer the] inde- needs they are satisfying in today’s mar-
pendence to ensure the PSCs credibility ketplace. The bottom line is that we have
among other [resin] suppliers. The PSCs opted to continue selling our materials
have been steadfast in a commitment to through [our own] direct sales [team].
viewing Borg Warner as only one of The most important reason for our
their many quality suppliers [avoiding decision to sell directly is our desire to
any possible claims of favoritism by help molders grow. We are investing a
other resin producers distributing their significant portion of our resources in the
products through PSC]. development of new applications, many
We at Borg Warner think of our- of which involve a conversion from metal
selves as good business persons with into plastics. As a resin supplier, we need
foresight, imagination, and an ability to to work closely with the companies who
serve a dynamic marketplace. That’s will handle that conversion. This is im-
what the PSCs are all about. Last fall we portant to the industry as a whole, as there
opened our 11th PSC location built on is a need to develop the molding capacity
those principles. The PSCs offer a full necessary to meet the demands all of us
range of products from producers includ- are generating for plastics. At G.E., we
ing Borg Warner Chemicals, Gulf, Arco, believe that much future capacity will
DuPont, . . . and Miles. . . .7 The PSCs come from what are now small molders.
have more than 4000 customers, and our We’d like to help them grow, and we can
6
Ibid.
7
In this case, the number of participating companies has been reduced. Also, names as used may not reflect current names
as a result of acquisition, merger, or other corporate exchanges.
do a much better job of that by serving needs our customers have. Among other
them directly. things, we have done the following:
The move toward just-in-time de-
• We have put into place additional sales
livery systems, plus the cost of carrying
resources [more field sellers] so we can
inventories, is forcing molders and resin
maintain our already high level of direct
suppliers to manage inventory differently
communication with customers, and
and better. Distributors help meet that
increase our contact with the smaller
need by reducing inventory . . .
molders. In short, we’ve increased our
of . . . molders . . . They [distributors]
capability to manage higher levels of
are, in fact, inventory-management com-
direct contact with more molders by
panies, and have little to do with applica-
investing in an expansion of human
tion development or technical service. At
resources.
G.E., we believe there are several advan-
• We have centralized our customer
tages in using direct sales:
service efforts [across all of our plastic
• While distributors may be able to han- product lines] to respond more quickly
dle commodity materials effectively, and effectively to customer needs. This
they are generally not equipped to han- operation . . . enables us to provide
dle engineering plastics. Engineering improved order handling and better
resins are not commodities and require inventory management, develop just-
sales support both before and after in-time inventory management, and
the sale. establish electronic order entry which
• Engineering plastics also require we expect to be a major factor in cus-
much more technical support than the tomer service. We have taken the steps
typical distributor can provide. necessary to meet the whole order-
• We have found that our customers entry/ inventory-control challenge.
would rather deal directly with the • We have established our first specialty
prime supplier than with a middle- compounding facility at our Indiana
man. The reasons are obvious, but cru- manufacturing site. This facility pro-
cial—they get better overall service, duces small lot quantities for both
better response to their needs, and developmental and commercial use,
faster resolution of their questions and giving us greater flexibility to meet
concerns. In addition, they know that special customer needs [“small order
all of the resources of a company like sizes”].
General Electric stand behind their
These systems we are putting into
resin purchases.
place will help provide many of the ser-
I feel that using a distributor to vices that customers need in addition to a
handle our products is an admission that direct link to their material source—direct
we are not able to serve customers our- contact, instantaneous communication,
selves. That’s not an admission that I and feedback. In taking this approach, we
would like to make on behalf of G.E. know we are bucking an industry trend.
Plastics. So, having decided not to use We stand virtually alone in this commit-
distributors, yet recognizing that they do ment to direct customer service. In a
serve some needs, we know we must sense, we are “out of step” with almost
manage our business to satisfy all of the everyone else, but perhaps that’s what
leadership is all about. We take our lead- 2. If GE and BW have the same views of the
ership role in this industry seriously and environment, why are the two approaches
would relinquish that title if our service to to the market dramatically different? If
customers were no longer second to none. they are different, which view do you feel
We can only guarantee quality service is more useful?
when we provide it directly. . . . 3. Consider customer needs, as viewed by
In summary, we at G.E. Plastics are GE and BW. Do they see customer needs
designing our business in such a way that from the same perspective?
we can service our customers—large and 4. Are both companies segmenting the
small, short term and long term—with market the same? Have they targeted the
the complete range of products and ser- same segments? Are they interested in
vices they demand. We simply are not the same market?
willing to compromise that objective. We 5. Does selection of target markets impact
call ourselves the “Strategic Supplier.” channel design?
We want to be a company our customers 6. From what you can discern in this case,
can call upon, can rely upon—directly— describe and compare the goals of BW
for all their needs.8 and GE.
a. How do their goals impact their
Questions for Discussion channel structure?
b. Do their goals impact how they view
This case presents two large, experienced, and
the market? Are their views realistic?
well-reputed firms who have selected two very
c. It may be of assistance to consider how
different approaches to market similar products.
their goals and market view compare to
BW formed PSCs to handle smaller LTL cus-
others in the market, such as DuPont.
tomers not only for their own products but also
7. Are certain channel structures more
for other resin manufacturers as well, while
suited to certain goals?
maintaining their established direct sales force
8. Consider the service mix BW and GE
for larger customers. GE, on the other hand,
intend to provide. Relate these services
relied entirely on its own direct sales force.
to promotion strategy and marketing
functions. Is the mix of services con-
General Question: Given all the facts at your sistent with their and/or your view of
command, what is your recommended chan- customer needs?
nel structure for plastic resins? What are the 9. What role does the FMD specialist play
alternatives? in the marketing organization of GE?
What potential conflicts do you see in the
dual field structure of GE (having both
In the development of your case analysis, it will
field market development personnel and
assist you to consider the following:
field salespeople in sales territories)?
1. From the information provided, describe Consider all viewpoints—the custom
the market environment as viewed by GE molder, the plastics end user, and the
and BW. Are both views the same (consis- individuals serving as either FMDs or
tent with each other) or are they different? salespeople.
8
From “Why GE Plastics relies on a direct sales force” (sic) by Herb Rammrath, from the February, 1986 edition of
Plastics Industry News.
Note 1: As described in the case, extensive use has reason, specific situations and factors mentioned
been made of articles appearing in the February herein may not recreate the actual circumstances
1986 issue of Plastics Industry News, as well as the experienced.
author’s personal experience and discussions with Note 2: This case can be used as part of a “trilogy”
professionals in this market. When quoting from the when combined with the cases “Automotive
article, bracketed comments have been added for Headlamps II” and “Makrolon: The High-Tech
clarity while “ . . . ” indicates the deletion of parts of Material,” found in this text. All three concern the
the article not considered germane to this academic same general core product but discuss how different
exercise. Though based on real situations, some organizations will approach the market at different
names have been changed and several simpli- times. Additional details are provided in the
fications have been made, in the interest of academic Instructors’ Manual.
clarity, to product and market Information. For this
CASE V
Automotive Headlamps II: The Paradigm Shift from Standardized
Glass Sealed Beams to Today’s Plastic Custom Designs
Overview bases and radio cabinets) and, in 1930, formed
the company’s first plastics department to mar-
This case brings together many factors: ket these plastic materials in the general market
• Strategic business unit management to other manufacturers of similar devices.
philosophy Plastic materials with improved physical
• Innovation in the face of contrary “conven- properties were a continuously evolving need as
tional wisdom” more complex component designs demanded
• How innovation can be viewed differently improved physical material properties. General
by various stakeholders Electric Research and Development Laboratories,
• Customer organizational as well as product one of the premier industry-sponsored R&D
goals centers, maintained an ongoing materials research
• Value, as perceived by the customer, rather effort. This led GE research labs to the develop-
than the supplier. ment of new, thermoplastic engineering plas-
tics such as polycarbonate (Lexan®) in 1959,
Introduction and Company polyphenylene oxide (PPO) in 1965, and PPO
Backgrounds alloys (Noryl®) by 1966. With these materials,
GEP, then led by Jack Welch who was eventually
For clarity, the backgrounds of the main players to become GE chairman, became a significant
in this case are provided. factor in the growing plastics materials industry
and a star in the GE corporate portfolio.
General Electric The General Electric Lamp Division (GEL)
The two strategic business units (SBUs) of is an outgrowth of the very beginning of GE, dat-
General Electric directly involved in this case ing back to the company’s founding by Thomas
are the General Electric Plastics Division and Edison in 1878. Over the years, GEL has been at
the General Electric Lamp Division. the forefront of lighting developments in almost
The General Electric Company Plastics every market: stadium lighting, aircraft and air-
Division (GEP) began as an internal supplier of port lighting systems, home lighting, to name
thermoset phenolic molding compounds used a few; and in every technology—incandescent
in electrical components (such as vacuum tube (such as standard light bulbs), fluorescent, mercury
Thermosets and Thermoplastics
Simply defined, thermoset phenolics are those Engineering thermoplastics are materials
materials that undergo a chemical change when that can be melted again after the initial molding
heat is applied in the molding process and, process, analogous to ice melting to water and
when reheated, do not melt. These materials are then being cooled to ice again. Thermoplastics are
capable of withstanding high heats without de- easier to recycle and generally have better physical
forming but usually have poorer physical proper- properties, making possible more complex part
ties than thermoplastics. designs.
464
Case V • Automotive Headlamps II 465
vapor, sodium, and others. GEL is an integrated, steel mills, rubber plantations, automotive glass
high-volume producer and is among the only plants (windows, windshields—not lighting),
lighting device manufacturers that make most of iron ore barges and mines, and paint manufac-
its own glass for its products. turing facilities.3 Ford, like GM, manufactured
The glass sealed-beam automotive head- many of its own components including lighting
lamp, introduced in the 1930s, is one of the devices and was strongly vertically integrated
developments that GEL is most proud. At the in the manufacture of components made of
time of this case, GEL was the largest supplier plastics. However, Ford did not manufacture
of “light bulbs” to the North American automo- headlamps and thus was the largest customer
tive market. The sealed-beam design had of GEL.
remained an industry standard from the 1930s
to the date of this case. Within the GE corporate Regulatory Agencies
structure, GEL was a significant cash cow.
The U.S. Department of Transportation (DOT)
and its component National Highway Traffic
General Motors Safety Administration (NHTSA) were respon-
General Motors (GM), the largest automotive sible for maintaining safety standards for the
company in the world, at the time of this case, industry. DOT performance standards regulated
held almost 60 percent of the American windshields, windows, lighting effectiveness,
market. GM was built primarily through occupant protection devices (airbags, seatbelts),
acquisition of not only smaller car companies and so on, on the vehicles.
but supplier companies and brands as well.
AC Spark Plugs and Delco electrical compo- Professional Organizations
nents were among GM-owned, through acqui- The Society of Automotive Engineers (SAE) is
sition, supply divisions. The GM Guide Lamp the professional society of automotive and
Division (GMGuide—not to be confused with transportation engineers. As the auto industry
GEL) produced various lamp assemblies for evolved, the SAE, as with many professional
the interior and exterior of GM products. societies, created voluntary performance stan-
GMGuide was also the primary supplier of dards for many vehicle systems and devices.
sealed-beam headlamps to GM vehicles, Many SAE-recommended performance stan-
though they were not as integrated as GEL.1 dards became standard industry practice. DOT
adapted many of these voluntary standards as
Ford Motor Company regulations.
Ford Motor Company was the second largest
GEP Organization
automotive company in the world, with approxi-
mately 25 percent of the American market.2 The GEP initially served the automotive industry
growth of Ford was achieved primarily through from a district office in Cleveland, coinciden-
vertical integration rather than acquisition. At tally the “home” of GEL. Early applications of
one time, Ford owned and operated its own GEP plastics included use in the production of
1
At this writing, many GM captive supply divisions have been spun off into Delphi Corporation, a separate company
engaged in the supply of automotive components to the automotive industry.
2
At this writing, Toyota has passed Ford in number of worldwide vehicle sales.
3
As with GM, many Ford captive supply divisions have been spun off into Visteon Corporation, a separate company
engaged in the supply of automotive components to the automotive industry.
466 Case V • Automotive Headlamps II
vehicle ignition components (distributor caps required the heat resistance properties of poly-
and rotors) and, as plastics materials are good carbonate also became selective applications of
insulators, the plastic parts of many other Lexan.
electrical devices. As the use of engineering By the late 1970s, GE’s automotive mar-
plastics in the automotive market grew, GEP keting team, in pursuit of new applications,
established a field office and development speculated that headlamps would also benefit
center in the Detroit suburb of Southfield, from what their plastics materials could do. By
Michigan, in closer proximity to the concentra- this time, the quest for better fuel economy
tion of automotive customers. With the estab- was a major factor in design and material
lishment of the Detroit center, a local manager selection decisions. Headlamps, made of glass,
and a team of market development specialists were very heavy when compared to other vehi-
were assigned responsibility for business devel- cle lighting applications made of plastics.
opment at the U.S. vehicle OEMs. The focus Substituting Lexan polycarbonate for the glass
shifted from plastic sales used in traditional was a natural fit. The GE team set out with
applications (insulators, rotors, distributor caps, a new goal: to convert headlamps to their
etc.) to generating new business at the car com- plastics, worldwide.
panies through the development of automotive
applications that incorporated the use of GE
The History of Forward
plastics. At the time of the relocation (approxi-
Lighting—Headlamps
mately 1972), GEP annual automotive sales at
the time were less than a million dollars, but In the 1930s, prior to the development of the
destined to grow. GE Plastics was moving out of standardized sealed beam, cars manufactured in
the shadow of larger GE divisions, becoming the United States had glass headlamps of vari-
a star in the corporate portfolio. ous shapes, such as the “teardrop” design on the
During the 1970s the GEP product line, Lincoln Zephyr and the rounded rectangular
automotive application development efforts, shape on the 1939 Plymouth. The construction
applications, and sales grew rapidly. The market of these lamps was typically comprised of
development efforts of the GEP team estab- a glass lens, a bright surface metal reflector, and
lished applications in several areas of the a separate incandescent bulb. The multipiece
vehicle, including engine and body electrical design of these lamps did not prevent sealing
components, interior and exterior trim and light- and corrosion problems. Over time, the perfor-
ing, where plastics had not been successfully mance of the headlamps deteriorated, becoming
used before. With its higher thermal and impact a major safety issue. The many different shapes
performance offsetting higher cost, Lexan and sizes also prevented standardization of per-
polycarbonate had replaced acrylic in lenses as formance and the easy availability of service
well as zinc and acrylonitrile-butadiene-styrene and replacement parts. This became a larger
(ABS) in housings—in specific, demanding sig- issue as more people drove longer distances
nal lighting applications. Tail lamp applications from their local communities.
of Lexan polycarbonate began in the commer- As a result, the “sealed beam” came into
cial truck segment and then were translated into use and became the standard of headlamps for
pickup trucks and other vehicles with bumper many years. The term sealed beam was used to
mounted lamps—where break resistance was describe a hermetically sealed, all glass lens,
a major concern. Smaller, more compact signal and reflector unit, containing filaments in an
lamps that enclosed the heat of the light inert gas atmosphere—similar to an incandes-
bulb (park and turn, cornering, etc.) and thus cent light bulb. From their inception in the
Acrylic versus Polycarbonate
Acrylic, best known as Plexiglas® from Rohm & polycarbonate are often considered to be “virtu-
Haas Chemicals, and polycarbonate (Lexan from ally unbreakable” and are able to perform in
GE) are two of the most widely used plastic mate- higher temperature environments.
rials when optical-quality transparency is required. Why not use polycarbonate all the time?
While both exhibit excellent optical properties, Cost. Polycarbonate is 50–100 percent more
acrylic is considered to have poor impact and expensive than acrylic. As a result, polycarbon-
less high-temperature capability when compared ate gets used only in the more demanding
to the polycarbonate. Products molded from applications.
1930s until 1957, they were available in one

round size: 7⬙ diameter, usually with two
filaments to provide both low- and high-beam
lighting (Exhibit V-1). Becoming standard on
every car, they were readily available, low cost
and easy to replace.
By the 1957 model year, styling trends of
“longer, lower, wider” led to the advent of the
5 3⁄4⬙, four-lamp system, with two outer high/low
beams and two inner high-beam units. This sys-
tem was first seen on such cars as the 1957 EXHIBIT V-2 Typical 4 Lamp Round System
Mercury Turnpike Cruiser and the 1958
Edsel4—with most other 1958 models adopting diversity in headlamp appearance was increas-
the same configuration (Exhibit V-2). By the ing; however, it was unlikely that regulatory
mid-1970s, rectangular sealed-beam headlamps bodies would approve additional complexity.
also became available in rectangular 4⬙ × 6⬙, During most of this time, headlamps in
four-unit systems and 5⬙ × 7⬙, two-unit systems Europe evolved differently. The sealed-beam
(Exhibit V-3). Obviously, the desire for greater phenomena—the requirement to seal the lamp
EXHIBIT V-3 Typical 4 Lamp Rectangular

