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Robert Vitale, Waldemar Pfoertsch, Joseph Giglierano - Business To Business Marketing-Pearson (2010)
Robert Vitale, Waldemar Pfoertsch, Joseph Giglierano - Business To Business Marketing-Pearson (2010)
Marketing: Analysis
and Practice
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Business-to-Business
Marketing: Analysis
and Practice
Robert P. Vitale
San Jose State University
Joseph Giglierano
San Jose State University
Waldemar Pfoertsch
China Europe International Business School
Prentice Hall
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10 9 8 7 6 5 4 3 2 1
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
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CONTENTS
Foreword xxvii
Preface xxix
Acknowledgments xxxi
ix
x Contents
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
Thoughts to Take with You into the Next Chapter 170
Key Terms 170 • Questions for Review and Discussion 171 •
Endnotes 171
Cases
Case 1 LastMile Corporation II: Choosing a Development
Partner 423
Overview 423
LastMile’s Dilemma 423
Questions for Discussion 425
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
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.
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
San Jose State University
Joseph Giglierano
San Jose State University
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
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Business-to-Business
Marketing: Analysis
and Practice
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Chapter 1
Introduction to
Business-to-Business
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.
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 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.
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.
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.
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
Chapter 1 • Introduction to Business-to-Business Marketing 5
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
6 Chapter 1 • Introduction to Business-to-Business Marketing
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.
Chapter 1 • Introduction to Business-to-Business Marketing 7
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
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
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
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).
Chapter 1 • Introduction to Business-to-Business Marketing 11
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
12 Chapter 1 • Introduction to Business-to-Business Marketing
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.
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
14 Chapter 1 • Introduction to Business-to-Business Marketing
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.
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
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
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
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
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.
Chapter 1 • Introduction to Business-to-Business Marketing 19
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.
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
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.
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
Chapter 1 • Introduction to Business-to-Business Marketing 23
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
24 Chapter 1 • Introduction to Business-to-Business Marketing
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.
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
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
Chapter 1 • Introduction to Business-to-Business Marketing 27
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
Business-to-Business
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.
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
By reading this chapter, you will
䊏 Understand the different kinds of business customers.
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
business-to-business markets.
䊏 Gain an initial introduction to the technology adoption life cycle (TALC) and its implications
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.
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.
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.
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
32 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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.
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.
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 33
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.
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
34 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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.
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
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 35
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.
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
36 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 37
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.
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.
38 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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.
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 39
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.
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.
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.
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 41
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 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.
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.
B G
A
Lead Collaborator
H
C
E Value Activities
Value
Segment
F enabling Value X
creating
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.
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.
Maturity
Sales Revenue/
Period
Growth
Decline
Introduction
Time
EXHIBIT 2-5 The Product Life Cycle
46 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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.
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 47
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.
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.
48 Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets
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.
Chapter 2 • Business-to-Business Environment: Customers, Organizations, and Markets 49
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
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
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.
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
By reading this chapter, you will
䊏 Develop an understanding of the difference between quantifiable organizational needs
development.
䊏 Gain an appreciation for the different levels of complexity of decisions made in the buying
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.
Chapter 3 • Organizational Buying and Buyer Behavior 55
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
56 Chapter 3 • Organizational Buying and Buyer Behavior
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.
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.
58 Chapter 3 • Organizational Buying and Buyer Behavior
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
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.
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.
Chapter 3 • Organizational Buying and Buyer Behavior 61
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
62 Chapter 3 • Organizational Buying and Buyer Behavior
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
Chapter 3 • Organizational Buying and Buyer Behavior 63
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
64 Chapter 3 • Organizational Buying and Buyer Behavior
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).
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.
Chapter 3 • Organizational Buying and Buyer Behavior 65
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.
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.
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
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.
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.
Chapter 3 • Organizational Buying and Buyer Behavior 69
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
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.
New Task
Rebuy
Selection
Definition
Is buyer
satisfied? Selection
Solution
Solution
delivery
delivery
Endgame
Endgame
Modified Rebuy
Straight Rebuy
Definition
Large
Evaluation in Endgame difference To New Task
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.
