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CONTENTS Unit No. 1. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

22. 23. 24. 2. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. TITL E The Nature of Industrial Marketing Introduction Types of Marketing Entities Industrial Marketing Types and Forms Demand Forces Industrial Products Vs. Consumer Product Marketing Relationship Marketing Cross-Functional Relationships Global Scenario and India Impact of Current Developments on Industrial Firms Types of Actions by Industrial Companies Major differences in Supplier-Customer Interaction Summary Keywords Self-assessment Questions Industrial Marketing Environment Introduction Business Environment Micro - Environment Macro - Environment Governmental Influences Competitive Forces The International Environment Modern Trends in Industrial Marketing The Internet Age Trend Towards Increased Globalisation Summary 25 Page No.

Unit No.

TITLE

Page No.

36. Keywords 37. Self-assessment Questions


5.

Market Segmentation, Targeting and Positioning 38. Introduction 39. Purpose of industrial market segmentation 40. Benefits of product segmentation 41. Essential requirements of market segmentation evaluation 42. Segmentation Process 43. Market Segmentation Evaluation 44. Target Segments 45. Positioning 46. Communicating the Company's Positioning 47. Summary 48. Keywords 49. Self-assessment Questions Product Planning and Development 50. Introduction 51. Types of Product Lines 52. Product Policy and Strategy 53. Industrial Product Life Cycle (PLC) 54. Delivering Superior Value 55. Value-added Process 56. Product/Market Strategic Development 57. New Product Development (NPD) 58. Managing Products in High Technology Industries 59. Quality Function Deployment 60. Summary 61. Keywords 62. Self-assessment Questions

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6.

145

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Unit
No.

TITLE

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Integrated 7 . 63. Introduction


64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

M arketing Comm unications (IM C)

173

Definition of MC Role of Advertising Decision Stages in Developing Advertising Programs Direct Marketing using Direct Mail The Communications Mix Media Selection Personal Selling Relationship-building Process Managing Key Accounts Internet Marketing Communications Sales Promotion Publicity and Public Relations Industrial Product Brand Promotion Summary Keywords Self-assessment Questions

8.

| D istribution C hannels and Logistics


80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. Introduction Nature of Industrial Distribution Channels Industrial Channel Structure Functions of Intermediaries Types of Intermediaries Channel Design Logistics Management Supply Chain Management (SCM) Concepts IT Systems in SCM Summary Keywords Self-assessment Questions

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Unit No. 9.

TITLE

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Role of Services 92. Introduction 93. Growth of Industrial Services 94. Defining Services 95. Nature of Industrial Services 96. Differences between Goods and Services 97. Service Quality 98. Customer Satisfaction and Loyalty 99. Developing the Service Package 100.Importance of Service Employees 101. Summary 102.Keywords 103.Self-assessment Questions Price and Pricing Strategies 104.Introduction 105.Implications of Price in Industrial Markets 106.Industrial Product Pricing Process 107.Pricing Across PLC Stages 108.Pricing Policies 109.Market Structure and Price 110.Value-based Pricing 111.Pricing Differences between Industrial Products and Consumer Products 112. Summary 113.Key Words 114.Self-assessment Questions

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10 .

265

205

11 .

Personal Selling and Negotiations


11.1 Introduction

301

Unit No.

TITLE 11.2 Importance of Personal Selling 11.3 Differences in Personal Selling in Industrial and Consumer Markets ; 11.4 Tasks in Personal Selling 11.5 The Personal Selling Process 11.6 Handling Objections 11.7 Integrating Personal Selling with other Elements of the Communications Mix 11.8 Negotiation Skills 11.9 Summary 11.10 Keywords 11.11 Self-assessment Questions

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12.

Strategic Marketing Planning 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 Introduction Need for Strategic Planning Approach to Strategy Strategic Planning Strategic Planning Process Strategic Marketing Planning Process Summary Keywords Self-assessment Questions

323

13.

International and Global Marketing Issues 13.1 Introduction 13.2 World Economy 13.3 Driving Forces Affecting International Strategies and Marketing 13.4 International Marketing Tasks 13.5 International Marketing in Global Strategy

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TITLE 13.6 International Buyers 13.7 International MIS System 13.8 International Market Entry and Expansion 13.9 Investment in New Ventures 13.10 Summary 13.11 Keywords 13.12 Self-assessment Questions

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14.