EXHIBIT V-1 Typical 2 Lamp Round System System
4
At the time of this case, GM brands included Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. Ford brands included
Ford, Mercury, Edsel, and Lincoln. The Edsel was discontinued in 1961.
from potentially damaging and/or corrosive vehicles had evolved to all-plastic units,
elements—never became a major factor. Instead, designed to fit the style and shape of the car,
headlamps continued to evolve in shapes designed using replaceable, standard bulbs inserted from
to fit the vehicle design, and construction contin- the rear of the lamp, and standard sockets and
ued to evolve and improve. Typical units were connections. Acrylic plastics were typically
comprised of a glass lens, a metal reflector, and used for lenses, with various other plastics and
one or more replaceable bulbs, with an industry- metals competing for the reflector or housing
standardized connection at the base of the bulb. and trim components.
Bulbs evolved from standard incandescent to
halogen-cycle units, typically exemplified by the
The Situation
H4 two-filament high- or low-beam design in
the main headlamps, with single filament bulbs When GEP began to approach car companies
used for long-range driving, front fog, and other with the idea of plastic headlamps, they encoun-
forward lighting applications. These designs tered many objections. Some of those objec-
were a “bulb within a bulb”—the halogen fila- tions were that plastic headlamps wouldn’t
ment itself was fully and separately encapsulated work because:
within its own glass envelope, which was then
• compared to glass sealed-beam units, they
protected within the headlamp housing. However,
will be unable to maintain a hermetic seal,
these designs did not meet U.S. standards,
thus causing premature filament failure
though they were considered more stylish and,
(note that this was likely to be an issue
with fuel economy becoming an issue, more
only when “bulb within a bulb” was not
aerodynamic. European vehicles sold in the
used);
United States required to comply with DOT
• the lens surface will be insufficiently
standards had their designs modified to incorpo-
resistant to weathering and abrasion over
rate the U.S. sealed-beam units—often to the
the life of the vehicle;
detriment of the vehicle appearance.
• engineering says they’re not legal or not
In the late 1970s, the domination by the
approved by the U.S. Department of
conventional incandescent sealed beam in
Transportation, the NHTSA, nor are they
the United States was challenged by the desire
endorsed by the SAE;
for better lighting and the availability of
• they will cost more, and therefore offer
European halogen-bulb replacement units in
no incentive to change;
the aftermarket—the consumer replacement
• some car company captive manufacturing
and retrofit market. As a result, OEMs devel-
divisions (e.g., GM Guide Lamp Division)
oped headlamps with halogen bulbs added
and some independent suppliers that made
inside of the standard-shaped glass sealed-
glass headlamps (e.g., GE)5 had consider-
beam headlamps, resulting in a premium range
able investment and vested interests in
of products, producing a whiter, brighter light
conventional glass sealed-beam lamp
(the halogen filament was encapsulated
manufacturing. Therefore, they will not be
separately and sealed within the headlamp—
receptive to change.
a bulb within a bulb).
At this juncture (with the exception of At this time, GEL also suggested that,
headlamps), all exterior lighting on modern even if all of these factors could be overcome,
5
GE was by far the market share leader in the supply of automotive headlamps. There were other suppliers, but up to this
time these other suppliers had played a minor role.
Captive and Custom Molders
A manufacturer that makes plastics components components are produced to the manufacturer’s
itself at its own plastic manufacturing facilities is specifications by custom injection molders—
said to have “captive facilities”—manufacturing contract providers that produce plastic parts as
facilities that produce plastic parts strictly for designed and specified by the manufacturer.
that manufacturer. When outsourced, plastic
the styled headlamp was a fad, that wouldn’t be • The Lexan lamp would be significantly
universally adopted by the industry. lighter than a glass sealed-beam lamp,
Faced with these objections, a few mem- contributing to need for lower vehicle
bers of the GEP marketing team felt that the weight.
project was not worth pursuing. The time spent
These benefits, when combined into
marketing the plastic headlamp could be better
a package, could provide a method for manu-
spent on less complex applications (really
facturers to make their cars look better and
meaning applications with easier to overcome
different and have that advantage over their
and fewer objections). Still, the GEP Detroit
competitors, potentially reduce collision haz-
team wanted to move forward and develop
ards, and contribute to the overall goal to
business in plastic headlamps, and a few people
produce lighter vehicles. Indeed, at this time
were prepared to bet their careers on it.
there was a heightened concern for safety, since
a spate of sensational rear-end collisions and
The Marketing Plan
resultant fires had occurred coincidentally. In
Benefits addition to the safety aspects, GEP noted the
proposed shaped-to-the-car flush designs as
GEP marketing people began analyzing and
being more aerodynamic, and thus contributing
developing ideas about the benefits of plastic
to less drag and better fuel economy. (The new
headlamps to OEM’s. They concluded that the
concept was quickly tagged as the aerodynamic
primary benefits of plastics were
headlamp at Ford, and the term was used
• the ability to create unique designs with during development and application.)
easier optical detail reproduction than
glass, allowing vehicle manufacturers to
Risks
design a more modern, smooth, stream-
lined front end, with the headlamps inte- The development project was not without
grated into the overall vehicle shape and risks, both for customers and the GEP team.
mounted flush to adjacent surfaces. GMGuide (now part of Delphi Automotive) was
• the plastic and halogen bulb combination the primary supplier of glass sealed-beam head-
could reduce the risk of fire in a rear-end lamps to GM. GMGuide was unreceptive, and
collision—since the Lexan was virtually its general manager typified this by stating
unbreakable—and even if broken, the bulb emphatically that the company was not going to
filament was separately encapsulated. change from glass to plastic because “sand (the
Therefore the risk of fire was reduced, basic raw material in glass) will always be
compared to the glass sealed-beam unit, cheaper than oil (the raw material in plastic).”
with its incandescent filament exposed The GEP program manager also recalls being
when broken. practically thrown out of a meeting by the head
of GEL at GEL home offices near Cleveland. on the vehicle. If headlamps were to be made of
Fortunately, GEP’s management at the plastic, Ford could manufacture the housings
Pittsfield, MA, headquarters backed the efforts itself, purchasing just the filament (bulb within
of the GEP Detroit team and provided political a bulb) from outside sources. Additionally,
support within GE for them. Ford was known as more receptive to innova-
tive ideas, particularly from a marketing
Finding the Right Customer perspective as it understood the role innovation
The GEP approach to the customer then played in a better product and image in the
changed. Realizing that the potential customers market. These factors combined to lead the
within the customer were actually those who GEP team to focus on Ford as the most likely
would value the benefits of styling differentia- company to innovate.
tion, they focused on the design and styling The GEP team developed a champion
organization of the car companies, as well as within the Ford organization: an open-minded,
managers in product planning and marketing. In creative manager in advanced engineering—
other words, attention centered on the people at who not only “got it,” but wanted to see it
the car companies who were responsible for the happen himself. Though the effort was consid-
way a car looked and sold. The degree to which ered to be a waste of time by some Ford person-
these stakeholders (marketing, styling/design, nel, particularly in regard to the previously
and product planning departments) within the mentioned regulatory risks, the Ford “intrapre-
car company buying centers could influence neur” and the GEP team began a program to
the other members (engineering and purchasing make the new lamp happen.
people) became critical. While engineering
Challenging the Standard
was a necessary, if sometimes reluctant ally,
they did not determine vehicle content. After GEP marketing people started to politely but
approaching all major car manufacturers, the systematically question “legal” assumptions.
GEP marketing team realized that GM was not They made some important discoveries. Most
a likely first customer because GMGuide was everyone had assumed the incumbent designs to
focused on cost, not innovation. Though some be necessary (sealed, one-piece glass). However,
GM designers, particularly at Cadillac, had Sylvania, a small lamp producer, was to shortly
expressed interest in the plastic aerodynamic prove that this was not the case.6 The applicable
headlamp, they would not be able to take advan- SAE standard was in place primarily as a design
tage of the development until GMGuide was guideline to describe the significant dimensions,
ready to embrace the technology. The situation mounting and aiming points, and so on of
was different at Ford. sealed-beam headlamps—but not outlining or
Ford did not manufacture its own glass determining performance.
headlamps, instead was purchasing most of its GEP also decided to question the “legal”
needs from GEL. Ford was, however, fully assumptions at the external agency level. The
integrated in the manufacturing of plastic GEP program manager contacted a senior DOT
components, among those all of the other lamps official in Washington, D.C., and arranged
6
Sylvania, a small competitor to GEL but looking for a bigger presence in automotive lighting, was attempting to enter
the market with glass “sealed” beam halogen headlamps that were made of a separate lens and housing. The two separate
parts were bonded and the hermetic seal was achieved with adhesive rather than the industry-standard “flame sealing”
that melted the two pieces of glass together. If the adhesive system worked, Sylvania could avoid the investment in the
flame-sealing process. GEL believed that, ultimately, this adhesive design would not survive neither the DOT approval
process nor vehicle durability requirements.
a meeting to discuss a new, safe headlamp idea. coating, bonded to an injection molded, metal-
At this meeting, the official indicated that the lized, and coated reflector/housing. The vehicle
government’s only real concern was that application was the inboard lamp of the four-
headlights provided the driver consistent, safe lamp rectangular system (high beam only, as
illumination over the period of its life (or that part of the standard four-lamp configuration)
of the car) and, should one fail, replacements units on the 1980 Lincoln Town Car, of which
be widely available. In fact, they did not care approximately 60,000 examples were produced
about their material or shape. The GEP repre- and sold that year. Conventional glass sealed-
sentative cited the safety benefits of the plastic beam units were used on the outer high/low
concept. The plastic and halogen bulb combi- beam pair of headlamps. This configuration
nation would reduce the risk of fire in a rear- provided a way to gain production use and
end collision—since the Lexan was virtually experience and prove the durability of the
unbreakable and even if broken, the bulb fila- plastic lamp in actual field use. (Should the new
ment was separately encapsulated. Therefore plastic lamps fail, the vehicle would still have
the risk of fire was reduced, compared to the the normal, safe use of the primary outer
glass sealed-beam unit, with its incandescent “high/low” sealed beam, and the inboard plastic
filament exposed when the glass housing was high beam could be easily retrofitted with the
broken. standard glass lamp.) The plastic lamps were
manufactured by GEL as part of a development
project funded by GEP and Ford.
Validating the Concept
The test application on the Lincoln Town
GEP decided to make some prototype plastic Car was deemed successful, paving the way for
headlamps, test them in simulated use to see if further use.
they would work over an acceptable period of GEP hired an experienced automotive
time. Since GEL was the lighting expert, and at designer/stylist (they don’t like to be called
this point, they did not want to get too far from stylists!) from Europe, where aerodynamic
the project (at least to maintain knowledge of headlamps, made of glass, styled to fit the car
what was going on), they agreed to work with were the norm. The designer developed “before
GEP and Ford to develop the prototypes. All and after” illustrations of existing and poten-
agreed that if those tests went well, then the tial vehicle models, graphically showing the
next step would be to further prove it out with appearance advantage of smooth, new, flush
a production vehicle trial. Until then, no one plastic designs—compared to the upright, rec-
had questioned the prevailing assumptions. tangular holes in the otherwise stylish front end
Prototypes were designed, fabricated, and of most vehicles. It worked.
tested. Results were favorable and reviewed At about this time, GE Lamp withdrew
with Ford as well as with the appropriate support of the development program. To say
agencies. Ford decided to further validate the that both Ford and GEP were disappointed
concept in actual field use and requested GEL to would be an understatement. While Ford was
manufacture the lamps. The first polycarbonate proficient at the manufacture of plastic parts
headlamp to be used on a production U.S.-built with some of the largest captive molding facili-
vehicle was a two-piece injection molded ties in the industry, it was convinced that the
version of the standard 4⬙ × 6⬙ rectangular high development required a cooperative lamp man-
beam-only design—using a halogen capsule ufacturer. Over dinner with a GEP representa-
bulb as its light source. It used an injection tive, the Ford vice president of Car Engineering
molded lens with an ultraviolet (UV) protective made the Ford position clear. Ford was going to
go ahead with the aerodynamic lamp develop- Questions for Discussion