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.
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.
• 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.
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.
76 Chapter 3 • Organizational Buying and Buyer Behavior
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.
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
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
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
LEARNING OBJECTIVES
By reading this chapter, you will
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 defining role that legislation can have with regards to intricate and multiple
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.
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,
82 Chapter 4 • The Legal and Regulatory Environment
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.
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.
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.
84 Chapter 4 • The Legal and Regulatory Environment
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.
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,
Chapter 4 • The Legal and Regulatory Environment 87
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.
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
88 Chapter 4 • The Legal and Regulatory Environment
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.
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.
Chapter 4 • The Legal and Regulatory Environment 89
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
90 Chapter 4 • The Legal and Regulatory Environment
PACIFIC DRIVES
NBM PaloAlto
Computers Computers
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.
PACIFIC DRIVES
UNITED MEMORIES
NBM PaloAlto
Computers 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
92 Chapter 4 • The Legal and Regulatory Environment
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.
Chapter 4 • The Legal and Regulatory Environment 93
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.
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:
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?
Chapter 4 • The Legal and Regulatory Environment 95
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
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.
96 Chapter 4 • The Legal and Regulatory Environment
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.
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
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.
98 Chapter 4 • The Legal and Regulatory Environment
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.
Chapter 4 • The Legal and Regulatory Environment 99
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
100 Chapter 4 • The Legal and Regulatory Environment
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.
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
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
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.
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.
oriented.
䊏 Demonstrate an understanding of different strategy tools (growth-share and business-
an industry.
䊏 Understand the importance of agility, adaptability, and alignment in pursing integrated value
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.
106 Chapter 5 • Concepts and Context of Business Strategy
Corporate Strategy
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.
“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.
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
Chapter 5 • Concepts and Context of Business Strategy 109
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.
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.
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.
114 Chapter 5 • Concepts and Context of Business Strategy
• 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.)
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
116 Chapter 5 • Concepts and Context of Business Strategy
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.
Market
attractiveness
Invest/Grow
Low Protect & Manage for
Divest
Selectively Earn refocus earnings
Harvest/Divest
Strong Medium Weak
Business strength
EXHIBIT 5-6 Attractiveness—Strength Matrix
Chapter 5 • Concepts and Context of Business Strategy 117
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.
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.
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.
118 Chapter 5 • Concepts and Context of Business Strategy
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.
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:
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
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
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.
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
By reading this chapter, you will
䊏 Appreciate the rationale for market research in business-to-business markets.
marketing.
䊏 Understand the kinds of market research methods employed in business-to-business
marketing.
126 Chapter 6 • Market Research and Competitive Analysis
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
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:
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!
128 Chapter 6 • Market Research and Competitive Analysis
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.
Chapter 6 • Market Research and Competitive Analysis 129
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.
130 Chapter 6 • Market Research and Competitive Analysis
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.
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.
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
132 Chapter 6 • Market Research and Competitive Analysis
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.
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 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
No-go
X
EXHIBIT 6-5 Go/No-Go Decision Points in the Marketing Initiative Development Process
134 Chapter 6 • Market Research and Competitive Analysis
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.
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
Chapter 6 • Market Research and Competitive Analysis 135
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.
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
136 Chapter 6 • Market Research and Competitive Analysis
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
138 Chapter 6 • Market Research and Competitive Analysis
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.
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.
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.
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.
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.
Current Competitive
partners Product Market Substitutes
Upstream New
suppliers entrants
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.”)
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
Chapter 6 • Market Research and Competitive Analysis 143
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.
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.
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
Chapter 6 • Market Research and Competitive Analysis 145
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.)
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
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
LEARNING OBJECTIVES
By reading this chapter, you will:
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
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 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.
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
Chapter 7 • Segmenting, Targeting, and Positioning 153
• 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.
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.
154 Chapter 7 • Segmenting, Targeting, and Positioning
Exhibit 7-2a
Exhibit 7-2b
EXHIBIT 7-2 Segments and the Value Chain
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.