Future Trends 14.1 Introduction 14.2 Growth Factors 14.3 Expansion Plans of Major Companies

375

347

14.4 Macro Level Indicators 14.5 Routes ahead for Indian Companies 14.6 Paths to Progress 14.7 Summary 14.8 Keywords

Industrial Marketing

1.1 INTRODUCTION Marketing is the identification of a customer's needs and wants. All marketing activities directed by industrial companies start and end with the customer, more so in the case of industrial marketing that deals with raw materials, components, equipments and systems. Industrial marketing now represents an important sub-function of the marketing discipline. It is sure to gain more importance as a result of the globalisation and liberalisation of the Indian economy. The important aspect of industrial marketing is to create value through the right package of benefits for the customers with products and services that focus on the buying organisation's needs and objectives. It is necessary to understand the forms and types of industrial marketing and the demand forces that shape the products and policies of industrial firms. It is also necessary to understand the concepts of cross-functional relationships and relationship marketing as applied to this branch of marketing. These concepts and underlying principles help us understand the differences between industrial product marketing and consumer product marketing. Two examples of actions taken by Indian industrial companies set the stage for delving deeper into the fascinating world of industry and explore its close links with marketing. 1.2 TYPES OF MARKETING ENTITIES As we all know, marketing is a set of activities concerned with creating value for shareholders and other stakeholders by creating exceptional value for customers. Marketers are the business as well as marketing professionals who make decisions about marketing. Depending on the contexts, there are different types of marketing applied across types of customers, sellers, products and services. Organisations and their marketers have to select and use technologies appropriate to their specific context. Some typical marketing contexts are summarized in Fig. 1.1 ("Marketing of Consumer Nondurables such as Personal/ Home care products (e.g. Soaps, Detergents, Fairness "S Creams). Can also include consumer durables variant (e.g. Air Conditioners, Water Purifiers, Refrigerators, Audio/DVD Players) Marketing of Technological Products & Services such as J Steel Wires, Ropes, UPS systems for PCs, Large Batteries, Diesel Locomotives.

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The Nature of Industrial Marketing

ing activities in the case of and systems. ing discipline, lisationofthe ght package of ; organisation's of s industrial idustrial firms, ationships and iand underlying ; marketing and stria! companies explore its close

Project M arketing 'M arketing N on-profit Com panies or SM Es

C C onstruction of IT Park w ith Full Infrastructure, Road J F lyover, B rew eries, Su gar or C em en t P lant, A irport I Terminal.
^

I M arketing to C haritable Institutions, Sm all & M edium | E nterprises (S M E s) involved in social w ork, N G O s. Fig. 1.1 : Type of Marketing Contexts

Typical Marketing Characteristics Typel:


The emphasis is on identification of customers' needs and techniques of segmentation, targeting and positioning supported by branding and communication. This marketing model is suitable for mass marketing. Type2:

for shareholders Marketers are the narketing. ;d across types of ters have to select marketing contexts as Personal/ s, Fairness es variant (e.g. Air ,Audio/DVD rv ices such as Large Batteries,

The importance is on orientation, power of buyers, technological complexity. This model usually involves identifiable customers and relies heavily on selling products and services. Type 3: The value of a single order constitutes a significant proportion of turnover in a period. Execution time is usually in terms of months and years. It involves heavy investments by the seller in terms of manpower, machinery, services, financial allocations and cash flow techniques. Type 4: The firm is not driven primarily by profits or shareholder value. Competition may not be a significant factor in strategy. Products and services are driven by social needs and obligations such as in disaster recovery - such as rescue work after an earthquake, flood, tsunami or rail accident. 1.3 INDUSTRIAL MARKETING___________________________ _ _ ^ _ _ Industrial marketing refers to the marketing of products and services to business organisations, which can include manufacturing companies, government undertakings,

Industrial Marketing

private sector enterprises, educational institutions, hospitals and distributor organisations. On the other hand, consumer marketing refers to the marketing of goods and services to individuals and families. Consumers generally buy consumer goods for their own consumption. By now it is well accepted that the industrial market differs from the consumer market in most aspects. The sellers of industrial products therefore need to understand an organisation's buying behavior, needs, resources, purchasing policies and procedures to create customer value. Industrial marketing was, and sometimes still is, considered the 'non- glamorous' counterpart of consumer marketing.