ment. It preferred to partner with GE, as GE
had both plastics materials and lighting exper- 1. What is your assessment of the situation?
tise. However, it wouldn’t refrain from finding 2. What are the benefits of plastic headlamps?
another lighting manufacturer and/or another To whom?
plastics material supplier and put them together 3. How would you overcome the objections
into a team (e.g., a value network) to make of the GM Guide Lamp division?
the project happen. The vice president of Ford 4. What is the rationale behind the GEL
asked the GEP representative to get that decision to withdraw support from the
message back to GE. development?
5. Does it make sense to innovate the offer-
Analysis ings of a cash cow? Why?
6. How has GEL impacted the GEP rela-
This case represents a situation that is often tionship at Ford?
associated with innovation. A few people within 7. What approaches would you take with
a company have a bright idea that would benefit other potential customers?
them if accepted and implemented. However, 8. How would you address and overcome
the current industry situation is characterized by the issues regarding agency approval?
a well-established technology and committed 9. What are the key factors likely to deter-
manufacturing, combined with external, third- mine success in this application?
party government and industry standards devel-
oped around the incumbent systems.
CASE VI
Makrolon: The High-Tech Material
People all over the world come into contact with Makrolon was primarily used as an insulating
polycarbonates every day. Ever since 1953, this plastic, for example for switches and fuse
plastic has built an impressive array of success boxes, but it is now recognized as a highly
in many different product Today, countless pro- versatile material that can be used in many
ducers all over the world rely on the properties areas of life. With its high transparency,
of polycarbonates. And more products and impact strength, and dimensional stability,
applications are constantly being added. It is even at high temperatures, Makrolon is versa-
impossible to imagine the future without poly- tile in the extreme. Makrolon continues to be
carbonates. One of these polycarbonates is used in electrical engineering applications but
Bayer’s Makrolon.® The 45 billion or so CDs also, for instance, in headlamps and interior
that have been produced from Makrolon since fittings for cars, transparent roofing for car-
the birth of the compact disc in 1982 up to the ports and swimming pools, UV protection for
beginning of 2008 would create a belt about sports goggles and sunglasses, and packaging
10,800,000 kilometers long. This is roughly for reusable milk bottles and water dispensers.
equivalent to twenty eight times the mean dis- When Polygram, a subsidiary of Philips, made
tance between the Earth and the Moon. the first CD, they used Makrolon, which is
In 2007, Makrolon had a brand aware- now used by renowned manufacturers as
ness of 31 percent and was absolutely the best- a fixed component of many CDs, CD-ROMs,
known polycarbonate in the marketplace in and DVDs. Recently it has also been adapted
Europe. In the United States Lexan from GE for blue-ray discs.
Plastics had the leading position.1 The follow- Bayer Polymers did not pursue an ingre-
ing case study describes Bayer’s ingredient dient branding strategy until 2000, when it
branding strategy for Makrolon in Europe. We began marketing Makrolon as a brand in its
focus on the rise of Makrolon and we broach own right and bringing it into the public eye
the issue of developing this strategy for the (see Exhibit VI-1). Prior to this, it was largely
future. In the end, awareness is not everything. unknown to consumers and only marketed to
Does branding pay off? What are the conditions businesses as an application chemical.
that determine the benefit Bayer can achieve Bayer has had little difficulty in finding
with Makrolon? All these questions are ingredient branding partners to use and process
germane to successful management of the
Makrolon brand.
When the Bayer Corporation from
Leverkusen invented the polycarbonate
Makrolon® in 1953, it did not cause any
particular shockwaves. Bayer patented the
invention in the same year. In the early days EXHIBIT VI-1 Makrolon Trademark/Logo
1
On May 27, 2007 General Electric (USA) sold GE Plastics to Saudi Basic Industries Corp. (SABIC) for $11.6 billion.
In 2006, the Pittsfield, MA-based business employed 10,300 people and generated $6.6 billion in sales and $675 million in
profits in that year. In 2002 they had started a branding campaign which improved Lexan’s reputation outside the
Americas.
473
474 Case VI • Makrolon: The High-Tech Material
the product, given that Makrolon has had a GmbH & Co. KG, CD-ROMs and DVD-ROMs
good reputation in the plastics processing in- from MMore International BV, and ampoules
dustry. The strategy aims to make the consumer for a needle-free injection system from
aware that both the manufacturer of the end Rösch AG all carry the Makrolon seal of
product and the company that makes the most quality.
elementary component of the product stand for But the ingredient branding family also
flawless quality and that the customer can trust includes CDs and DVDs from other manufac-
this product. turers (regionally separated), protective floor
But being a processor of Makrolon does mats, water dispensers, flexible solar modules,
not necessarily mean that the end product meets and many other products. What Bayer and its
the same quality standards or reflects Bayer’s partners are both aiming to achieve is to differ-
level of prestige. The polycarbonate could be entiate themselves from the competition and
simply an ingredient, which cannot compensate competing products by means of the branding
for a manufacturer’s poor reputation or the infe- strategy. It is important to highlight the advan-
rior quality of other ingredients used in the man- tages of Makrolon and transfer this positive
ufacturing process. To protect the reputation of image to the end product with the help of brand
Bayer and Makrolon and make sure it is not name. This differentiation gives the ingredient
damaged by quality issues of this kind, Bayer a unique selling proposition, or USP, and
tests all products that are destined to carry the encourages the end customer to give preference
Makrolon label. to products with the Makrolon logo or even
Bayer also uses brand usage agreements keep a lookout for this particular product when
to ensure the required level of quality and looking to make a purchase. The potential cus-
assumes the right to take samples during pro- tomer then may ask for a product manufactured
duction to offer end consumers assurance of with Makrolon.
consistently high quality. But Bayer does not But the pull effect cannot be achieved
only consider a company’s products when simply by adding the Makrolon quality seal
choosing its ingredient branding partners; to product, packaging, and advertising mater-
it also scrutinises the company and its image ial. Quality and credibility must also be con-
as a whole. When it comes to ingredient veyed to the consumer, who must be able to
branding the Leverkusen firm wants to know build up a familiarity with the Makrolon
exactly with whom they are associating in the brand. Bayer’s ingredient branding partners
public eye and who is allowed to use the label their products and brochures all over
Bayer cross for their own marketing pur- Europe with the words “Made of Makrolon®”
poses. This process aims to avoid associ- and the Bayer umbrella brand (branded
ating the company with partners engaged in house). The partners explain the advantages
“price wars”; a close association with the end of this special polycarbonate and why cus-
product could potentially damage the image tomers should choose products with this
of Makrolon. ingredient in print advertisements, brochures,
Becoming an ingredient branding part- catalogues, on their Web sites, and at trade
ner is a coveted position amongst companies fairs. To initiate the pull effect, Bayer uses
that process Makrolon. As a result, Bayer is advertising campaigns to appeal directly to
signing brand usage agreements with more (potential) end consumers and in 2000 it
and more firms. At the present time, cycling, began targeting individual audiences with
skiing, and sports goggles from UVEX Sports appropriate motifs, giving the brand the right
Case VI • Makrolon: The High-Tech Material 475
emotional associations for the particular making consumers associate the plastic from
segment. Bayer used PR in the print media the outset with the Bayer Corporation, which
and on television to convey its messages. The already represents tradition and quality and
“fastest” and most conspicuous advertising has proven it with brands such as Aspirin.
medium was the intercity locomotives oper- The positive image of the company can
ated by Deutsche Bahn. Bayer was the first thus be transferred to the new Bayer brand.
company to use intercity locomotives as Demonstrating the link between the two
advertising space. brands cuts down on costs for introductory
The Makrolon brand was given five and ongoing advertising, partly because
different motifs, which were partially oriented Makrolon benefits indirectly from product
toward Bayer’s partners UVEX, Legoland, advertising for other Bayer products.
and MMore. These locomotives proved
extremely popular with railway fans, and a Background on Bayer AG
dedicated Web site set up by Bayer attracted
The History
huge numbers of hits. Model railway maker
Märklin currently stocks a model of the loco- The general partnership “Friedr. Bayer et comp.”
motive featuring partner MMore, which is was founded on August 1, 1863, in Barmen—
delivered with a computer mouse made of now a district of the city of Wuppertal—by dye
Makrolon. ® This is another example of salesman Friedrich Bayer (1825–1880) and mas-
Bayer seeking to demonstrate the versatility ter dyer Johann Friedrich Weskott (1821–1876).
of its plastic, and by partnering with Märklin, The object of the company was the manufacture
it aims to highlight the fact that the polycar- and sale of synthetic dyestuffs. Between 1881
bonate is used in many models from the and 1913, Bayer developed into a chemical com-
Göppingen toy manufacturer. pany with international operations. Although
The ingredient branding partnership dyestuffs remained the company’s largest
between Bayer Makrolon and its customers is division, new fields of business were joining
balanced because of its interdependence. The the fold.
principle is based on synergies, that is, each Of primary importance for Bayer’s contin-
partner integrates the other and refers to the uing development was the establishment of
partnership in their advertising, brochures, cat- a major research capability by Carl Duisberg
alogues, Web sites, and other publications. (1861–1935). A scientific laboratory was built in
This does not result in advertising cost Wuppertal-Elberfeld—which was also the com-
allowances or similar benefits and concessions pany’s headquarters from 1878 until 1912—that
for either side. set new standards in industrial research. Bayer’s
As a relative newcomer to ingredient research efforts gave rise to numerous intermedi-
branding, Bayer is still in the early stages of ates, dyes and pharmaceuticals, including the
establishing its high-tech plastic Makrolon as “drug of the century,” Aspirin, which was devel-
a brand with the user. Establishing a brand oped by Felix Hoffmann and launched onto the
that has hitherto been completely unknown to market in 1899.
consumers is an extremely difficult task and World War I interrupted Bayer’s dazzling
often incurs considerable advertising costs. development. The company was largely cut off
So Bayer exploited its well-known name and from its major export markets, and sales of
reputation and incorporated the Bayer cross dyes and pharmaceuticals dropped accordingly.
into the Makrolon logo. This had the effect of Bayer was increasingly integrated into the war
economy and began to produce war materials, Germany. As a result of World War II, Bayer
including explosives and chemical weapons. In for the second time had lost its foreign assets,
1917, during the war, Bayer launched its third including its valuable patents. It was
production site in Dormagen. clearly vital to rebuild Bayer’s foreign busi-
A community of interests had already ness. Farbenfabriken Bayer AG was newly
existed between Bayer, BASF, and Agfa since established on December 19, 1951. The
1905. In order to regain access to the vital Leverkusen, Dormagen, Elberfeld, and
export markets, these and other companies of Uerdingen sites were allocated to the new
the German tar dyes industry joined together to company, and in 1952 Bayer also received as
the IG Farben AG in a larger community of a subsidiary the newly established Agfa “joint
interests in 1915–1916 on the initiative of Carl stock company for photo fabrication,” but lost
Duisberg. After World War II in November their foreign subsidiaries.
1945, the Allied Forces confiscated the opera- The first mild recession in the Federal
tions of IG Farber AG and placed all its sites Republic of Germany occurred in 1966, but it
under the control of Allied officers. The com- was the oil crisis of 1973–1974 that ended the
pany was to be dissolved and its assets made “economic miracle” once and for all. By the
available for war reparations. Yet the British time Herbert Grünewald succeeded Kurt Hansen
permitted Ulrich Haberland (1900–1961), who as Management Board chairman of the Bayer
had been in charge of the Lower Rhine consor- AG following the 1974 Annual Stockholders’
tium since 1943, to remain in his position. Soon Meeting, the global economy was undergoing
they allowed production to resume as well, as a radical transformation. Within just a few
the chemical industry’s products were essential months, prices for chemical raw materials based
to supply the population. In the years that on oil had risen astronomically. Makrolon too
followed, Haberland worked to build up a new was affected by these developments. The crisis
and competitive company in the successful reached its apex in the early 1980s as a severe
Bayer tradition. The Allied military govern- global recession set in.
ments had initially planned to break up the IG The 1990s saw another major structural
Farber AG into as many small companies as transformation, with Bayer, like other compa-
possible. Yet these companies would hardly nies, facing the challenge of globalization. In
have been able to survive on the world market the wake of the radical political changes
or even in Germany itself. The Allies finally that took place in Germany and Eastern
came to this realization as well, and thus—on Europe after 1989, the company increased its
the basis of Allied law—twelve new thoroughly focus on these promising markets. As early
competitive companies were created in the as 1992, Bayer broke ground on a new site
Federal Republic of Germany. Thus in 1946, in Bitterfeld in eastern Germany, where
while still under Allied control, Bayer began to production of Aspirin began in 1994. The
re-establish its sales activities abroad. By the importance of North America to the Bayer
1950s, the company was allowed to acquire Group continued to increase. In Canada Bayer
foreign affiliates as well. At first the United acquired Toronto-based Polysar Rubber
States and Latin America were the focus of Corporation in 1990—the most significant
these activities. acquisition in the company’s history up to
The reconstruction of Bayer was closely that point. The transaction made Bayer the
linked with the Wirtschaftswunder (“eco- world’s biggest supplier of raw materials for
nomic miracle”), in the Federal Republic of the rubber industry.
Under the leadership of Dr. Manfred In 2005, Bayer completed the acquisi-
Schneider, Bayer acquired the North American tion of the Roche consumer health business,
self-medication (over-the-counter drugs) busi- advancing to become one of the world’s top
ness of Sterling Winthrop in 1994—a milestone three suppliers of nonprescription medicines in
in the company’s history, as the purchase also the same year. Lanxess AG was spun off from
allowed the company to regain the rights to the the Bayer Group. This company now continues
“Bayer” company name in the United States. Bayer’s chemicals business and parts of its
For the first time in seventy five years, Bayer polymers business.
could operate in the United States under its own In January 2005, an Extraordinary
name and with the Bayer Cross as its corporate Stockholders’ Meeting of Bayer Schering
logo.2 In 1995 U.S.-based Miles, Inc., was Pharma AG resolved to effect a “squeeze-out”
renamed Bayer Corporation, and Makrolon of the remaining minority stockholders. Bayer
could also use the Bayer Cross in their logo. Schering Pharma AG, headquartered in Berlin,
To better equip itself for the challenges of now operates together with Bayer’s existing
the future, Bayer set up a third pharmaceutical pharmaceuticals business as a division of the
research center, this time in Japan, in addition Bayer HealthCare subgroup. Bayer is now one
to the locations in Europe (Wuppertal) and of the global leading enterprises with core com-
North America (West Haven, Connecticut). In petencies in the fields of health care, nutrition,
1995 the research center of Japanese pharma- and high-tech materials.
ceutical subsidiary Bayer Yakuhin Ltd. was
dedicated at Kansai Science City near Kyoto. Organization
This marked the basic completion of Bayer’s
Bayer AG defines common values, goals, and
Europe–North America–Japan “pharmaceutical
strategies for the entire group. The three sub-
research triad.” In the years that followed, these
groups (HealthCare, CorpScience, Material
operations were supplemented by alliances with
Science) and three service companies (Business
numerous innovative biotechnology companies.
Services, Technology Services, Industry
In 2001, Bayer acquired Aventis Crop
Services) operate independently, led by the
Science for €7.25 billion, making it a world leader
management holding company. The Corporate
in crop protection. In December of the same year,
Centre supports the Group Management
the company’s management announces planned
Board in its task of strategic leadership (see
to establish independent operating groups. One
Exhibit VI-2). The revenues of each business
year later Bayer CropScience AG was launched
unit at the revenues of the whole Bayer Group
as the first legally independent Bayer subgroup.
is shown in Exhibit VI-3.
In 2003, the subgroups Bayer Chemicals AG and
Bayer HealthCare AG and the service company
Bayer MaterialScience AG
Bayer Technology Services GmbH gained
legal independence as part of the reorganization Bayer MaterialScience is a renowned supplier
of the Bayer Group. The subgroup Bayer of high-performance materials, such as poly-
MaterialScience AG (which produces Makrolon) carbonates and polyurethanes, and innovative
and the service companies Bayer Business system solutions, such as coatings, for a wide
Services GmbH and Bayer Industry Services range of everyday uses. Products holding leading
GmbH & Co. OHG followed. positions on the world market account for a large
2
Prior to this time, Bayer had competed with GE in the United States through a subsidiary, Mobay Chemical. Mobay used
the brand name “Merlon” for its polycarbonate.
Group
Corporate
Bayer Bayer Bayer Bayer Business

HealthCare CorpScience MaterialScience
Bayer Technology
Bayer Industry
Services
EXHIBIT VI-2 Bayer Group Organization
Bayer HealthCare 40%

Bayer CropScience 20%
Reconciliation 5%
Bayer MaterialScience 35%
EXHIBIT VI-3 Revenues Per Business Unit of the Bayer AG 2007
proportion of its sales.3 The business unit of for padding, furniture, and so on, and
Bayer MaterialScience holds five subdivisions. also of many durable industrial and com-
Collectively, the subdivisions provide the basis mercial coatings.
for Bayer MaterialScience’s operations. They • Thermoplastic Polyurethanes (BU TPU)
develop and manufacture products within their Thermoplastic polyurethanes have become
focus. The subdivisions are simply indispensable. They make sure, for
example that your car functions properly.
• Coatings, Adhesives, Sealants (BU CAS) • Inorganic Basic Chemicals (IBC)
This business unit is responsible for the IBC is responsible for worldwide chlo-
development and production of a broad rine supplies at Bayer MaterialScience.
range of raw materials for coatings,
adhesives, and sealants.
Background on Makrolon
• Polycarbonates (BU PCS)
Makrolon polycarbonate is a classic among Today’s Makrolon production reaches an every-
Bayer MaterialScience’s products. day use of more than 500 tons and a capacity
• Polyurethanes (BU PUR) of more than 740,000 tons in four existing
Polyurethanes are one of the major mate- subsidiaries. Bayer MaterialScience is increas-
rials used in the manufacturer of foams ing its market share based on high investments
3
The financial key data for the whole Bayer Group and its subdivisions are attached in the Exhibits VI.5 and VI.6.
and focusing on China in the future.4 With an brandings concept was the requirement that
expected growth of more than 8 percent per the component was used for high-class care
annum in polycarbonates Bayer chose China products labelled with the Makrolon logo.
with Shanghai as location to strengthen its Within consumer’s faith in the core product
competitor advantage. Bayer MaterialScience and the qualitative ingredient, the new instru-
is investing more than 720M € up to 1.1 bil- ment of “ingredient branding” puts both the
lions from 2006 to 2012 in projects including product and the component in an excellent
polycarbonates. Makrolon has been crowned competitive position by creating and commu-
with success and is used by different seg- nicating added value.
ments, ranging from roofing, surface coating, The locations for the Makrolon produc-
and medical technology to car windows. tion are organized globally. There are seven
Because of the great success and diversity production places: Newark and Baytown in the
Bayer has had with Makrolon they opted for United States; Uerdingen, Antwerp, and Filago
the marketing tool “ingredient branding.” in Europe; and Caojing and Map Ta Phut in
The key to Bayer Makrolon’s new ingredient Asia (see Exhibit VI-4).
Antwerp
Uerdingen
Newark
Filago
Baytown
Caojing
Map Ta Phut
EXHIBIT VI-4 Local Production of Makrolon
4
As noted, Bayer also benefited from the sale of its largest competitor, the Plastics Group of General Electric. Until the
sale to Saudi Industries Corp., GE had been a very strong competitor, dominating the U.S. market with its Lexan®
Polycarbonate. In the 1970s, GE considered a consumer branding effort for its Lexan Polycarbonate, including filming
of commercials (A Bull in a Lexan Shop) and tagline development (Lexan—A Good Name to Stand On), and logo.
Deemed too expensive at the time, the full implementation of the project was abandoned, with a minor effort to tag
products with the new logo (an elephant standing on a circus stand of Lexan). For greater understanding of how these
companies competed, particularly in the arena for development of new applications of polycarbonate, see the case
“Marketing Plastic Resins; BW and GE,” elsewhere in this book.
The Market for Polycarbonate an annual rate of 12–15 percent. Moreover,