EXHIBIT 7-3 Top-Level Industry Groups in the North American Industrial Classification System (NAICS)
Source: www.census.gov/eos/www/naics/index.html
156 Chapter 7 • Segmenting, Targeting, and Positioning
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.
Chapter 7 • Segmenting, Targeting, and Positioning 157
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.
158 Chapter 7 • Segmenting, Targeting, and Positioning
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.
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.
160 Chapter 7 • Segmenting, Targeting, and Positioning
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.
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
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.
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.
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
164 Chapter 7 • Segmenting, Targeting, and Positioning
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%
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
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.
Chapter 7 • Segmenting, Targeting, and Positioning 165
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.
166 Chapter 7 • Segmenting, Targeting, and Positioning
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.
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
Chapter 7 • Segmenting, Targeting, and Positioning 167
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.
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.
Chapter 7 • Segmenting, Targeting, and Positioning 169
as the offering evolves. The TALC and the adoption environment of the customer thus have
significant impact on the design of business development efforts.
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.
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
Chapter 7 • Segmenting, Targeting, and Positioning 171
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
172 Chapter 7 • Segmenting, Targeting, and Positioning
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
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.
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
By reading this chapter, you will:
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
Maturity
Sales Revenue/
Period
Growth
Decline
Introduction
Time
Development
EXHIBIT 8-1 The Product Life Cycle
176 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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.
178 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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
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.
Chapter 8 • Developing the Product, Service, and Value of the Offering 181
Depending on the circumstances of the company, a business in decline is often viewed as a dog
and is either harvested or divested.
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.
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.
184 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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.
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.
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
188 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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.
190 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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
Chapter 8 • Developing the Product, Service, and Value of the Offering 191
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.
• 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!
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.
Chapter 8 • Developing the Product, Service, and Value of the Offering 193
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.
194 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
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?
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!
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 that will exceed the value that Sensacon can produce for itself. This level of supplier-
delivered value will
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.
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,
Chapter 8 • Developing the Product, Service, and Value of the Offering 197
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.
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
198 Chapter 8 • Developing the Product, Service, and Value of the Offering
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.
Chapter 8 • Developing the Product, Service, and Value of the Offering 199
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
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
LEARNING OBJECTIVES
By reading this chapter, you will:
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.
Opportunity Idea
Recognition Generation
Launch
Feedback
Revise
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.
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.
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
206 Chapter 9 • Innovation and Competitiveness
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.
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.
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.
Chapter 9 • Innovation and Competitiveness 207
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
Chapter 9 • Innovation and Competitiveness 209
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
210 Chapter 9 • Innovation and Competitiveness
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.
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
212 Chapter 9 • Innovation and Competitiveness
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.
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,
214 Chapter 9 • Innovation and Competitiveness
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
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.
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.
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
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;
Chapter 9 • Innovation and Competitiveness 217
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.
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
By reading this chapter, you will:
䊏 Remember the basics of pricing from your marketing principles course.
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,
Chapter 10 • Pricing in Business-to-Business Marketing 221
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
222 Chapter 10 • Pricing in Business-to-Business Marketing
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,
Chapter 10 • Pricing in Business-to-Business Marketing 223
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.
224 Chapter 10 • Pricing in Business-to-Business Marketing
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
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
226 Chapter 10 • Pricing in Business-to-Business Marketing
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 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 )
Chapter 10 • Pricing in Business-to-Business Marketing 227
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
228 Chapter 10 • Pricing in Business-to-Business Marketing
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
Chapter 10 • Pricing in Business-to-Business Marketing 229
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:
Original
$10,000 Price
Attributable
Costs
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
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 Supply
Price
P1
Elasticity at P1Q1
(Slope of demand
curve)
Q1 Quantity
EXHIBIT 10-7 Demand and Supply Curves
232 Chapter 10 • Pricing in Business-to-Business Marketing
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
Chapter 10 • Pricing in Business-to-Business Marketing 233
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.
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
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 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.
Chapter 10 • Pricing in Business-to-Business Marketing 237
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.
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.