Definitions of Industrial Marketing


Industrial marketing is a human activity directed towards satisfying the needs and demands of organisations through exchange processes. Industrial marketing is the marketing to customers who utilise the products and services they buy for manufacturing some other products, not for personal use. Industrial marketing consists of all the activities involved in the marketing of products and services to the organisations that use these products and services for the production of other consumer or industrial products and services.

The other common terms used for Industrial Marketing are: Organisational marketing Business marketing B2B marketing

Why is it be necessary to focus on industrial marketing as a separate and specialised branch of marketing?
Because the companies (sellers) that make computers, chemical plants, transmission towers, etc have to deal with other companies (buyers) - and not individuals. Buyers have their own needs, resources, policies and purchase procedures. In quite a few instances, there are widely dispersed consumers and points of actual usage. The other characteristics which differentiate the industrial buying process from the consumer buying process are: i) discerning and technically competent buyers

n) longer production cycles

Unit 1

The Nature of Industrial Marketing

m) high value of purchases iv) relatively few customers v) durability, maintenance and service requirements (post-purchase transaction) vi) high costs of product failures or serious product complaints vii) environmental influences (STEP or PEST analysis *) (* see Unit 2) An important aspect in industrial marketing is to create value through the right package of benefits for the customers with products and services that focus on the buying organisation's needs and objectives. However, the recent upturns and downturns in the Indian economy have redefined the essential commonalities between the two. In addition, the large number and quality of differences between consumer marketing and industrial marketing are narrowing down, and both branches are adopting many of the specialized approaches. For example, one of the specialised approaches in industrial marketing is Key Account Management (dealt with in a later unit). This approach has now been effectively transported to consumer product marketing quite successfully. Hopefully the day is not far off when both branches will be given equal status by academicians, industrialists, entrepreneurs and practicing managers. By its nature, industrial marketing strategy cannot be easily delinked from corporate strategy, while changes in consumer marketing strategy are relatively easier to carry out. In most cases of industrial purchases, particularly those involving capital goods and machinery, the purchases are made not only for meeting immediate requirements, but also in anticipation of future increased sales. If businessmen feel a recession is round the corner, all purchases will slow down. If he feels the business environment and economy is improving, investment in capital goods and purchases will show an upward trend. Hence, a good interpretation of the business market is essential in segments in which the industrial buyer operates. This requires very close interaction with the customers and their operating staff on their likely purchase policies and timing of purchase decisions - which can take from a couple of days or weeks (routine purchases of items like steel hardware or small motors) to a couple of years and more (purchases for a new grass root refinery or for new passenger aircraft).

Industrial Marketing

Je Activity A; a) Mention two ways in which industrial product buying influences differ from those of consumer product influences.

b) The purchase of industrial firms will decrease/increase when the business economy is on the upswing.

1.4 TYPES AND FORMS


Although the classification of industrial products is given in a later chapter, it is important to briefly highlight some types. There are numerous ways by which the types and forms can be arrived at, but a few of the various items are given for illustrative purposes.

Table 1.1: Types and forms of industrial products


I. Industrial products 115. Standard or fixed items (Mass-manufactured) 116. Customised items Examples Gaskets, cabinets, wires Tail-light assemblies, large steel enclosures, fuelinjection assemblies for automobiles Small stabilisers, inverters, ATMs Large transformers, large generators, Large turbines

Industrial Equipment

1. Standard items 2. Customised items

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The Nature of Industrial Marketing

ffl. Industrial systems

1. Standard

2. Customised

Small control systems in plants, Gear boxes, UPS systems Distributed control systems, Integrated software, airconditioning systems.

When Combined & Assembled When Combined & Assembled When Combined & Assembled When Combined & Assembled Complete Low Voltage Power Distribution

End to End Entire high voltage to low voltage power distribution network

Fig. 1.2 : Stages of Integration

Motors, Wires, Electrical APLE Transformer Cables Substation

Industrial Marketing

As can be seen from Table 1 and Fig. 1.2, there are stages of integration in the spectrum of industrial products and services offered by any industrial firm. In the electrical power distribution industry, the firm can consider a narrow scope of supply such as raw materials and components or a broad range of products, equipment and systems along with a broad range of services offering end- to- end solutions as a total turnkey package.