experts forecast that PC-based blend alloy com-
Polycarbonates (PC) were first prepared by
posite material suppliers will become one of the
Einhorn in 1898 and extensively researched
largest consumers for PC, as the automotive
until 1930 when they
Hollow sunlight panels industry has a great demand for their product.6
are semistructural, were discarded. Research
The main competitors in the marketplace for
corrugated (much like was then started in the
Bayer MaterialScience polycarbonate are
cardboard) panels that mid-1950s by General
take advantage of the Electric and in 1958 the • SABIC (GE Plastics Lexan®)
clarity and toughness of
polycarbonate populari- • Dow (Calibre®)
polycarbonate. They are
often used instead of ty expanded to a global • Teijin
glass for greenhouses community. Today, ap- • Mitsubishi Chemical Group
and other similar proximately 75 percent • Idemitsu
structures, as they are of the polycarbonate • Sam Yang
virtually unbreakable.
market is held by Bayer • Chi Mei
Bayer pioneered this
application in the and GE Plastics, now • Formosa
1970s in Europe, acquired by Saudi Basic • Policarbonatos do Brasil
bringing the application Industries (SABIC).5
to the United States by Experts predict
the early 1980s. GE Bayer’s Branding Strategy
that the demand of com-
entered the market for Makrolon
in the middle of puters and home appli-
the decade, but this ances will continue to To get in touch with consumers and retailers,
application has remained grow in the next few Bayer started with ingredient branding cam-
a major application years, and the demand paigns to inform end users about Makrolon.
for Bayer.
for PC from this sector Bayer’s multistage marketing differs from the
will increase at an annual rate of 10–12 percent. “Intel-Inside” strategy. Whereas Intel is using
For the railway, highway, airport, and urban con- brand advertising and cooperation advertising,
struction sectors, it is expected that they will also Bayer is almost solely using cooperation adver-
have a strong demand for hollow sunlight panels. tising. In terms of cooperation marketing both
In the past few years, enterprises located in the partners are advertising together. Interestingly,
Yangtze River Delta (YRD) and Pearl River Bayer is not paying any advertising grants to
Delta (PRD) regions that use PC to manufacture advertise with partners. Cooperation advertising
panels greatly outperformed those enterprises in terms of Bayer means that each partner has to
that produce panels from other resins. It is finance his own part. This form of a partnership
anticipated the demand for PC from the hollow results in a “win-win” situation of both sides,
sunlight panels manufacturing sector will grow at with added value for both without sharing costs.
5
General Electric sold its plastics division to Saudi Basic Industries, Saudi Arabia’s largest industrial firm, for $11 Billion.
General Electric’s plastics unit reached $6.6 billion in revenue in 2006. The division had struggled to meet aggressive margin
and share goals amid inflation in natural gas and raw materials like benzene, and profits at the unit fell about 22 percent, to
$674 million 2006 from $867 million in 2005. The sale has always been controversial, but it is not unusual for GE to leave
markets when the major offerings reach the mature stage. (Such as phenolic plastics, consumer electronics, television, small
appliances, etc.)
6
By the late 1970s, the competition between GE and Bayer was a global battle. The 1985 European Ford Sierra and some
Fiats were the first to use Polycarbonate blended with polyesters for energy-absorbing bumpers. In 1986, the U.S. Ford
Taurus and Mercury Sable used the PC blend for bumpers. These blended derivatives of PC were developed specifically for
these applications by GE Plastics.
Bayer is furthermore expecting good Bayer’s aim is to communicate Makrolon’s

reputation with high quality and good image of benefit to the end user. This could lead the
the end product. With signing license contracts end users to be more willing to pay more for
the partner has to agree with pre-product tests the products labelled with the Makrolon ingredi-
before labelling the ingredient on the core ent as well as demand the ingredient in core
product, the allowance of samples taken by products.
Bayer to secure the quality.7 The Makrolon The communication process usually starts
logo is labelled on the core product or pack- with partner campaigns, using the Bayer cross
ages. The integration of Bayer Makrolon logo and “made of Makrolon.” The communication
is further extended to exhibitions, advertising process also includes “point of sale” marketing
campaigns, events, and sponsoring activities. activities. In addition public relations is helping
With Bayer’s ingredient branding cam- to inform the target customers. End user sur-
paign of cooperation advertising from 2001, veys help to define consumer wants and
Bayer targeted the selected end user groups for needs. Building partnerships and the resulting
products such as CD/DVD, sunglasses, and “win-win” situation is an important step in
medical products. Bayer and its partners were implementing an ingredient branding strategy.
pushing the message to consumers to call atten- The “win-win” situation can occur through
tion to Makrolon, the labelled polycarbonate, reduction of prices for the core product manu-
and create the pull effect. Bayer and its partners facturer or support in advertising campaigns.
communicated the new branded ingredient in The different partnership campaigns made
magazines, journals, and popular magazines. the ingredient as well as the core product known.
The campaign was launched in Germany, Great Advertisements on intercity train locomotives
Britain, Spain, and other countries. had been a communicator in pushing the mes-
In collateral materials, the chosen partners sages and they strengthen Makrolon’s profile.8
educated the end user of the ingredient through By applying this seal of quality, branding part-
advertising campaigns, flyers, Web sites, and ners like MMore, HiSpace, and DataTrack con-
exhibitions. The integration of advertising and vey the message that the material used for their
public relation pushes the message to more con- recordable CDs and DVDs guarantees optimum
sumers’ minds. Today Makrolon is a well-known storage quality and security. Through CDs, auto-
brand to many end users in most of the world, motive headlights,9 eyeglass lenses, helmets,
with consumers in the United States still lagging household appliances, and water bottles almost
behind. For Bayer Material Science, brand man- everybody comes into contact with Makrolon at
agement became an important part not only for least once a day. Makrolon is about to become
B2B customers but also for addressing end users. a well-known brand, like Aspirin,® the other big
Makrolon created a competitive advantage Bayer brand.
through communication with the end user, and it To accompany the labelling of their prod-
showed that ingredient branding can properly ucts, the partners also use ads, flyers, Web
improve the brand value of polycarbonate. sites, and exhibition stands to draw attention to
7
Horizont 2002, Zeitschrift für Marketing, Frankfurt, S. 26.
8
Ironically, by the 1970s, one of the major U.S. applications for polycarbonate was in commuter train windows, primarily
for safety reasons. Though initially more expensive, the lower replacement frequency and added passenger safety over-
came the initial costs. Today, polycarbonate glazing (windows) are the standard in all passenger rail applications.
9
See “Automotive Headlamps II: The Paradigm Shift from Standardized Glass Beams to Today’s Plastic Custom Designs”
elsewhere in this book.
OEM End Product Brand Product Categories

RS Office Rollsafe, Roll-o-Grip u.a. Flor cover mats
BNL Eurolens BNL Eurolens Eye glasses
Euro Digital Disc Manufacturing Data Track CDs
MMORE MMORE CDs/DVDs
Tera Media Corporation Nashua CDs/DVDs
Videolar EMTEC/Nipponic CDs/DVDs
Luceplan Constanza Design-lamps
Salman Plastik Salblend, Salflex Electronic
Spirit of Golf Laser Line Tee Golf equipment
Matsuzaki Industry Co. Ltd. Maruem Suitcases
G+B Pronova Holo Pro Holographische Projektionsscheiben
Geomag SA Geomag Magnet-Toys
Societe Bourgeois Galaxy Optical Lenses
Alurunner GmbH Alurunner sleigh
Sunovation Sunovation Solar modules
UVEX UVEX Sports equipment
Goldwell Enterprises Inc. Goldwell Water bottle
Watertek Watertek Water bottle
Capsnap Europe Capsnap Water bottle
Portola Packaging Inc. Portola, Garafón Water bottle
EXHIBIT VI-5 OEMs Using Makrolon for Their End Product
Makrolon.® Other co-branding partners include material to help to achieve this mission. UVEX
water bottle producers Capsnap in Austria and WINTER HOLDING comprises four interna-
Watertek in Turkey, and Makroform GmbH, tional subsidiaries under one roof:
a member of the Bayer Group whose products • UVEX SECURITY, for protection at
include polycarbonate sheeting for high-quality work: eyewear, helmets, gloves, hearing
roofing. protection, foot, and workwear.
Exhibit VI-5 shows selected OEMs • UVEX SPORTS, for sport and leisure:
which use Makrolon in their end product. All helmets for skiing, cycling, and motor-
these companies further show the ingredient cycling; sunglasses and goggles for skiing,
by using the Makrolon brand on their final cycling, motorcycling, and protective
product. For additional information regarding clothing and boots for motorcyclists.
Bayer Group’s earning see Exhibit VI-6. • ALPINA, for sport, leisure, and the optical
trade: ski and cycle helmets, ski goggles,
The Example UVEX cycle and sports sunglasses, optical frames,
and sunglasses.
UVEX was one of the early participants in the
• FILTRAL, Fashion sunglasses and reading
ingredient branding activities of Makrolon.
glasses.
Since the company was founded in 1926,
UVEX has always focused on its mission Bayer’s partner for the ingredient brand-
“Protecting People” at work, sport, and leisure ing strategy is UVEX SPORTS. This business
activities and Makrolon was the perfect unit offers products for motor sports, cycling,
and skiing that are sold in specialist shops Makrolon can be transparent or opaque, is
throughout the world. As well as distributing resistant to impact and weathering, and withstands
to all major world markets, the company has high and low temperatures. These attributes linked
subsidiaries in Switzerland, Austria, the to the Makrolon brand are major aspects for high-
Netherlands, the United States, and Japan. quality sport products. The partnership between
UVEX SPORTS is known as a professional these two brands embodies similar or complemen-
supplier of protective equipment in international tary attributes to the end user.
top-class sports. Far-reaching sponsorship acti- UVEX product portfolio is an excellent
vities in bobsledding, luge, snowboarding, and example. UVEX offers products in which
both downhill and cross-country skiing increase Makrolon can be used to build flexible eyewear
the company’s market presence and significance. frames, breathable coated textiles, transparent
Top professionals such as ski jumpers Janne shells for ski shoes, transparent high impact
Ahonen, Sigurd Pettersen, and Kazujoshi Funaki; resistant cases for bindings, and lightweight and
racing skiers such as Michaela Dorfmeister, attractive surfaces for skis and snowboards as
Renate Götschl, Sonja Nef, Fritz Strobl, Andi possible applications.
Schifferer, and Sammi Uotila; luger Georg Hackl Bayer and UVEX have created a promo-
and bobsledder Christoph Langen; and many tion campaign together. Both companies
more represent the UVEX winter sports team. communicate the brands not only on the
Bayer Group Key Data

2005 2006
(in € million) (in € million)
Bayer Group
Net sales 24,701 28,956
EBITDAi 4,122 4,675
EBITDA before special items 4,602 5,584
EBITii 2,514 2,762
EBIT before special items 3,047 3,479
Income before income taxes 1,912 1,98
Net income 1,597 1,683
Earnings per share (€)iii 2,19 2,22
Gross cash flowiv 3,114 3,913
Net cash flowv 3,227 3,928
Capital expenditures 1,21 1,739
Research and development expenses 1,729 2,297
Dividend per Bayer AG share (€) 0,95 1
Bayer HealthCare
Net external sales 7,996 11,724
EBITDA1 1,28 1,947
EBIT2 923 1,313
EXHIBIT VI-6 Bayer Group Key Data

Bayer Group Key Data

2005 2006
(in € million) (in € million)
Gross cash flow4 923 1,72
Net cash flow5 1,087 1,526
Capital expenditures 225 576
Bayer CropScience
EBITDA1 1,284 1,166
EBIT2 690 584
EBIT before special items 685 641
Gross cash flow4 964 900
Net cash flow5 904 898
Bayer MaterialScience
EBITDA1 1,721 1,499
EBIT2 1,25 992
Gross cash flow4 1,254 1,166
Net cash flow5 1,337 1,281
EXHIBIT VI-6 (continued)

1
EBITDA = EBIT plus amortization of intangible assets and depreciation of property,
plant, and equipment. EBITDA, EBITDA before special items, and EBITDA margin are not
defined in the International Financial Reporting Standards and should therefore be
regarded only as supplementary information. The company considers underlying EBITDA
to be a more suitable indicator of operating performance since it is not affected by
depreciation, amortization, write-downs/write-backs, or special items. The company also
believes that this indicator gives readers a clearer picture of the results of operations and
ensures greater comparability of data over time. The underlying EBITDA margin is
calculated by dividing underlying EBITDA by sales.
2
EBIT as shown in the income statement.
3
Earnings per share as defined in IAS 33 = net income divided by the average number of
shares.
4
Gross cash flow = income after taxes from continuing operations plus income taxes,
plus/minus non-operating result, minus income taxes paid, plus depreciation,
amortization and write-downs, minus write-backs, plus/minus changes in pension
provisions, minus gains/plus losses on retirements of noncurrent assets, plus noncash
effects of the remeasurement of acquired assets. The change in pension provisions
includes the elimination of non-cash components of the operating result. It also
contains benefit payments during the year.
5
Net cash flow = cash flow from operating activities according to IAS 7.
products but also in sports events or in image Questions for Discussion