Chapter 10 • Pricing in Business-to-Business Marketing 239
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.
240 Chapter 10 • Pricing in Business-to-Business Marketing
• 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.
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.
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.
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
Chapter 10 • Pricing in Business-to-Business Marketing 243
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
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:
where
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
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.
Chapter 10 • Pricing in Business-to-Business Marketing 245
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.
S2 S1
Price
P2
P1
Q2 Q1 Quantity
EXHIBIT 10-11 Effect of an Industry Increase in Costs
246 Chapter 10 • Pricing in Business-to-Business Marketing
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.
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
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
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
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
Chapter 10 • Pricing in Business-to-Business Marketing 249
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.
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
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.
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
By reading this chapter, you will:
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
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
256 Chapter 11 • Business Development and Planning
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).
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.
Chapter 11 • Business Development and Planning 257
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.
258 Chapter 11 • Business Development and Planning
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.
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.
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
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.
Chapter 11 • Business Development and Planning 261
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
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
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.
Chapter 11 • Business Development and Planning 265
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.
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
266 Chapter 11 • Business Development and Planning
PLC—Total
Sales
TALC—Sales from
New Adopters/Period
Time
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
EXHIBIT 11-5 The Product Life Cycle
Chapter 11 • Business Development and Planning 267
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
268 Chapter 11 • Business Development and Planning
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.
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.
Chapter 11 • Business Development and Planning 269
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.
270 Chapter 11 • Business Development and Planning
Several factors impact the success of the organization as the chasm is approached.
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.
Chapter 11 • Business Development and Planning 271
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.
272 Chapter 11 • Business Development and Planning
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.
Chapter 11 • Business Development and Planning 273
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.
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
EXHIBIT 11-6 Activities Emphasized at Stages of the PLC for a Hypothetical Product
Chapter 11 • Business Development and Planning 275
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.
Time
EXHIBIT 11-7 Business Development Bands over the Product Life Cycle
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
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.
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
By reading this chapter, you will:
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.
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.
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
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.
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
Chapter 12 • Business-to-Business Selling 285
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.
286 Chapter 12 • Business-to-Business Selling
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.
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
Chapter 12 • Business-to-Business Selling 287
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
288 Chapter 12 • Business-to-Business Selling
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.
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 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.
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.
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
292 Chapter 12 • Business-to-Business Selling
Headquarters Headquarters
Segment Segment
Field Field Field Specialists Specialists
Sellers Sellers Sellers
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.
Chapter 12 • Business-to-Business Selling 293
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
294 Chapter 12 • Business-to-Business Selling
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
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.
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).
Chapter 12 • Business-to-Business Selling 297
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.
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!
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.
Chapter 12 • Business-to-Business Selling 299
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.
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.
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.
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
Chapter 12 • Business-to-Business Selling 303
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
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
304 Chapter 12 • Business-to-Business Selling
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
Chapter 12 • Business-to-Business Selling 305
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.
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.
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
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
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.
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
Chapter 13 • Business-to-Business Branding 311
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
By reading this chapter, you will:
䊏 Understand the creation and application of brand management in order to compete
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
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.
312 Chapter 13 • Business-to-Business Branding
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
Chapter 13 • Business-to-Business Branding 313
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.
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).
314 Chapter 13 • Business-to-Business Branding
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
Differentiate
Differentiate
Marketing
Brand
Risk Reduction
Information Efficiency
Value Added
Increase Create
Sales Preferences
Collaborators Customers
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.
316 Chapter 13 • Business-to-Business Branding
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).
Chapter 13 • Business-to-Business Branding 317
Publicity PR/Advertising
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
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.
318 Chapter 13 • Business-to-Business Branding
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.
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
Chapter 13 • Business-to-Business Branding 319
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
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.
320 Chapter 13 • Business-to-Business Branding
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
Chapter 13 • Business-to-Business Branding 321
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.
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”
Chapter 13 • Business-to-Business Branding 323
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).
• 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.
Chapter 13 • Business-to-Business Branding 325
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.)
326 Chapter 13 • Business-to-Business Branding
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.