JS$ Activity B;
Mention any two types of: a) Standard industrial products 1.________________ .______________________________________

2.
b) Tailor-made industrial equipment 117. 118. _________________________ _________________________

c) Turnkey projects I_____

2. ___________ 1.5 DEMAND FORCES The demand for industrial products and services is usually derived from the ultimate demand for consumer goods and services. Industrial demand is therefore called derived demand. For example, the demand for hot rolled /cold rolled steel sheets does not exist by itself .It is demanded for the production of automobiles, trucks, steel cabinets, motorcycles, etc. which are ultimately bought by the consumers. The demand for industrial products is dependent upon the demand for consumer products. Consider the materials and components that are used in a Bajaj. motorcycle. Some of the components are manufactured by Bajaj Auto, but the finished product reflects the efforts of over 500 suppliers or industrial firms, that deal directly with the firm. In purchasing a

Unit 1

The Nature of Industrial Marketing

motorcycle from Bajaj, the customer is stimulating the demand for a wide array of products such as springs, aluminum castings, lamps, electrical wires and other items manufactured by other industrial companies. If we take the example of a company selling radiator coolant, to be used on new cars to be produced, to an automobile manufacturer, a fall in demand for cars will result in a fall in demand for more coolant.

Fig. 1.3 : Concept of Derived Demand Fluctuating Demand


Because demand is derived, the industrial firm needs to monitor demand patterns and changing buyer preferences in the consumer market, often on a worldwide basis. For example, a decline in lending rates (interest rates on loans and borrowings) can trigger a demand for new homes nationwide. A higher disposable income among consumers can generate an increase in demand for luxury goods and household appliances. A downturn in the economy creates the opposite effect of sluggish consumer demand and hence, lowers offtake. So the demand for many industrial products tends to fluctuate more than the demand for consumer products.

Stimulating Demand
Many industrial companies, particularly those involved in making raw materials and semifinished goods for other industries, have to not only monitor final consumer markets, but also develop a marketing program that reaches the ultimate consumer directly. If Gujarat Ambuja Cement wants to expand the market for its cement, it has to advertise to reach out to ultimate consumers, just as INTEL has to promote 'INTEL INSIDE' brand for PCs and Salem Steel (part of SAIL) has to promote for stainless steel kitchenware.

Industrial Marketing i

Joint Demand Joint demand occurs when an industrial product is useful only if other products also exist. For example, a diesel generator set cannot be used if either the diesel engine or the electric generator is unavailable. A similar situation exists for motor pump sets, cable joint kits and cables, basic hardware and software for PCs etc. Hence, some industrial products do not have industrial demand, but are in demand only when available jointly with other products.

JSZ Activity C:
The four major types of demand related to industrial product marketing are: 1.___________________________________________________________________ 2.________________________________________________________'____________ 4. 1.6 INDUSTRIAL PRODUCTS VS. CONSUMER PRODUCT MARKETING Table 1.2 : Consumer Market Vs. Industrial Market Areas Characteristics of Industrial Markets Characteristics of Consumer Markets

1. Market characterisation

Geographically concentrated Relatively fewer buyers Customer & actual users may be different Derived demand High technical complexity Customised items in large number of cases Cost of maintenance is high Requirement is usually high

Geographically spread out Mass markets Customers and users are usually some Direct demand from customers Low complexity Standard items available off the shelf Cost of maintenance does not arise Requirement is usually low

2. Products

3. Technical

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The Nature of Industrial Marketing

services requirement 4. Buyer behaviour

Requirement of presales services and post sales services for most items Functional departments Rational buyers Technical expertise required Stable interpersonal relationships Pre-dispatch customer inspection stage may be applicable

Requirement is virtually non existent Family involvement Impulse buying behaviour No such requirement Non personal relationship No such stage exists

5. Channel characteristics

Sales through direct channels and few intermediaries Short channels required Less stock holding by channel members Personal selling is most powerful

Sales through many intermediaries Long channels required Stock holding by channel member Advertising and heavy promo tion through media are required High advertising budget (usually 5-10 % of sales) List pricing usually adopted List price selling is common No price negotiations in most cases Simple pricing policies No negotiations

6. Promotion

Low advertising budget (usually 0.5 to 5% of sales) Transaction-based pricing is common Competitive bidding is involved Price negotiations are prevalent Complex pricing policies Negotiations take place on other commercial terms