brochures. Both companies perform together
in fairs and shows, illustrating the use of the 1. What was the original motivation behind
raw material polycarbonate. They also use Bayer’s decision to launch the Makrolon
these events to show other possible applica- ingredient branding concept?
tions for Makrolon. However, the UVEX 2. What factors were responsible for the
sport products are made for high-performance success and failure of the efforts?
sportsmen. These products symbolize the 3. What was the brand promise and how
high-performance standards that bring the was it materialized?
consumer closer to the ingredient Makrolon 4. How did they manage the ingredient
thereby enabling both companies to achieve branding concept and what other options
a win-win situation. does the management have?
CASE VII
SENSACON Corporation1: High Technology Evolves to High Volume
Amanda Nguyen and Dan DelMonaco were Ameritrol, an electronics company that catered
sitting in the Bella Mia Restaurant & Bar on to OEM applications of electronic control
First Street in downtown San Jose, California. modules; and Tom, a financial professional,
Together with Tom Foster, their third partner was enjoying six months of sanity-checking
and co-founder of SENSACON, they remi- vacation enabled by financial gains from
nisced about how they got to this point, why the acquisition, by a large conglomerate, of
they separated, and what did it mean to their a small start-up company where he had been
joint company. The past years had been a very one of the first employees. Amanda and Dan
traumatic period for SENSACON. Its markets were anxious to move ahead, with little
were changing—the transition beyond visionary patience for the “bureaucracy” of their current
adopters was occurring and the founding part- employers, and Tom was interested in his
ners had to make tough choices for the company next business-building opportunity. They made
and themselves. a natural team.
Six years prior they had each worked for Silicon micromachining is an extension
different companies in the sensors and controls of the technology that makes integrated
industry. They met at a four-day Sensors Expo circuits, extended to three dimensions. This
trade conference at the San Jose Convention process is used to manufacture many types of
Center in a plenary session about “the future of microstructures, referred to in the industry as
micro-robots.” Each of the three professionals micromachined electromechanical systems—
saw a unique opportunity, not in micro-robots, MEMS.2
but in the enabling technology known as silicon Within four months, the TDA team (Tom,
micromachining. Their friendship began at the Dan and Amanda –TaDa!), as they called them-
conference and they recognized their common selves, had relocated to Silicon Valley to begin
interests and business outlook. At the time, the ground roots development of their new start-
Amanda was a product development manager up, SENSACON Corporation. They believed that
with General Controls (GC), a well-known each member of the team brought a needed
and established electrical controls company; expertise to the venture. Tom, with his experience
Dan was “Chief Technology Evangelist” of with some of the financial aspects of start-up
1
This case study is a compilation of the experiences of several companies as they progress through organization and product
life cycles. Simplifications have been made for academic clarity, and care has been taken to prevent any direct relationship
with any single market participant. Much of this case has been used as a continuous example through the text. Portions have
been repeated and/or edited here. Students can find additional discussions and issues in Chapters 8, 11, 13, and 15.
2
Microelectromechanical systems (MEMS) (also written as micro-electro-mechanical, or MicroElectroMechanical) is
the technology of the very small, and merges at the nano-scale into nanoelectromechanical systems (NEMS) and nano-
technology. MEMS are also referred to as micromachines (in Japan), or Micro Systems Technology—MST (in Europe).
MEMS are separate and distinct from the hypothetical vision of molecular nanotechnology or molecular electronics.
MEMS are made up of components between 1 and 100 micrometers in size (i.e., 0.001–0.1 mm) and MEMS devices
generally range in size from 20 micrometers (20 millionths of a meter) to a millimeter. They usually consist of a central
unit that processes data, the microprocessor and several components that interact with the outside such as microsensors. At
these size scales, the standard constructs of classical physics do not always hold true. Due to MEMS’ large surface area
to volume ratio, surface effects such as electrostatics and wetting dominate volume effects such as inertia or thermal mass.
See also Jean-Baptiste Waldner (2008), Nanocomputers and Swarm Intelligence (London: ISTE John Wiley & Sons),
p. 205, ISBN 1847040020.
486
Case VII • SENSACON Corporation: High Technology Evolves to High Volume 487
companies, became CEO/CFO of the new com- reputation has little opportunity to become
pany. Dan was the technologist—his doctorate in successful in markets dominated by others—
microelectronics and his custom design experi- SENSACON would always be playing by
ence led to his position as Chief Technology someone else’s rules. Without special circum-
Officer (CTO), and Amanda became the Chief stances, the company must expend considerable
Product and Production Development Officer effort to build a strong reputation. In established
(CPPO). Suitable staff were hired to create a markets in which young companies compete
functional organization. against companies with strong brands, young
companies are at a disadvantage because they
Branding and Positioning have no brand recognition or reputation. In
the New Company other markets, principally early markets in which
Shortly after becoming established, it became there are no established competitors, a young
apparent to the TDA team that the company company can build market ownership and brand
competency was in the application of very reputation quickly. Consequently, from an early
precise micromachining technology to critical point in time, the young company needs to think
measurement applications. However, large about whether and how it should build its brand.
customers were not likely to trust this capabi- In general, unless a company is going to be a
lity without some tangible evidence. While low-cost, low-price supplier, a strong brand
they were fortunate enough to have attracted reputation will translate into competitive
early funding, they knew that they would not advantage. This fits well with the goal of
be able to take on existing large players in the becoming known as the technology leader in the
silicon electronics market. TDA elected to market—but not large markets in head-to-head
carve out their niche as the leading-edge tech- competition with established firms.
nology leader in silicon micromachining. The Following the recommendations of the
goal was in place—how could this be carried consultant, the TDA team and a select set of
out? How does a company without any current technical employees were supported in active
customers, products, or volume manufacturing membership in all related professional soci-
capability convince the market that it has eties. This support included both financial
special expertise? incentives and time commitments; the active
TDA soon recognized that they had little membership became part of the job description
expertise in the communication area. They hired for these individuals. Soon, SENSACON repre-
a marketing and public relations consultant to sentatives were chairing technical committees
assess the competitive environment and recom- and conferences. This was only the start.
mend a positioning strategy for the company. At Technical papers were written for presentation
the same time this was to happen, Tom would at conferences focusing on SENSACON tech-
work to strengthen the financial support for the nology and its potential in the marketplace.
new organization while Dan would focus on Hypothetical examples of high-volume appli-
leading-edge sensor technology. Amanda would cations of the technology were demonstrated at
put together the capability to make “more than associated trade shows. A delicate balance was
one of ” any new products. necessary between revealing proprietary infor-
The new marketing consultant provided mation and presenting technically enlightening
his recommendations to TDA. Basically, the information. Through the relationships of the
TDA team learned that strong brands take time PR consultant, SENSACON was able to get
to build unless special circumstances prevail. mentioned as an up-and-coming organization
A start-up or young company without a brand by editors of trade journals and magazines.
488 Case VII • SENSACON Corporation: High Technology Evolves to High Volume
Technical papers authored by SENSACON Customers acquiesced to time delays and initial
employees were accepted for publication in delivery problems; investors anxious to see
peer-reviewed professional journals. As momen- positive cash flow at SENSACON expressed
tum developed, SENSACON experts were the only sense of urgency.
asked to contribute signed articles about SENSACON Corporation had success-
pressure sensor developments to trade journals fully developed a growing market for the
in that market segment. In reprint form, the micromachined pressure sensor and began to
signed articles were used as leave-behind sales deliver on the profitability promises that
support items. After approximately two years, management made to investors. By avoiding
SENSACON was the technology icon in the large-scale manufacturing, fixed costs were
pressure sensor industry. kept relatively low throughout the introductory
period. Sensors were etched and assembled
without much automation. The labor force was
The Business Development Strategy increased or reduced as needed through the use
of an agency that provided skilled temporary
SENSACON engineers and developers spent
assembly workers. Users of the sensors were
these two years developing new products in
technology-oriented themselves, and volumes
collaboration with customers. To support the
were such that the inconsistencies that resulted
business needs of the firm, management
from hand assembly could be adjusted in the
focused on low-volume but technically com-
users’ operations. SENSACON’s production
plex markets. In these markets, SENSACON
volume developed to approximately 5,000 units
could prove the technology without investing in
per month as the sensors became widely
high-volume manufacturing. Initially, the
accepted in SCUBA diving equipment used to
market was comprised primarily of visionaries;
measure pressure underwater and in medical
typical applications were in self-contained
devices used to measure blood pressure.
underwater breathing apparatus (SCUBA)
Additional high-value customers in chemical
equipment and healthcare devices. Both market
process control and environmental monitoring
segments were ideal targets for SENSACON as
developed confidence in the product.
market demand and SENSACON manufacturing
capabilities (high variable costs, no economies
New Market Development
of scale, quality, and accuracy of greater value
that low cost) were well matched. The marketing and PR consultant retained by
In the product development stage and the the TDA team advised them that SENSACON
introductory stage of the product life cycle, business was growing to the point where they
the SENSACON staff of technology-savvy should invest in a strong internal marketing
“customer engineers” worked closely with organization. SENSACON must develop mar-
customers. The creation of the pressure sensor kets to avoid becoming a one-product company.
was dominated by the specific customer A business development effort that will reach
needs of the visionary market. Product changes the first pragmatist market segment that can
were mostly incremental, as the customers in serve as a beachhead for crossing the chasm
this market segment were interested in the would soon be necessary, and shortly after that,
performance of the sensor and were willing to a market development effort to translate those
design their products to accommodate the business successes to other segments would be
SENSACON product. The customers’ low- required. As SENSACON becomes comfort-
volume products provided an excellent proving able with the capabilities of its offering, so will
ground for the SENSACON technology. potential users.
Shortly after receiving the consultant’s The SENSACON breakthrough came

advice, SENSACON began development of a when the sensor was selected for use in an
missionary sales effort to reach out to new automatic tire pressure monitor. Two vehicle
customers where the success of SENSACON manufacturers specified systems for all of
technology could be translated to new business. the SUVs they produced. The combined vol-
At about this time, vehicle rollover problems, ume of the two companies was forecast to
mostly attributed to Firestone tires on Ford reach over three million vehicles. With four
Sport Utility Vehicles, were major headlines. sensors on each vehicle, the sensor volume
The battle between the two corporate giants, would be over 12 million units. SENSACON
long regarded as inseparable, was creating had been selected to supply approximately
waves throughout the industry. Among those 50 percent of this volume. The remaining
waves was an inquiry by the Department of volume was divided up among three competi-
Transportation. Regardless of whether the tires tors. SENSACON monthly sales volume at the
or the vehicles or the owners were eventually start of tire monitor production would exceed
determined to be at fault (or a combination of the most recent annual volumes experienced
factors), industry pundits were asking for a by the company and was expected to reach
system to warn the (maintenance inattentive) an annual rate of approximately six million
driver of low tire pressure. Manufacturers of units. Initial shipments were to begin in four
SUVs had to find sources with the capabilities months. SENSACON employees and inves-
to solve the tire pressure monitor problem. tors were ecstatic.
These capabilities had to be not only in tech- To be sure, the SUV manufacturers
nology, but also in the ability to support the did not select SENSACON automatically.
SUV unit volume requirements and to work Competitors were entering the sensor market as
with the culture of a mass production-oriented the potential profitability was a very attractive
customer—not something for which high- lure. SENSACON executives were aggressive
technology companies are known. SUV manu- in the price to the SUV manufacturers as they
facturers had to believe that SENSACON was wanted to establish a leadership position in this
capable of meeting the standard. new market segment. Recognizing the newly
Among other factors, SENSACON arrived competition, SENSACON had started
management used publicity and corporate posi- development of the next-generation offering,
tioning to establish its positioning in the market. SensorSUV. The aggressive price to the manu-
SENSACON pitched its technology to SUV facturers did not concern SENSACON as it was
manufacturers demonstrating that the techno- believed that the experience curve combined
logy satisfied the need of a low tire pressure with economies of scale in manufacturing
warning to the vehicle driver. SENSACON, would create the necessary low-cost position to
along with other companies who proposed enable profits at the aggressive price.
solutions to the pressure monitoring problem,
had to go through a series of demonstrations
One of Many Changes
and trials to prove the effectiveness of the
product design. SENSACON had found its Tom, Dan, and Amanda remembered a joint
“beachhead” pragmatist segment. The TDA meeting that had taken place about four years
team believed that once the manufacturing and ago in the middle of the decision making
quality problems associated with manufacturing process for the large automotive customer.
in quantity were addressed, SENSACON could They were discussing the company’s major
realize rapid increases in sales, as did the other turning point. They were at the chasm. Several
competing manufacturers. corporate and personal upheavals were on the
horizon. The TDA team had just left the first Concurrent with the revelation that a
meeting of a task force created to solve a major significant product redesign was necessary,
problem. SENSACON was overwhelmed with inquiries
About three days after the new business from its new customers. Contract and procure-
was announced, manufacturing management ment provisions, supply chain requirements, as
attempted to scale up production of the existing well as a significantly more complex and larger
sensor. In anticipation of a production tryout, buying center had exceeded SENSACON orga-
additional space had been leased and temporary nizational capabilities. The staff that served
workers were added to the regular workforce. a small number of healthcare and SCUBA
Unfortunately, even with added automated equipment manufacturers was unable to serve
etching, manufacturing and machining for the the new customer base.
brass enclosure, and increased facilities and Manufacturing development, significant
labor, the tryout could not meet anywhere near product redesign for volume manufacturing, and
the volumes hoped for. In addition, the part-to- support for significantly larger and more com-
part variability of the sensors was outside of the plex customer buying centers became necessi-
SUV manufacturers’ specification. While SEN- ties of the transition. The small staff that
SACON technology was up to the challenge, had been successful in creating value for
manufacturing was not. This was among the technophiles and visionaries—moving R&D
issues addressed by the task force of key invention to market innovation—was over-
SENSACON personnel. whelmed by the volume of new customer inquiries
It soon became obvious that the sensor and application requirements. Additional market-
would have to undergo a complete redesign to ing resources were added to interface with
enable high-volume manufacturing. The neces- customer demands in all phases—supply chain
sary changes in the sensor included redesign of organization and development, customer educa-
the sensor itself for automated handling and tion in the proper application of the sensor, and
insertion into the enclosure; redesign of the so on—all required development and coordina-
enclosure and investigation of new materials, tion. SENSACON needed to learn a new way of
like plastics, to replace the brass enclosure; doing business.
new manufacturing expertise in high-volume
plastic molding and assembly; and new high-
Partners with Different Goals
volume, production-capable sealing techniques
to protect the sensor core from the harsh vehi- SENSACON was going to get big—bureaucratic,
cle environment. diverse, decentralized. The impact of the new
The TDA team discussed strategy to solve business would impact not only manufacturing
this new set of problems. They recognized that and product design but also the culture of
both a long-term and a short-term strategy were SENSACON. Once a small specialty product
necessary to satisfy immediate customer needs company, SENSACON now had to redesign
and develop the organization to handle such itself organizationally. Crossing into the growth
situations in a more routine fashion. stage can be traumatic.
SENSACON management began the Tom, Dan, and Amanda were not in
search for a qualified independent contract agreement on the possible solutions to the
manufacturer. Hoping to eventually develop its problems. Tom was interested in moving on
own capabilities later in the contract period, to his next entrepreneurial effort, and Dan
immediate time pressures from customers did wanted to pursue the next generation of micro-
not allow SENSACON the luxury of develop- machining technology. Only Amanda and the
ing its own high-volume manufacturing facility. SENSACON marketing team were excited by
the new direction. TDA recognized that at least buying parts” rather than “specifying a solu-
the “T” of their team was likely to move on. tion” the business would be vulnerable to a
“me-too” organization that could focus on man-
“Under New Management” ufacturing efficiencies, distribution economies,
and alternative cost (read “lower”) positions
Two years ago, while SENSACON made the
with purchasing departments.
transition to the growth stage of the PLC, senior
Allen wanted SensorSUV to be a stan-
management made many changes. While Tom
dard in the industry. Through the development
remained a director of the company, a search
process with customer engineering staffs,
firm was hired to find a new CEO with high-
customer laboratories as well as an independent
volume business experience. Eventually, Allen
investigatory body selected by the customer
Chen, formerly with Motorola, a large automo-
verified the performance of SensorSUV. Based
tive electronics supplier, became CEO of SEN-
on samples performance data supplied by SEN-
SACON. Concurrently, the process began to
SACON, the customer’s laboratories developed
make the customer relationship routine and
a standard, based on the accepted performance
to establish SENSACON as the standard in its
of the sensors as previously approved. Once
market. A decentralized management approach
this standard specification was completed and
was required.
accepted, copycat products would be required
to meet it. This standard is “owned” by the first
Innovating the Need—Not the
manufacturer—SENSACON. Any “me-too”
Technology
manufacturer will always be faced with the
One of Allen Chen’s first initiatives was to shift question, “Does your sensor do everything that
SENSACON from a technology-driven com- SensorSUV does?”
pany to a market-driven company. Allen recog-
nized that as SensorSUV matured and became
New Channels
known throughout the customer base, less
application development would be necessary Allen also immediately expanded the field
on the part of SENSACON. However, users of market development team and approached the
SensorSUV would begin to look to the next SUV manufacturers with application designs
generation of their product and how it could be for all vehicles, not just SUVs, and also
enhanced. This enhancement could lead to a approached other vehicle manufacturers. The
need for a next-generation sensor. This next- process began of translating this new business
generation product, if it was to be truly new, success to additional opportunities. Customers
might require new technology, style, and were soon found that were interested in the
materials and/or would have different perfor- development of hand-held tire pressure sen-
mance requirements. By serving the need and sors for car owners and heavy-duty models for
not the product, the SensorSUV brand could tire shops.
become known as a solution rather than a SENSACON would soon find it neces-
component part. sary to develop a new marketing channel
Allen also realized that as long as for the product as dealers and tire repair shops
SENSACON was known as a technology com- adapted to the new vehicle feature and needed
pany, technology innovation would be neces- service and replacement parts—and the
sary, though not sufficient, for success. The training to use them.
argument that SENSACON was focused on Translation to the automotive after-
high technology was a dangerous position. If market to reach vehicle owners that wanted to
the customer believed that he or she was “just upgrade older vehicles was also anticipated.
An additional channel was to be developed— new component into SensorSUV. While the
another level of decentralization. Eventually, technology of the component is not, by itself,
the SENSACON total offering included the new, it is the first time it has been used in the
training and deployment of service personnel sensor market and SENSACON has modified
at the consumer level. As competition entered the component somewhat. The challenge:
the aftermarket, a consumer positioning effort Should SENSACON manufacture this “new”
was deployed to attract customers to the component itself or purchase it from an outside
“real” tire pressure system. Though the source?
core product did not change (other than those
changes that made it possible to mass- Defending the Market Position
produce it), the marketing organization, at
SensorSUV is a profitable item, thus there will
each transition through the adopter cate-
be imitators, either copycats trying to be the
gories, evolved to meet different customer
low-cost producer or modifiers trying to slightly
needs and opportunities.
move the technology envelope—at least enough
to meet all the properties of SensorSUV while
Allen Chen’s Challenge to His Staff
enhancing their own product’s attractiveness.
SENSACON has invested in new technology Allen’s next challenge to his staff is, “What are
to create the next-generation sensor. The new your ideas on how to defend our brand and grow
technology gives SensorSUV a faster response the company significantly and what future chal-
time and greater resistance to shock and vibra- lenges face SENSACON?” These questions
tion, both features in which the market has were new challenges for the company, but not
expressed interest. This new distinction is unfamiliar for companies who had moved
primarily the result of the incorporation of a through the TALC.
INDEX
A Aoki, N., 26
Aaker, D. A., 332–333 Armstrong, G., 102
Accessibility, 152 ArvinMeritor, 10, 16
Accomplishing innovation, practical aspects of, Associations, brand, 328
213–215 building, 328–329
directing right activities, 213–214 quality as, 329
impediments and incentives, 214–215 Assumptions, 143–144
obtaining right people, 213 Attractiveness, of segments, 160
Ace, 360 Auction hubs, 363
Ackerman, E., 366 Avery, S., 366
Actionability, 152 Avis, 4–7
Adams, J., 147 Avoidable costs, 229–230
Administered channel intermediaries, 361 Awareness, brand, 328
Advertising, 373–374
Aeppel, T., 227 B
Affiliate network, 363 Baker, S., 398
Afyon, T., 429 Balanced scorecard, 118
Agricultural Bank of China, Balfour, F., 171
434, 439 Banner advertising, 393
Ahlberg, E., 26 Barmash, I., 198
Airborne, 2 Barriers to entry/exit, 257
Alcoa, 11, 26 Barter hubs, 363
Alibaba International, 427–441, 450–451 Bartus, K., 198–199, 214–215, 221–222
Alpha test, 134 Bases for segmentation, 152–153
American Cellulose Chemical Corporation, 455 Bases of power, 358–359
American Marketing Association (AMA), Bayer Corporation, 473, 475, 477
149, 421 Beecham, M., 51
American Marketing Association (AMA) Berggren, E., 199
Code of Ethics, 403 Bergstein, B., 147
America Online, 44 Berrigan, J., 171
Analytic approach, to segmentation, Best, R. J., 51
154, 155–158 Beta tests, 134
Ancillary channel members, 336 Beuk, F., 333
Andersen, A., 367–369, 382 Billboards, 381
Andrew Corporation, 424 Birkins, R., 351
Anthes, G. H., 366 Black & Decker, 117, 458
Antimerger Act. See Celler-Kefauver Act BlackBerry, 120
Antitrust acts, summary and Blackstone, 29
focus of, 82 Blog, 394–395
Antitrust guidelines, 96 Bloomberg, M., 236
intellectual property laws and, 97–98 BMW, 15–16
ANZ Investment Group, 423–425 Booked, 302
493
494 Index
Borg Warner Chemicals (BW), Burns, A. C., 147