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
Chapter 13 • Business-to-Business Branding 327
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.
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 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
Chapter 13 • Business-to-Business Branding 329
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.
330 Chapter 13 • Business-to-Business Branding
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.
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
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
Chapter 13 • Business-to-Business Branding 333
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.
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
By reading this chapter, you will:
䊏 Understand the principles of market channel design and the delivery of economic utility—
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
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.
Chapter 14 • Channel Relationships and Supply Chains 337
V1 C1 V1 C1
V2 C2 V2 C2
RS
V3 C3 V3 C3
V4 C4 V4 C4
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).
338 Chapter 14 • Channel Relationships and Supply Chains
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,
Chapter 14 • Channel Relationships and Supply Chains 339
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
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
Chapter 14 • Channel Relationships and Supply Chains 341
Manufacturers/Suppliers
Missionary
sellers/field
marketing Specialized
installation and
service Financial
providers institutions
Direct sellers
Distributors
Manufacturers’
representatives
Value-added Payment flows
resellers
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.
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.
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.
Chapter 14 • Channel Relationships and Supply Chains 343
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.
344 Chapter 14 • Channel Relationships and Supply Chains
• 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.
Chapter 14 • Channel Relationships and Supply Chains 345
EXHIBIT 14-4 Enhanced Customer Service—Distributors Serve both Buyers and Sellers
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?
346 Chapter 14 • Channel Relationships and Supply Chains
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
Chapter 14 • Channel Relationships and Supply Chains 347
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.
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.
• 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.
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.
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
Chapter 14 • Channel Relationships and Supply Chains 351
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).
352 Chapter 14 • Channel Relationships and Supply Chains
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.
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.
• 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
354 Chapter 14 • Channel Relationships and Supply Chains
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.
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,
Chapter 14 • Channel Relationships and Supply Chains 355
EXHIBIT 14-6 Factors Favoring Use or Not Favoring Use of Distributor Channels
356 Chapter 14 • Channel Relationships and Supply Chains
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
Chapter 14 • Channel Relationships and Supply Chains 357
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.
• 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.
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
Chapter 14 • Channel Relationships and Supply Chains 359
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.
(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
Chapter 14 • Channel Relationships and Supply Chains 361
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!
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.
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.
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
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
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.
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
By reading this chapter, you will
䊏 Understand the distinctions between personal selling and the nonpersonal types of promotion.
business-to-business markets.
Chapter 15 • Communicating with the Market 369
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).
370 Chapter 15 • Communicating with the Market
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.
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
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
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
372 Chapter 15 • Communicating with the Market
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.
Chapter 15 • Communicating with the Market 373
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.
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.
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
376 Chapter 15 • Communicating with the Market
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
Chapter 15 • Communicating with the Market 377
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.
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
EXHIBIT 15-3 The Buying Decision Process and Potentially Effective Methods of Nonpersonal Communications
Chapter 15 • Communicating with the Market 379
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.
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
380 Chapter 15 • Communicating with the Market
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
Chapter 15 • Communicating with the Market 381
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.
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.
Chapter 15 • Communicating with the Market 383
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.
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
Chapter 15 • Communicating with the Market 385
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.
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
Chapter 15 • Communicating with the Market 387
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.
388 Chapter 15 • Communicating with the Market
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.
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:
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,
392 Chapter 15 • Communicating with the Market
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.
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.
Chapter 15 • Communicating with the Market 393
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.
394 Chapter 15 • Communicating with the Market
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.
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.
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
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
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.
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 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
By reading this chapter, you will:
䊏 Understand that a good ethical foundation is a good business foundation.
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.
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?
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.
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?
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
Chapter 16 • Business Ethics and Crisis Management 407
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.
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.
Chapter 16 • Business Ethics and Crisis Management 409
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)?
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
410 Chapter 16 • Business Ethics and Crisis Management
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?
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.
• 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.
412 Chapter 16 • Business Ethics and Crisis Management
Mutually exclusive
A B
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
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.
Common Ground = E
E C
D
win–win scenario, then, is determined not by size, technology, or leverage but through trust and
regard for all members of the team.