7. Price

A key element of difference between industrial marketing and consumer goods marketing is the service component (see Table 2). The industrial organisation evaluates the quality of the physical entity and the quality of the attached services. The requirement of pre-sales services and post-sales services is directly related to the complexity of the products. A small desktop UPS system for a single user PC would hardly require any visits by service personnel, but a turbo-generator in one of MSEB's power generating stations would 11

Industrial Marketing

requires a totally different level of services with high customer expectations of technical expertise. It is therefore important for the industrial marketing sales person to understand the buying process that an organisation follows in purchasing a product after a careful analysis of customer needs in terms of products and services. Successful industrial companies have achieved quantum jumps in market share by attaching the customer service component in the value chain. It represents the evergreen frontier in forging lasting relationships with customers. 1.7 RELATIONSHIP MARKETING This centers on all marketing activities directed towards establishing, developing and maintaining successful exchanges with customers. The relationship marketing concept places heavy emphasis on the importance of communications between the customer and supplier as well as emphasizing mutual satisfaction of objectives. This essentially requires an ongoing two-way communication between the customer and the supplier where customers are able to take the initiative in communicating. In industrial markets where individually tailored products are more the rule rather than the exception, products and services are modified to suit the micro-segments of the markets. These efforts are often supplemented by one-to-one communication which is made possible by using modern technology. Today, this is possible not only in face-toface encounters but also through well-designed websites, call centers and so on making two-way communication possible. Partner Advocate Customer Prospect

Fig. 1.4 : Relationship Ladder

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The Nature of Industrial Marketing

The ideal form of relationship building follows an elaborate process where suppliers move up the ladder (see Fig. 1.4) from prospect to customer to advocate to partner. Partnership represents relationsfiip marketing at its peak. Different types of communications and messages are required for each stage of the process as well as for different individual or micro-segments of customers. The forms of relationship discussed above when combined with customer data management has led to the modern-day concepts of customer relationship management (CRM). This topic is explored further in a later unit. To summarise the characteristics of the industrial market customer: Industrial market customers are institutions, commercial organisations and government departments. A single purchase of an industrial product customer is far larger than that of an individual customer. The demand for industrial products is derived from the ultimate demand for consumer products. Buying decisions by industrial firms often involve multiple buying influences, rather than a single decision maker. Relationship marketing provides an essential key to success in industrial markets.

J& Activity D: Tick the correct answer : a) The level of services required for marketing a room air-conditioner and a computer networking system will be: D D ifferent D The sam e D Dependent on the customer location

b) The two major types of services associated with industrial product marketing are: 1. _______________________________________________________

2. ___________________________ _ _______________________

Industrial Marketing

1.8 CROSS-FUNCTIONAL RELATIONSHIPS


Industrial marketing success depends to a large extent on such functional areas in the firm such as engineering, R & D (Research and Development), manufacturing and technical services. Planning in the industrial setting thus requires more functional interdependence and a closer relationship with total corporate strategy, than planning in the consumer goods sector. Changes in industrial marketing strategy are more likely to have on impact on capital requirements for new equipments, changes from traditional engineering and manufacturing approaches and shifts in development activities- any of which could have company-wide implications. E.g. If engineering considerations dictate the change of manufacturing process of bumpers (in automobiles) from pressed steel to molded plastic (or reinforced plastic), a total shift in manufacturing facilities and production personnel would become essential. Other functional areas affect all industrial marketing decisions with respect to the 4 P's product, price, place, and promotion - directly or indirectly. In turn, business decisions in R &D or manufacturing or procurement as well as adjustments in the overall corporate strategy are influenced by marketing considerations. Some of the functional areas that need to be integrated with industrial marketing planning are given in Fig. 1.5.

Finance Capital Budgetting ^requirements, ROI fory new product Accounting Cost History & forecast of future costs

R&D
Concept Product development t Evaluation

Industrial Marketing Planning

Procurement Interpretation relevant trends ^supplies; SCI

of in

Logistics Delivery support consistent with customer needs.

Customer Services Post-sales technical services

Manufacturing Forecast of production capacity;, costs

14

Fig.1.5 : Industrial Marketing Planning-functional Integration

Industrial Marketing

Geographical proximity to allow just-in-time delivery and faster closer ties aimed at improving product and service quality along the supply chain.