453, 459–460 Burrows, P., 216
Boston Consulting Group, 114 Burt, D. N., 26, 78
Boston Consulting Group Growth-Share Bush, R. F., 147
Matrix, 186 Business case analysis in new product
Boston Scientific Corporation (BSC), 84 development, 183
Bottom-up forecast, 299 Business development, 253–277. See also Product
Boundary personnel, 282 life cycle (PLC)
Bradford, K. D., 307 defined, 255–256
Bradford, R. W., 123 forecasting markets and, 256–265
Bradstreet, 156 business type and, 264–265
Brand, defined, 312 marketing operation, in depth, 260–264
Brand architecture, 317–318 types/techniques of, 258–259
Brand building, 319, 323 horizontal bands over PLC and, 275–276
Brand customer relation, 317 introduction to, 255–256
Brand elements, 318–323 simultaneous PLCs, managing, 273–276
Brand functions, 312 using specialists and, 274–275
Brand identity, 14–17 Business ethics, 399–414
Brand image, 317 AMA Code of Ethics, 403
Brand loyalty, 313 among stakeholders, 405
Brand management, 308, 316 at different levels in organization, 405–407
Brand strategy, 317 individual, 410–413
Brand strength, 328 compromise and win-win, 412–413
Brandenburger, A. M., 123 individual, vs. performance standards, 407
Branding as a standard, 325–328. See also marketing concept and, 402–403
Business-to-business branding obtaining competitive information and,
defending market position and, 326–328 409–410
engineering call-outs and, 325 product announcements and, 409
innovation and, 326 product claims and, 409
new technology and, 325 situational, 407–410
service and, 326 competitive information and, 409–410
Branding checklist, 316 product announcements and, 409
Branding dimensions, 315–321 product claims and, 409
brand architecture, 317–318 societal marketing and, 403–404
brand strategy, 317 value networks and, 413–414
visual identity code, 318–321 Business marketing
Branding triangle, 314–315 defined, 4
Bransten, L., 123 implications for, 72–73
Bravin, J., 102 trends and changes in, 22–24
Breakthrough innovation, 208 hypercompetition as, 22–23
Brown, B., 366 information technology, adoption of, 23
Brown, J. R., 366 partner networks, formation of, 23
Brown, S., 217 supply chain management, 23–24
Brunyee, J., 307 time compression as, 24
Bullwhip effect, 8–11 Business markets, defined, 3
Bundling, 242 Business model, 112
Index 495
Business portfolio, 113 marketing concept for, 7–8

Business strategy issues marketing mix differences in, 4–7
Internet and, 120–121 place, 6
market ownership and, 121 price, 5–6
new businesses and, 121 product, 4–5
value networks and supply chains, 120 promotion, 7
Business unit management, strategic, 112–113 trends and changes in, 22–24
Business-to-business branding, 308–331 hypercompetition as, 22–23
branding triangle and, 314–315 information technology, adoption of, 23
building a strong brand and, 328–331 partner networks, formation of, 23
associates for, 328–339 supply chain management, 23–24
ingredient branding and, 329–331 time compression as, 24
quality and, 329 value, examination of, 18–21
characteristics of, 312–313 concept, misunderstanding, 21–22
competing through, 323–328 value chain, 19–20
buyer behavior and, 324–325 concept, misunderstanding, 21–22
defending the brand, 326–327 direct vs. support activities, 20–21
innovation needs and, 326 Business-to-business selling, 279–305
internal marketing and, 326 characteristics of, 282–283
new technology and, 325 direct sales force and, 299–302
service and, 326 introduction to, 281
standard and, 325 manufacturers’ representatives and, 302–305
subordinate brands and, 327–328 marketing philosophies in, 286
dimensions, 315–321 mutual needs of buyer and, 295–298
brand architecture, 317–318 individuals, 297–298
brand strategy, 317 job function, 295
visual identity code, organization, 295–297
318–321 nature of, 281–282
equity/value, measuring, 321–323 seller roles in, 283–305
holistic approach to, 312 forms of, 286–294
introduction to, 311 management and, 294–295
role of, 313–314 relationship selling and, 283–285
Business-to-business marketing structure of, 298–299
competitive forms of, 40 Buyer behavior, 324–325
consumer marketing, differences between, Buying, nature of, 55–58
8–18 buying center and, 56–58
brand identification and, 14–17 consumer, decision process, 55
bullwhip effect as, 8–11 organizational buying, 55–56
close relationships and, 13 Buying center, 56–58
complexity and, 12 disciplines contributing to, 57
derived demand supply chains as, 8 Buying decision process, 66–71
international implications of, 17–18 consumer, 55–58
market structure as, 13–14 human factors in, 73–74
volatility and, 11–12 influences on, 71–72
fundamentals of, 3–4 intricacies of, 58–59
introduction to, 3 stages in process flow model of, 60
496 Index
Buying decision process (continued) Closed bid, 243

steps in, 58 Collaboration, 284–285
transition of, 70–71 Collaborators, 192–193
variability of, 73–76 Collateral materials, 383
Buzzell, R. D., 333 Collins & Aikman, 11
Buzzotta, V. R., 307 Colonial Oil of Atlanta, 362
Commercial enterprises, 31
C Common law, 87
Call pattern, 298 Common promise, 413
Canon, 325, 333 Communications, market, 367–397. See also
Capabilities, 143 Promotional methods in B2B marketing;
Capital goods Trade shows and conferences
defined, 34 communications model for, 370–373
manufacturers, 34–35 feedback and, 371–372
Cases media impact on, 371
Automotive Headlamps II, 464 noise and, 371
B2B E-commerce in China, 427–441 promotion and, 371–373
Dow Corning success in China, 442–452 translation, losing meaning in,
LastMile Corporation II, 423–426 370–371
Makrolon, 473–485 Internet and Web, 390–395
Marketing plastic resins, 453–463 introduction to, 369–370
Sensacon Corporation, 486–492 promotion mix, elements of, 373–377
Cash cows, growth-share matrix, 115 advertising, 373–374
Catalog hubs, 363 personal selling, 373
Celler-Kefauver Act, 85 public relations, 375–377
Chandler, J. D., 123, 333 sales promotion, 374–375
Channel facilitators, 23 promotional methods in, 377–385
Channel pattern, 339–341 Communications model, 370–373
Channel promotions, 384–385 feedback and, 371–372
Chasm media impact on, 371
bridging a, 47–48 noise and, 372
defined, 47 promotion and, 372–373
Chemdex, 364 translation, losing meaning in, 370–371
China Compensation, sales force, 300–302
B2B E-commerce in, 427–441 Competition
Dow Corning success in, 442–452 in branding (See under Business-to-business
China Construction Bank, 434, 439 branding)
China Merchants Bank, 434 forms of, 40
Christensen, C. M., 207, 208–209, nature of, 140–141
211, 217 sources of, 141–142
Chu, S., 332 Competitive analysis, 140–145
Churchill, Jr., G. A., 307 information sources, 144–145
Cisco, 103, 186, 192–193, 278, 411, information to collect for, 142–144
415–416, 422 Competitive bidding
Clayton Act, 83 pricing and, 242–244
Click-through rates, 393 profit expectations in, 243–244
Index 497
Competitive information, sources of, 144–145 Core

business and trade press as, 145 business, 260
customer as, 144 churn, 261–262
ethics in obtaining, 409–410 competencies, 111
internet as, 144–145 Corporate advertising, 382–383
trade shows as, 145 Corporate identity, as visual identity code, 324
Competitive intelligence, 126 Corporate Law Economic Reform Program
Competitive market, 39–41 (CLERP), 86, 102
Complexity, markets, 12 Corporate vertical marketing system
Component parts/manufactured materials (CVMS), 360
producers, 34 Cost-based pricing, 222, 237
Compromise, 412 Covin, J. G., 217
Compromise and win-win, 412–413 Crisis, stages of, 416
Conclusive research, 132 Crisis management, 414–420
Concurrent development, 187–188 assessing crisis risk and, 415–416
Confidentiality agreements, crisis preparation and, 415
99–100 entrepreneurial marketing
Conkey, C., 421 and, 420
Consent decree, 84 media relations and, 417–418
Conservatives, 168 minor crisis and, 418–419
Consumer demand, 8 organizational structure for, 415
Consumer Goods Pricing Act, 85 unanticipated events and, 416–417
Consumer marketing vs. B2B marketing, 8–18 Crisis-related systems, layers of, 414–415
brand identification and, 14–17 Cross fertilization, 169
bullwhip effect as, 8–11 Cross license, 97, 98–99
close relationships and, 13 Culture, defined, 3
complexity and, 12 Cummings, B., 421
derived demand supply Customer specifications, 35
chains as, 8 Customer/market orientation in
international implications of, 17–18 new product development, 185–186
market structure as, 13–14 Customers, knowing your, 127
volatility and, 11–12
Consumer media, 380–381 D
Consumer Product Safety Commission Daimler-Chrysler, 40, 296, 306
(CPSC), 81 Dana Corporation, 10, 16, 53, 336–337,
Contact network, execution, 206 340, 352
Contractual channel, 360 Davis, E. J., 278
Contribution margin, 230–231 Davis, R., 421
calculation for, 230 Decision types, market research,
Controlled risk taking, 203 130–134
Controls, J., 53, 78 Decline stage, offerings, 181–182
Cook, T., 442, 449, 452 Defending supplier advantage, 244
Cooper, R. G., 187, 190, 198–199 Definition stage, flow model, 60–61
Cooper Tire, 163 Delphi Automotive, 53, 469
Co-opetition, 111–112 Demand curve, 231
Copyrights, 97 Demographics, 37
498 Index
Dennis, K., 333 Donahue, S., 366

Derived demand Done, K., 172
business-to-business supply chains and, 8–18 Dornier, P.-P., 26
defined, 8 Douglas, M., 85
Design decisions, 130 Dow Chemical Co, 442
research to support, 132–133 Dow Corning, 442–452
Designing tools, strategic management, Doyle, P., 164, 171
113–118 Dual distribution, 352
balanced scorecard, 118 Duisberg, C., 480–481
culture incompatibility and, 117 Duncan, J. P., 123
growth-share matrix, 114–116 Dunn, 156
market attractiveness-business strength Dyadic interactions, 282
matrix, 116–117 DynaDrive Peripherals, 80
portfolios and value, 117–118
Development stage, 176–177 E
DHL, 2, 326, 330 Eaton, 10
Dickson, P., 258 Economic environment, 38
Dickson, P. R., 123, 147, 171, Economic utility. See also under Marketing
202, 216 channel
Differentially invisible, 350 in consumer markets, 6
Differentiation, 111, 167, 286 differentiation, 152
Digital Equipment Corporation (DEC), 39 marketing channel, 338–339
Direct channel, 336 Economies of scale, offerings and, 179–180, 181
Direct mail, 383 Edwards, C., 252
Direct response requests, 372 80/20 rule, 40
Direct sales force, 299–302 Einhorn, B., 78
combination plans for, 301–302 Eisenhardt, K. M., 217
compensation of, 300 El-Ansary, A. I., 366
deployment of, 299–300 Elasticity
straight-commission programs for, defined, 232
300–301 of demand, 11
straight-salary plans for, 301 in forecasting market, 257
Directory advertising, 380 E-mail, 393
Discontinuous demand, 11 End users, 32
Discounts and allowances, Endgame stage, process flow model, 66
pricing, 242 Eng, R., 398
Discovery-based planning, 212 Engardio, P., 78
Discrete exchange, 284 Engineering call-outs, 325
Disruptive innovation, 204, 209 Entrepreneurial cycle, 204
Distribution centers, 349 Entrepreneurial marketing, 202–206
Distributor channels changing market rules as, 204–205
factors favoring, 352–354, 355–356 crisis management in, 420
factors not favoring, 354, 355 defined, 3, 202–203
Distributors, 298 entrepreneurial orientation as, 205–206
Dobler, D. W., 26, 78 market research and, 136
Dogs, growth-share matrix, 115 marketing strategy and, 118–120
Index 499
Entrepreneurial orientation, creating, 205–206 Fink, S., 422

directing appropriate activities and, 205–206 Finkbeiner, C., 171
hiring right people for, 205 Firestone, 10, 12, 51, 267, 285, 411, 489
incentives and, 206 First time value network, 177
removing impediments as, 206 Fisher, R., 252
Equality/proportionately equal terms, 85 Fit, 111
Equity and value, measuring, 321–323 Five-stage consumer buyer decision process, 55
combined approaches to, 323 Fixed costs of sales, 308
financially driven approach to, 321, 323 Flagship product, 169–170
research based, 321 Ford, 10, 12, 15–17, 27, 37, 40, 52–54, 174,
Erdener, K., 429 193, 198, 267, 272, 285, 307, 337,
Ericson, J., 78 340, 395, 411, 454, 458, 465, 469–472,
Ernst, R., 26 480, 489
Ethics. See Business ethics Ford, N. M., 307
European Union (EU), 95 Forecast expenditures, 257
Evaluated price, 18, 223–227 Forecasting markets, 256–265
value and, 227 business type and, 264–265
Evidence seeking, 130 good vs. useful, 256
Ewing, J., 123 market changing factors in, 257
Exchange hubs, 363 marketing operation, in depth, 260–264
Exclusive dealing, 83 types/techniques of, 258–259
Exploratory research, 131–132 Foreign Corrupt Practices Act (FCPA), 95–96
External marketing, 320 provisions of, 96
Form, in consumer markets, 6
F Form utility, 338
Fadem, T. J., 217 Forward-looking incremental
Fair trade pricing, 85. See also Consumer Goods costs, 229
Pricing Act Four Ps, 4–7
Fattah, H. M., 216, 398 Freedman, 398
Federal Aviation Administration, 400, 421 Free riders, 89
Federal Trade Commission (FTC), 81–84, Friesen, P. H., 216
100–102 Fujitsu, 149
Act, 83 Fulfillment firms, 387
Boston Scientific Corporation (BSC) and, 84 Functional spin-off, 342
Silicon Graphics, Inc. (SGI) Funkhouser, R. G., 78
and, 84
FedEx, 1–3, 25–26, 30, 290, 326, 342, 349 G
Feedback, 371–372 Gale, B. T., 333
Fender, M., 26 Garicano, L., 427
Ferrera, G., 102 General Electric Plastics (GE), 453, 457,
Feyerick, D., 421 459–460, 464
Field market development (FMD) personnel, 159 General Mills, 40
Field marketers, 291–292 General Motors (GM), 4–7, 16, 32, 40, 52–54,
Field marketing operatives, 263 173, 193, 296, 336–337, 340, 454, 458,
Financial publics, 36 465, 467–470, 472
Financially driven approaches, 321, 323 Gersick, C. J. G., 217
500 Index
Gerstner, L., 124–125, 127, 140, 146, 273 Hypercompetition, 22–23