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
Chapter 16 • Business Ethics and Crisis Management 415
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.
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
416 Chapter 16 • Business Ethics and Crisis Management
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
• 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!
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.
Chapter 16 • Business Ethics and Crisis Management 419
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.
420 Chapter 16 • Business Ethics and Crisis Management
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
Chapter 16 • Business Ethics and Crisis Management 421
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.
422 Chapter 16 • Business Ethics and Crisis Management
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).
430 Case II • B2B E-Commerce in China: The Story of Alibaba.com
15
The Economist Intelligence Unit Limited, “Country Commerce: Ecommerce in China” (2006), p. 131.
16
C. Splinder, “The Alibaba Story,” p. 1.
Case II • B2B E-Commerce in China: The Story of Alibaba.com 431
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).
432 Case II • B2B E-Commerce in China: The Story of Alibaba.com
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
Case II • B2B E-Commerce in China: The Story of Alibaba.com 433
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).
434 Case II • B2B E-Commerce in China: The Story of Alibaba.com
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
Case II • B2B E-Commerce in China: The Story of Alibaba.com 435
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
436 Case II • B2B E-Commerce in China: The Story of Alibaba.com
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?”
Case II • B2B E-Commerce in China: The Story of Alibaba.com 437
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?”
438 Case II • B2B E-Commerce in China: The Story of Alibaba.com
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
Case II • B2B E-Commerce in China: The Story of Alibaba.com 439
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.
440 Case II • B2B E-Commerce in China: The Story of Alibaba.com
442
Case III • Dow Corning Success in China 443
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.
Tech
Product Support
& Sales
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.
Case III • Dow Corning Success in China 445
Two models
Dow Corning® XIAMETER®
Brand Brand
Sales Volume
Service
& Cost
Support
Unit Cost
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.
EXHIBIT III-5 Customer Value Proposition of the Two brands Source: Dow Corning
Case III • Dow Corning Success in China 447
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
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.
448 Case III • Dow Corning Success in China
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.
Case III • Dow Corning Success in China 449
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).
450 Case III • Dow Corning Success in China
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).
Case III • Dow Corning Success in China 451
12
Analysis International, China B2B Market.
452 Case III • Dow Corning Success in China
453
454 Case IV • Marketing Plastic Resins: GE and BW II
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.
456 Case IV • Marketing Plastic Resins: GE and BW II
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.
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
Case IV • Marketing Plastic Resins: GE and BW II 457
Marketing Manager
Regional Regional
Sales Sales
Manager Manager
Field Manager
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
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.
458 Case IV • Marketing Plastic Resins: GE and BW II
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.
460 Case IV • Marketing Plastic Resins: GE and BW II
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.
Case IV • Marketing Plastic Resins: GE and BW II 461
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
462 Case IV • Marketing Plastic Resins: GE and BW II
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.
Case IV • Marketing Plastic Resins: GE and BW II 463
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
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
Case V • Automotive Headlamps II 467
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.
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.
468 Case V • Automotive Headlamps II
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.
Case V • Automotive Headlamps II 469
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
470 Case V • Automotive Headlamps II
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.
Case V • Automotive Headlamps II 471
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
472 Case V • Automotive Headlamps II
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
476 Case VI • Makrolon: The High-Tech Material
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.
Case VI • Makrolon: The High-Tech Material 477
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.
478 Case VI • Makrolon: The High-Tech Material
Group
Corporate
Bayer Industry
Services
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.
Case VI • Makrolon: The High-Tech Material 479
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
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.
480 Case VI • Makrolon: The High-Tech Material
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.
Case VI • Makrolon: The High-Tech Material 481
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.
482 Case VI • Makrolon: The High-Tech Material
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,
Case VI • Makrolon: The High-Tech Material 483
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
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.
Case VII • SENSACON Corporation: High Technology Evolves to High Volume 489
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
Case VII • SENSACON Corporation: High Technology Evolves to High Volume 491
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.
492 Case VII • SENSACON Corporation: High Technology Evolves to High Volume
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
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
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
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