Many corporations and business houses are building e-commerce capabilities and transforming these into offerings that provide more customer value. A variety of responses can be found to the liberalized regime in India and to the new opportunities available as a result of widespread globalization.

Examples
Videocon group is moving from consumer electronics to power generation, oil drilling, petroleum refining and telecom sectors. Reliance group has moved from textiles and man-made fibers to oil exploration, telecom, petrochemicals, construction, power generation and distribution. ITC is moving from tobacco, edible oils, paperboards and hotels into biotech & rubber.

Many Indian business houses are considering takeovers of European and American companies through the acquisitions route. It is seen that industrial marketing programs involve a customised mix of physical products, engineering and service support and ongoing information in the pre-sales and post-sales phases. Clearly, relationship marketing is at the heart of industrial marketing.

^Activity Ft
Name any two Indian companies that are involved in both consumer products and industrial products. 1. __________________________________,_______________________________

2.
1.10 IMPACT OF CURRENT DEVELOPMENTS ON INDUSTRIAL FIRMS

16

The relative importance of strategic issues might vary from one industrial organisation to another. But there are a few common developments over the last few years that are creating a major impact on many firms.

Unit 1

The Nature of Industrial Marketing

1. Intel-n ation alisation

Internationalisation is. a factor that is affecting both the developed and the developing nations in a variety of ways. For industrial firms, internationalisation can extend the size of the market as well as the number of competitors. It also raises issues of relationship with potential partners overseas and the organisation of activities across national boundaries. Dell Computers that sources, manufactures and sells computers across the world, has to continuously deal with such issues in dealing with competitors from Japan, Taiwan and Europe.

2. E -C om m erce
There is a huge impact of data communications on organisations and within organisations. Entire organisations are being transformed by the development of powerful information and communication Technologies (ICT). The growth of ecommerce around the world has reached tremendous proportions, especially, in industrial markets. The industrial buyer organisations have much easier and faster access to competitors' offerings around the world. No industrial firm can ignore to understand how e-commerce is changing the business environment. Industrial firms whether old or new, small or big are adapting themselves and using e-commerce to complete more effectively in industrial markets. E-commerce principles are dealt with in a later unit.

3. Shift in corporate and business strategy


Till the nineties, the private sector in India was profit driven and it did not matter whether the public sector Companies made any profit. The new economy has brought new rules of governance and corporate responsibility, with the numerous measures in liberalisation and the opening up of various sectors of the economy. Previously, only ONGC was allowed in the field of oil exploration, but today a host of private companies (Reliance, Essar, Videocon) are ready with business ventures in this field The opening up of the Indian economy has emphasized a greater need among industrial units for: Market knowledge New competences (such as financial management)

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Industrial Marketing

Development of abilities to work in teams and partnerships

;' .

Less centralisation of organisation structures

4.

Knowledge Management

Industrial organisations need to continuously innovate in order to survive and generate adequate returns from products and services. This can only occur if an organisation is able to both generate and integrate knowledge from both inside and outside the organisation. This knowledge is to be managed in order to develop new products and services and remain continuously competitive. In today's conditions of a fast-moving world, constant improvement and change have become essential for survival and success. The rapid developments in information technology have thrown up many more opportunities to expand business in new ways. There are other factors and influences that are changing the bigger environments for industries involved in industrial products or B2B (business to business) markets. It has become fundamentally important for industrial firms to analyse the growth stage of the industries as well as to identify the specific factors causing rapid changes in the industry growth cycle. The driving forces in an industry are the major causes of changing industry and competitive conditions- some forces originate from the external environment (e.g. software piracy) and some originate from within a company's immediate industrial environment (e.g. the entry of MNCs in the Indian automobile sector) 119. Increased globalisation: Globalisation results when industry players seek customers in foreign markets or when production activities move to countries where manufacturing costs are the lowest. The large corporations and medium size companies involved in the industrial sector are now finding it more profitable to shift their production base and marketing focus to countries that are showing higher GDP growth rates (such as India, China, Malaysia, Brazil) 120.Growing use of the Internet: Industrial companies are using the Internet to reach beyond their borders to find the best suppliers and further to collaborate closely with them to achieve gains in efficiency and cost reductions. They are also using a range of Internet technologies and applications to strengthen their internal operations (e.g. ERP or Enterprise Resource Planning Systems). 121. Product innovation: Successful new product introduction has always strengthened the market positions of innovating companies by grabbing market share from