Giglierano, J., 217, 366 pricing and, 250
Ginter, J. L., 171 promotion and, 396
Glazer, A., 252
Goals, 105, 142–143 I
life cycle stage, 255 IBM, 24, 39, 124–125, 127, 142, 146–147,
Goldman Sachs, 432, 438 174, 186, 196, 202, 209, 218, 272,
Goldsmith, C., 236 398, 308–309, 351, 454
Go/no-go decisions, 130 Idea generation in new product
research to support, 133–134 development, 182
Goodyear, 32, 163, 360 Impediments, removing, 206
Gopwani, J., 78 InBranding, 329–331
Government units, 33 push and pull by, 331
Govoni, N., 398 Incentives
Grace, R., 51 for participation, 139
Green, H., 398 providing, 206
Growth stage, 178 Incremental innovation, 208, 213
Growth-share matrix, 114–116 Independent press, 36
elements of, defined, 114–115 Individual competitors, information to collect on,
usefulness of, rethinking, 115–116 142–144
Grünewald, H., 476 assumptions, 143–144
Gunsalus, J., 172 capabilities, 143
Guerrilla marketing, 376 goals, 142–143
strategies, 143
H Industrial and Commercial Bank of China,
Hamel, G. T., 111, 116, 123, 204, 217 434, 439
Hansen, K., 476 Industrial distributors, 31
Hartman, S. J., 427 Industry standards, 34
Hard power bases, 359 Inelastic demand, 11
Hau, L. L., 26, 123 Infineon Technologies, 424
Henkel, H. L., 311 Information technology, adoption of, 23
Hewlett-Packard, 32, 46, 115, 202, 218, 264, Ingersoll-Rand Co., 227
279, 313, 411 Ingredient branding, 329–331
Hirschman, D., 26 push and pull by, 331
Hirshleifer, J., 252 Initial public offering (IPO), 86
Hitachi, 15, 149 Injunctions, defined, 82
Hoffman, L., 398 Innovation, 200–215
Hoffmann, F., 475 accomplishing, practical aspects of,
Holden, R. K., 252 213–215
Holistic branding, 312 directing right activities, 214–215
Honda, 15–16, 40 impediments and incentives, 215
Horizontal competitors, 359 obtaining right people, 213
Horizontal sprawl, 361 branding and, 215
House accounts, 359 breakthrough, 208
Hubs, 363 competing through, 207–210
Hurd, M., 279–281, 285 defined, 202, 207
Index 501
disruptive technologies and, Interview respondents, improving cooperation

209, 210–211, 213 from, 137–138
incremental, 208, 213 Introduction stage, 177–178
offering and, 207–210 Inventory management, 348
perceptions/misperceptions of, 215 Irwin, R. D., 307
radical, 208, 213
sustaining, 208–209, 212–214 J
Innovation translation James, G., 171
approach, 185 Jargon, 135, 371
to segmentation, 154, 158–159 Jennings, M., 408
InsightExpress, 136 Joachimsthaler, E., 332
Institute of Supply Management (ISM), 63 Joint ventures, 99
Integrated supply chain, 62–63 Jung, C., 78
Integrative bargaining, 249
Intellectual property law, 96–99 K
antitrust implications of, 97–98 Kahn, G., 351
cross licensing and, 98–99 Kang, C., 78
joint ventures and, 99 Kaplan, R. S., 123
Intensity of distribution, 350, 352 Kaplan, S. N., 427
Intensity of territory design, 300 Kasturi, R. V., 78, 217
Interactive marketing, 320 Kawakami, S., 437
Intercorporate stockholding, 83, 87 Kawamoto, D., 78
Interlocking directorates, 83–84, 87, 88 Keh, H. T., 332
Intermet Corp., 11 Keiretsu, 361
Internal brand, 62 Keller, K., 26
Internal marketing, 320, 326 Keller, M., 296
Internal publics, 37 Kellogg’s, 40
International considerations, 17–18 Kelly, D., 449
International Graphite electrode price-fixing Kelsey Hayes, 28, 32
conspiracy, 93–94 Kerstetter, J., 216
International Natural Rubber Organization Kitcho, C., 198
(INRO), 10 Kleinfeld, K., 310
International Organization for Standards Kobe, G., 51, 296
(ISO), 18, 63–64 Koch, C., 78
International Standards Organization (ISO), Kodak, 193, 325
18–19, 63–64 Kotler, P., 26–27, 102, 198, 307, 331–333, 398, 421
Internet and Web communications, 390–395 Kouvelis, P., 26
business strategy and, 120–121 Kraft General Foods, 88
effective, 395 Krupp, F., 311
newsletters as, 394 Kula, V., 429
online seminars as, 394 Kyziridis, P., 307
opt-in e-mail as, 393
pricing and, 250 L
social networking/new media as, 394–395 Lacey, R., 198
Web site as, 391–392 LaForge, R., 217
attracting visitors to, 392–393 Laggards, 168
502 Index
Lanier, 40 Locational convenience, 338

Larsen, K., 236 Loctite, 325
LastMile Corporation II, 423–426 Logistics, 351
Lead users, 211 Lopez, J. I., 296
Lear, 10, 15, 53 Loucks, Jr., V. R., 422
Learning curve effect, 238–239 Lowy, A., 366
Leave-behind materials, 388 Luczak, C. A., 333
Lee, B., 427 Lumpkin, J. R., 366
Lee, H. L., 26, 123 Lynch, M., 411
Lefton, R. E., 307
Legal and regulatory environment, 79–100. See M
also Legislation issues, business; Ma, J., 430–431, 433, 435–437
Legislative acts, marketing Macroeconomy, defined, 38
confidentiality/nondisclosure agreements and, Macroenvironment factors, 37–41
99–100 competitive market, 39–41
enforcement of business law, 81–82, 100 demographics, 37
free market regulation, 81 economic environment, 38
intellectual property law, 96–99 natural environment, 38–39
substantiality test and, 94–96 sociocultural environment, 38
supply chains and, 96 technological environment, 39
Legislation issues, business, 87–94 Magna International, 53
intercorporate stockholding, 87 Make-or-buy decisions, 193–197
interlocking directorates, 87 factors in, 194–195
price discrimination, 89–92 supplier role in, 195–196
price maintenance, 87–89 Makrolon, 473–485
quantity discounts, 92–94 Mann, R. A., 102
refusal to deal, 89 Manufacturers’ representatives, 302–306
resale restrictions, 89 customer feedback and, 305
Legislative acts, marketing, 82–87 favorable market conditions for, 303–305
Celler-Kefauver Act, 85 long lead times and, 303–304
Clayton Act, 83 missionary selling and, 304–305
Consumer Goods Pricing Act, 85 technically complex products and, 303
Federal Trade Commission Act, 83–84 Manufacturers’ suggested retail prices (MSRPs), 88
Robinson-Patman Act, 85 Marchetti, M., 307
Sarbanes-Oxley Act, 86 Market attractiveness-business strength matrix,
securities laws as, 86 116–117
Sherman Antitrust Act, 82–83 Market based pricing, 237
Uniform Commercial Code, 86–87 Market development gap, 48
Lenovo, 75–76 Market environments, classifying, 35–41
Leverage, 251 macroenvironment factors and, 37–41
Levitt, T., 39, 51, 199, 275 competitive market, 39–41
Lexan, 115, 313, 325, 328, 454, 458, 464, 466–467, demographics, 37
469, 471, 473, 479–480 economic environment, 38
Li, R., 440 natural environment, 38–39
License, 97 sociocultural environment, 38
Lincoln Mark IV, 28 technological environment, 39
Index 503
publics, 35–37 managing distribution channels, 357–361

financial publics, 36 distributors, selecting/caring for, 357–358
independent press, 36 patterns and control, 359–361
internal, 37 power/conflict in, 358–359
public interest groups, 36–37 team players and, 358
usefulness of, 41 product life cycle and, 356–357
Market generalizations, application of, 30–31 rationale for, 336–337
Market intelligence, 126 supply chain management as, 347–349
Market ownership, 115, 313 designing logistics systems, 348
vs. market share, 326 inventory management and, 348
Market position, defending, 326–327 materials requirements planning and, 349
Market research, 126–140 transportation methods and, 348
addressing issues, 138–139 warehousing and, 349
buying center and, 140 value networks as, 345–347
conducting interviews, 137–138 value provided by, 338–347
data types for, 127–128 activities that create, 339–341
decision types, 130–134 customer needs/expectations and, 341–342
defined, 126 economic utility as, 338–339
elements of, 127 industrial end users and, 342–343
entrepreneurial marketing manufacturers and, 344–345
and, 136 Marketing concept, 7–8
fundamentals, 128–130 Marketing fundamentals of B2B markets, 3–4
managing uncertainty, 139 Marketing mix, differences in, 4–7
online data collection/analytics place, 6
software and, 136 price, 5–6
process, steps in, 129–130 product, 4–5
surveys and, 139 promotion, 7
time compression and, Marketing Operation Forecast (MOF), 136,
135, 139–140 258–264
uncertainty and, 135–136 Marketing planning forecasts, 258
vendors, working with, 131 Marketing role in new product development,
Market segmentation, 151–160 188–190
Market structure, marketing and, 13–14 Marketing strategy
Marketing. See Business-to-business marketing entrepreneurial approach to, 118–120
Marketing channel managing price as, 233–241 (See also Pricing)
defined, 336 Markets, changes in over time, 44–49
design of, 348–355 product life cycle and, 45–47
assortment needs and, 352 technology adoption life cycle and, 47–49
distributor, favorable use of, 352–356 Martin, 310–311
distributor, non-favorable use of, 354, 355 Materials requirements planning (MRP), 349
economic utility of, 338–339, 349–350 Matlack, C., 171
form, 338 Maturity stage, offerings, 181
place, 338 McCarthy, E. J., 26
possession, 338–339 McDonald, R., 372
time, 338 McGarvey, M., 436
Internet and, 365–364 McGrath, M. E., 196, 199
504 Index
McKenna, R., 26, 39, 49, 51, 78, 115, 170–172, NBM, 89–93, 263
199, 313, 333, 398 NEC, 149
McKesson, 360 Negotiated pricing, 246–249
McWilliams, G., 102 leverage and, 249
Measurability, 152 preparation for, 247–249
Media buy, 374 situation types for, 246–247
Metaldyne, 11 stages in, 248
Michelin, 163 Netscape, 44
Midwest Technologies, 423–425 New media, 394–395
Miller, D., 216 New product development (NPD) process,
Miller-Tydings Act, 87 182–188
Mission, 105 business case analysis, 183
Missionary sellers, 258, 291–292 concurrent development of, 187–188
Mitroff, I. I., 414–416, 422 customer/market orientation, 185–186
Mitsubishi, 15, 93–94, 143, 458, 480 early stage standards of, 186–187
Modified rebuy, defined, 61 failures, reducing risk of, 190–192
Moltzen, E. F., 171, 252 idea generation, 182
Monopolistic competition, 40 innovation translation approach of, 185
Monopoly, 44 marketing role in, 188–190
Monopsony, 44 product launch, 184–185
Montalbano, E., 216 product screening, 182–183
Moore, Geoffrey, 47–49, 51, 168, 172, shortcuts and, 188
178, 198 stage gates/phase reviews of, 187
Moore, P., 196 strategy/plan development, 183
Moore’s Law, 257 team approach to, 186
Morejon, M., 171 test market, 183–184
Morgan Stanley Dean Witter, 53 New product failures, reducing risk of,
Morris, G., 243, 252 190–192
Morris, M. H., 26, 216, 243, 252, 307 New task
Motivator/problem solver, 289–290 defined, 61
Mounib, E., 147 example, 68–69
MTI Technology, 424 Newsletters, 394
Multidimensional value networks, 42 Niches, 168
Multidistribution, 352 Nippon Carbon Co. Ltd., 94
Multiple transactions, 284 Nir, M. M., 421
Nissan, 53
N Noise, 372
Nacher, T., 199 Nokia, 103, 309, 424
Nagle, T. T., 252 Nondisclosure agreements, 99–100
Nalebuff, B. J., 123 Nonpersonal communications, 369, 378
Narayandas, D., 78 Nonprofit organizations, 33
National Transportation Safety Board, North American Industry Classification System
400, 421 (NAICS), 155–156
Natural environment, 38–39 Northrop Grumman, 29, 310
Natural law, 407 Norton, D. P., 123
NBI, 40 Not-for-profit organizations, 33
Index 505
O specifications and, 35
Objectives, 105 users or end users, 32
O’Brien, T. C., 216 value added resellers, 31–32
O’Connor, G. C., 216–217 Organization of Economic Cooperation and
Offerings, 173–197 Development (OECD), 95
economies of scale and, 179–180 Original equipment manufacturers (OEMs), 32
life stages of, 176–182 Otellini, P., 219
decline stage, 181–182 Outsourcing, 12
development stage, 176–177 Ouyang, T. W., 428
growth stage, 178
introduction stage, 177–178 P
maturity stage, 181 Pacelle, M., 26
pricing components of, 223 Padmanabhan, V., 26
product acceptance of, 178–179 Page, M., 307
product differentiation of, 179 Pai, A., 147
Oligopolies, 40 Palletizing, 338
Oligopolistic competition, 40 Palmisano, S. J., 125, 127, 140, 147
Ongoing costs, 228 PaloAlto Computers, 89–92
Ongoing revenue, 228 Panasonic, 15, 148–152, 163, 166–167, 169–171
Online researchers, 136 Partner networks, formation of, 23
Online seminars, 394 Partnering, 284–285
Open bid, 243 Pasxtor, A., 421
Opportunity costs, 188 Patents, 97
Opportunity seeking, 118–119 Pauchant, T. C., 414–416, 422
Opt-in E-mail, 393 Pelton, L. E., 366
Order taker, 286–288 Peltz, J. F., 26
Organization mission, 119 Penetration pricing, 237–239
Organization of Economic Cooperation and learning curve effect of, 239–240
Development (OECD), 95 Penney, J. C., 351
Organizational buying, 55–56 Perreault, Jr. W. D., 26
individual needs in, 70 Pesola, M., 252
influences on, 72 Personal interviews, 134
process flow model of, 59–66 Personal selling, 373
stepwise model of, 58–59 Persuader/sustainer, 288–289
Organizational customers, types of, 31–35 Peters, M., 401
capital goods manufacturers, 34–35 Peters, T. J., 217
classification systems and, 35 Peugeot, 53
commercial enterprises, 31 Pfoertsch, W., 331–333
component parts/manufactured materials Physical distribution concept, 348
producers, 34 Pitney Bowes, 330
government units, 33 Pitt, L. F., 26
industrial distributors, 31 Place, in consumer markets, 6
nonprofit/not-for-profit organizations, 33 Place utility, 338
original equipment manufacturers, 32 Plastic resins, marketing, 453–463
producers, 33–35 Plexiglas, 325, 467
raw materials producers, 33–34 Portals, 364
506 Index
Porter, M. E., 18–19, 27, 141–142, situation types for, 246–247

147, 217 stages in, 248
Positioning, 150, 166–167. See also Segmenting, objectives, 234
targeting, and positioning penetration, 237–239
product line, 169–170 learning curve effect of, 239–240
public relations and, 388–389 relevant costs and, 228–233
Technology Adoption Life Cycle and, skimming and, 237–239
168–169 strategic context of, 233–234
Positioning statement, 167 throughout PLC and TALC, 235–237
Positive law, 407 in translation mode, 240–241
Possession, 338–339 value-based, 222
in consumer markets, 6 Primary channel participants, 336
Post-sale customer service, 293–294 Primary market research, 128
Pragmatists, 168 Principals, 302
Prahalad, C. K., 111, 116, 123, 204–205, 217 Print promotion, 379–380, 381–382
Predatory pricing, 91 Proactivity, defined, 203
Predictive models, 259 Problem solver, 289–290
Premium merchandise, 385 Process flow model decision process,
Price, 5–6 59–66
discrimination, 89–92 buying centers needs and, 64–65
maintenance, 87–89 definition, 60–61
models, 237 endgame stage of, 66
skimming, 238, 239 integrated supply chain and, 62–63
Pricing, 218–250 public sector purchasing and, 64
availability of choices for, 240 selection, 63–64
basics of, 222–228 solution delivery stage of, 65
to reflect customer value, 223–227 specifications, meaning of, 61–62
value-cost model and, 227–228 stages in, 60
changing business environment and, Product, 4–5
249–250 Product acceptance, offerings, 178–179
contribution analysis of, 230–231 Product announcements, ethics in, 409
cost-based, 222, 237 Product claims, ethics in, 409
demand functions and, 231–233 Product configurators, 391
for international markets, 241 Product differentiation, offerings, 179
introduction to, 220–222 Product elimination concerns, 182
managing, tactics, 241–246 Product launch in new product development,
bundling, 242 184–185
competitive bidding, 242–244 Product life cycle (PLC), 45–47, 49,
discounts/allowances, 242 175–176
initiating price changes, 244–245 business development bands, 275–276
summary of, 245–246 changes in markets over time and, 45–47
as marketing strategy, 233–241 concept of, 265–273
models, 237 decline stage, 267–268, 273
negotiated, 246–249 development stage, 265–266, 268–269
leverage and, 249 distribution and, 356–357
preparation for, 247–249 growth stage, 267, 270–271
Index 507
introduction stage, 266–267, 269–270 Public relations, 375–377

marketing channel and, 356–357 activities, 376
marketing throughout, 268–273 effectiveness in, 376–377
mature stage, 267, 271–273 image problems and, 377
TALC and, interrelating, 265 positioning and, 388–389
Product lines Public stakeholders, 376
defined, 169 Publics, 35–37
maintenance of, 359 financial publics, 36
positioning, 169–170 independent press, 36
Product screening in new product development, internal, 37
182–183 public interest groups, 36–37
Promotion, 7 Pure competition, 40
capabilities of, 372–373 Pure monopoly, 40
impact of trends on, 395–396 Push and pull, 331
hypercompetition, 396
time compression, 395–396 Q
Promotion mix, elements of, 373–377 Qingfen, D., 428–429
advertising, 373–374 Quality, 329
personal selling, 373 Quantity discounts, 92–94
public relations, 375–377 Question marks, growth-share matrix, 115
sales promotion, 374–375
Promotional methods in B2B marketing, R
377–385 Radical innovation, 208, 214
capabilities of, 372–373 Rangan, V. K., 78, 198–199, 214, 217
channel promotions and, 384–385 Range
consumer media and, 380–381 of initial business development for each
corporate advertising as, 382–383 offering, 275–276
direct mail as, 383 of major sales-driven effort, 276
directory advertising as, 380 of major translation effort, 276
merchandise as, 385 Raw materials producers, 33–34
nonpersonal communication and, Raynor, M. E., 207, 209–210, 217
378–379 Raytheon Corporation, 424
print promotion as, 379–380, Real new business, 262, 264–265
381–382 Realized costs, 229
promotion mix, convergence of, 379 Refusal to deal, 89
sales/support literature as, 383–384 Reinhardt, A., 171
trade journal advertising as, 380 Relational exchange, 284
trend impact on, 395–396 Relationship selling, 283–285
Proportionately equal terms, 85 attitude and, 285
Proprietary disclosure agreements, 184 corporate culture and, 285
Proprietary information, 193–194 defining, 284–285
Public Company Accounting Oversight loyalty and, 285
Board, 86 Relationships, opportunities through, 13
Public Company Accounting Reform Relationship/value creator, 290–291
and Investor Protection Act, 86 Renault, 53
Public interest groups, 36–37 Request for bid (RFB), 380
508 Index
Request for proposal (RFP), 63, 380 Search engine optimization (SEO),
Request for quotation (RFQ), 63, 380 392–393
Resale restrictions, 89 SEC Corporation, 94
Research based evaluations, 321 Secondary data, 128, 133
Research in Motion Ltd. (RIM), 120 Securities and Exchange Commission (SEC),
Resource allocation, strategic, 112 95, 144
Resultant costs, 229 Securities laws, 86
Return on investment (ROI), 118 Segment attractiveness, assessing, 160
Revenues, 228 Segmentation. See also Segmenting, targeting,
Rewick, J., 366 and positioning
Risks, assessing and addressing, 415–416 analytic approach to, 155–158
Ritte, R. R., 78 bases for, 152–153
Roberson, 102 determining, 154–155
Roberts, B. S., 102 framework, 150
Robinson-Patman Act, 85 analytic approach to determining,
Rogers, E. M., 47, 51, 168, 178 155–158
Rossant, J., 171 characteristics of, 152
Royal Mail, 330 framework of, 151–152
Ruiping, D., 310 information needs and, 152
by innovation translation,
S 155, 158–159
Sager, I., 147 summary of, 160
Salamat, R., 172 Technology Adoption Life Cycle and,
Sales and support literature, 383–384 168–169
capabilities brochures as, 383 value-based, 153–154
catalogs/brochures/data sheets as, 383 Segmenting, targeting, and positioning, 150
technical bulletins/test reports/application introduction to, 150
histories as, 384 issues in, 167–169
Sales calls, 299 relationship between, 150–151
Sales force. See also Seller roles, forms of Selection stage, process flow model,
compensation, 300–302 63–64
nature of, 281–282 Selective attention, 372–373
organization, 298–299 Selective exposure, 372
Sales forecasts, 258–259 Selective retention, 372–373
Sales promotion, 374–375 Self-interest considered upon the whole, 407
focused on channel intermediaries, 375 Seller roles, forms of, 286–295
focused on sales team, 374–375 management perspective of, 294–295
Sample, 129 missionary sellers/field marketers,
Samson, T., 26 291–292
Sarbanes-Oxley Act, 86 motivator/problem solver, 289–290
Saren, M., 307 order taker, 286–288
Saturn, 15–16 persuader/sustainer, 288–289
Saunders, J., 164, 171 post-sale customer service, 293–294
Schindehutte, M., 26, 216 relationship/value creator, 290–291
Schneider, Dr. M., 476 summary of, 291
Sealed bid, 243 Selling. See Business-to-business selling
Index 509
Selling structure, 298–299 Stars, growth-share matrix, 114

Sensacon Corporation, 179–180, 194–196, Stelzer, I. M., 96
253–254, 263, 265, 267, 269–270, 278, Stenefeld, J. H., 96
325–326, 328, 381–382, 384–385, Stephen, L. S., 26, 78
388–389, 398, 486–492 Stepwise model decision process,
Server logs, 390 58–59
Service Oriented Architectures (SOA), 125 steps in, 58
SGL Carbon AG, 94 Stern, L. W., 366
Sharma, A., 307 Straight rebuy
Shell, G. R., 252 defined, 61
Sherberg, M., 307 example, 66–67
Sherlock, P., 75, 78, 123, 188, 192, 198–199, Strategic business unit (SBU), 113
252, 307, 350, 366 Strategic forecast, 258
Sherman Antitrust Act, 82–83 Strategic management process
Sheth, J. N., 51 business unit and, 112–113
Showa Denko Carbon Inc., 94 critique of model, 110–111
Siemens, 103–104, 113, 118, 122–123, 310 designing tools for, 113–118
Siems, T. F., 366 balanced scorecard, 118
Siepler, Dr. D., 211 culture incompatibility and, 117
Silent period, 86 growth-share matrix, 114–116
Simon, H. A., 74, 78 market attractiveness-business strength
Sisodia, R., 51 matrix, 116–117
Slevin, D. P., 217 portfolios and value, 117–118
Smith, W. R., 102, 171 key concepts of, 111–113
Social networking, 394–395 performing, in B2B company, 107–110
Societal marketing concept, 403–404 resource allocation and, 112
as ethical base, 404 stages of, 107
Society of Automotive Engineers (SAE), template for, 108–110
17, 465, 468, 470 Strategic-planning model, 108–110
Society of Plastic Engineers (SPE), 17 critique of, 110–111
Sociocultural environment, 38 Strategy
Soft power bases, 359 competitor, 143
Solution delivery stage, process flow concepts, 111–113
model, 65 defined, 105
Son, M., 432 design, 109
Sony, 149, 196, 265 effective, developing, 106
Sources of competition, 141–142 elements of, 106–107
SOX. See Sarbanes-Oxley Act hierarchy of, 106
Specification, meaning of, 61–62 special issues in, 120–122
Spin Technologies, 80, 100 Strategy concepts, key, 111–113
Stage gates, 187 Strategy/plan development in new product
Stakeholders, defined, 56 development, 183
Standard Strutton, D., 366
branding as, 325–328 Stuart, N., 147
defined, 325 Subordinate brands, 327–328
engineering call-outs as, 325 Substantiality, 152
510 Index
Substantiality test, 94–96 Technical papers, 389

company size as, 95 Technological change, forecasting
European Union and, 95 market and, 257
Foreign Corrupt Practices Act and, 95–96 Technological environment, 39
Sun Microsystems, 44, 201–202, 213 Technology, defined, 203, 207
Superordinate goals, 358 Technology Adoption Life Cycle (TALC)
Supply, integrated vs. networked, 14–17 adoption categories in, 168
Supply chain, 8 segmentation/positioning based on,
Supply chain management, 347–350 168–169
business marketing and, 23–24 Technology adoption life cycle (TALC),
defined, 6, 347 47–49
designing logistics systems, 348 Technophiles, 168
inventory management and, 348 Telaxis Communications, 424
materials requirements planning and, 349 Test market in new product development,
transportation methods and, 348 183–184
as value network management, 43–44 Thomas, R., 147
warehousing and, 349 3Com, 192
Supply curve, 231 Tiboni, F., 171
Survey Monkey, 136 Ticoll, D., 366
Sustaining innovation, 209, 212–214 Time, in consumer markets, 6
Sutherland, P., 432 Time compression, 24
Switching costs, 13, 284 market research and, 139–140
SWOT analysis, 109 pricing and, 250
promotion and, 395–396
T target segments and, 166
TAL Apparel Ltd., 351 Time horizons, forecasting market and, 257
Tam, P.-W., 307 Time pacing, 212
TaoBao, 431–435, 438–439 Time utility, 338
Tapscott, D., 366 Tokai Carbon Co. Ltd., 94
Target segments, 160–166 Tomaszewicz, P., 147
attractiveness of, 160 Top-down forecast, 299
channel attractiveness of, 162 Tornado, 47, 48
choosing, 160, 163–166 Total offering, 223
time compression and, 166 defined, 5
uncertainty and, 166 Tower Automotive Inc., 11
competitive analysis of, 161–162 Toyota, 15–16, 40, 53, 309, 465
competitive attractiveness of, 162 Trade credit, 340
internal attractiveness of, 163 Trade journal advertising, 380
market attractiveness of, 161 Trade secrets, 97
Targeting, 150. See also Segmenting, targeting, Trade shows and conferences, 385–389
and positioning attendees of, 386
decisions, 130 capitalizing on the effort from, 387–388
research to support, 130–132 exhibits in, 386–387
Tatoglu, E., 429 public relations/positioning and,
Team approach in new product development, 186 388–389
Technical expertise, 134–135 technical papers and, 389
Index 511
Translation direct/support activities and, 19–21

business, 261–262, 265 evaluated price and, 19
losing meaning in, 370–371 offering and, 20
tools, 264–265 supply chain orientation of, 21
Transportation methods, 348 Value image
Trappey, A., 434 defined, 75, 402
Trappey, C., 429 ethical behavior and, 413–414
Treacy, M., 18, 27 Value networks, 345–347
Treble damages, 82 competition and, 44
Trends and changes in business marketing, ethical behavior and, 413–414
22–24 multidimensional, 42
hypercompetition as, 22–23 supply chains and, 41–44
information technology, adoption of, 23 value added resellers as, 31–32
partner networks, formation of, 23 Value-based pricing, 222
supply chain management, 23–24 Value-based segmentation, 153–154
time compression as, 24 Value-cost model, 227–228
TRW, 10, 15, 28–30, 32, 51 Variability of rational buying decisions,
Tyco International, 86 73–76
Tying contracts, 83 application in, 75–76
Tzokas, N., 307 human factors in, 73–74
mutual dependence and customer loyalty, 74
U psychology of, 74–75
Uncertainty Velcro, 325
market research and, 135–136, 139 Vertical integration, 342
target segments and, 166 Vertical marketing system, 359–360
Uniform Commercial Code (UCC), 86–87 Visionaries, 168
Unique value network, 177 Visteon, 10, 15–16, 53, 465
United Memories (UniMem), 90–92, 263 Visual identity code, 318–321
United Parcel Service (UPS), 1–3, 25–26, 43, Vitale, R., 366
326, 342, 349 Volatility, 11–12
Ury, W., 252 Volkswagen, 29, 53
U.S. Foreign Corrupt Practices Act, 95–96. See also Volvo, 15–16
Foreign Corrupt Practices Act (FCPA) von Hippel, E., 211, 217
Users, 32
Utterback, J. M., 217 W
Walker, O. C., 307
V Walsh, K. R., 427
Value. See also Value chain Waranuiak, J., 78
concept of, misunderstanding, 21–22 Warehouses, 349
defined, 18 Warner, B., 453–454, 457, 459–460
evaluated price and, 226 Washkewicz, D., 226
examination of, 18 Waterman, R. H., 217
Value added resellers (VARS), 31–32 Web site, 391–393
Value chain, 19–22, 41–42 attracting visitors to, 392–393
concept of, misunderstanding, 21–22 Webinars, 391
defined, 19 Weitz, B. A., 307
512 Index
Welch, D., 78 X
Welch, J., 117, 464 Xerox, 174, 209, 222, 325
Weskott, J. F., 475 Xiameter, 442–447, 450–452
Whang, S., 26
Wheeler-Lea Act, 83 Y
White, J. B., 102 Young, S., 416, 422
Wiersema, F., 18, 27 Yrle, A. C., 427
Wind, Y., 147 Yun, C., 429
Worldcom, 12, 86, 411
Wotapka, D., 26 Z
Wu, J., 432 Zedong, M., 429
Wu, S.-Y., 278 Zoomerang, 136

Robert Vitale, Waldemar Pfoertsch, Joseph Giglierano - Business To Business Marketing-Pearson (2010)

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Business-to-Business

Library of Congress Cataloging-in-Publication Data

ISBN 10: 0-13-605828-0

Chapter 1 Introduction to Business-to-Business Marketing 1

Chapter 2 Business-to-Business Environment: Customers,

Thoughts to Take with You into the Next Chapter 50

Chapter 3 Organizational Buying and Buyer Behavior 52

Thoughts to Take with You into the Next Chapter 76

Chapter 4 The Legal and Regulatory Environment 79

Thoughts to Take with You into the Next Chapter 100

Chapter 5 Concepts and Context of Business Strategy 103

Chapter 6 Market Research and Competitive Analysis 124

COLLECT THE DATA 130

Thoughts to Take with You into the Next Chapter 146

Chapter 7 Segmenting, Targeting, and Positioning 148

Chapter 8 Developing the Product, Service, and Value

The Product Life Cycle and Life Stages of Offerings 176

Chapter 9 Innovation and Competitiveness 200

Chapter 10 Pricing in Business-to-Business Marketing 218

Discounts and Allowances 242

Chapter 11 Business Development and Planning 253

Organizing to Manage Simultaneous Product Life Cycles 273

Chapter 12 Business-to-Business Selling 279

LONG TIME PERIOD BEFORE SELLING EFFORT PAYS OFF 283

Chapter 13 Business-to-Business Branding 308

Chapter 14 Channel Relationships and Supply Chains 334

Value Networks Are Marketing Channels 345

Chapter 15 Communicating with the Market 367

Public Relations and Positioning 388

Chapter 16 Business Ethics and Crisis Management 399

Crisis Preparation 415

Case 2 B2B E-Commerce in China: The Story

Case 3 Dow Corning Success in China 442

Case 4 Marketing Plastic Resins: GE and BW II 453

Case 5 Automotive Headlamps II: The Paradigm Shift from

GEP Organization 465

Case 6 Makrolon: The High-Tech Material 473

Case 7 SENSACON Corporation: High Technology Evolves

Evanston, July 2009 Philip Kotler

Example: FedEx Kinko’s versus The UPS Stores1

䊏 Understand the meaning of value.

䊏 Obtain a sense of the changing nature of the business environment.

MARKETING FUNDAMENTALS IN BUSINESS-TO-BUSINESS MARKETS

The Marketing Mix

PROMOTION Business-to-business marketing places different emphasis on the parts of the

FURTHER DIFFERENCES BETWEEN BUSINESS MARKETING

Buyer–Seller Relationship Expectations

EXHIBIT 1-1 Business-to-Business versus Consumer Marketing Summarizing the Differences

Complexity—A Rationale for Relationship Marketing

OPPORTUNITIES THROUGH RELATIONSHIPS In business-to-business markets, additional

Integrated versus Networked Supply, Brand Identity

Some International Considerations

Consumer Brands Aren’t Always What They Seem

1990 Ford 2008 2007 2007 2008 2007

EXHIBIT 1-3 Networked versus Integrated Supply

EXHIBIT 1-3 (continued)

The Value Chain

• Support Activities: “Value Enabling” • Direct Activities: “Value Creating”

EXHIBIT 1-4 Direct and Support Activities Contribute to Value

EXHIBIT 1-5 The Value Chain and Offering

Direct versus Support Activities

Value Activities Value Activities Value Activities

From Exhibit 1-5: Value-enabling activities include