Unit 1

The Nature of Industrial Marketing

companies that do not innovate or continue with their old products. Productsinnovation has been a key driving force in industries such as digital cameras, mobile phone sets, MP3 music players, LCD television sets. d) Entry or exit of major firms: entry of foreign MNCs into India (e.g. in The the auto sector- Ford Motors, Hyundai Motors, Toyota Motors, General Motors) has shaken the automobile industry in India that was traditionally up dominated by Maruti-Suzuki, Fiat and Hindustan Motors. Similarly, the exit of a major firm changes the competitive situation by reducing the number of market leaders (e.g. the exit of Fiat, Italy through Indian partner Premier their Automobiles)
t) Regulatory influences and government policy changes: Government actions t can force significant changes in industry practices and strategic approaches. In India f there has been significant de-regulation in industries such as oil exploration, f telecommunications, banking electricity generation and distribution industries.

# Activity G;
Two forces that are changing the way in which industrial products companies are carrying out business are:

1.11 TYPES OF ACTIONS BY INDUSTRIAL COMPANIES

There are various actions that the industrial firm takes to consolidate its position and improvestrategic responses to the above influences. The major types of actions at the companylevel are summarised below: Actions to: i) Gain more sales and market share i) Respond to changing market conditions 19

i) Enter existing and new markets with products and new product applications and expand to new geographical territories

Industrial Marketing

iv) Merge with or acquire smaller or bigger companies depending on financial strength v) Form strategic alliances and partnerships vi) Build defenses against threats from existing and new competitors or from the external environment vii) Restructure internal operations to reduce costs and to make the company totally customer-oriented viii) Enter new businesses and diversify Example I KOEL (Kirloskar Oil Engines Ltd.) is a Pune-based industrial firm manufacturing diesel engines and components for the automobile sector. It has a strong market position in small (3 HP to 20 HP) and medium size (20 Hp to 500 HP engines. Their applications are largely in agriculture, power generation and other industrial applications. The strong market share is primarily due to the company's continued focus on quality and reliability, its distribution infrastructure and its strong service capabilities. The Company is expanding its product portfolio especially in the 500 HP and above range to enhance its presence in this range where it has relatively low market share. Simultaneously, the company is also reducing the overall costs of its engines trough improved fuel efficiency and power-to-weight ratio of its engines. KOEL has progressively expanded its product portfolio over the last few years and is now better diversified in terms of its exposure to specific market segments like agriculture, power generations, tractors, industrial and marine applications and auto components. This has helped the company improve its stability against cyclical downturns in industrial user industries. The company is addressing the capacity constraint through fresh capacity additions. KOEL's auto components division manufactures engine bearings, valves, bushes and thrust washers for the automobile sector, engine manufacturers and the railway. The main thrust of future growth in this division is expected to come from exports, which accounted for above 16% of the total revenue of the division in the financial year 2004-05. The company is therefore planning intensive capital investments to gear up for this future growth.

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The Nature of Industrial Marketing

E xam ple II
An example of a company that has aggressively followed the strategy of a low-cost provider is the West Bengal-based Xenitis Group. This firm is just five years old and was among the first Indian companies to Sell PCs priced below Rs. 10,0007-. The sales turnover has grown from Rs.7 cr. in 2000-01 to Rs. 178 cr. in 2004-05. In 2 years' time, it is expected to reach a turnover of Rs.lOOOcr. Its brands are: Aamar PC in the east, Aamchi PC (West); Aapna PC (North) and Namma PC (South). Xenitis Group was funded with an initial investment of Rs.25 Lakhs and founded by two managers with experience in IBM and HCL Technologies. The company has set up a Rs.200 Crore PC components manufacturing unit in West Bengal in collaboration with Unitek Computers Co. of China. This will manufacture computer cases, SMPS (Switch mode power Supply) units, media chips, computer peripherals like keyboards, CD-ROM and CD-DVD drives, speakers and home theaters at this facility. This will enable the company to expand its capacity from 2.4 lakh PCs to 4.2 lakh units annually. Its product range includes higher range PCs, servers and media centers. It is already exporting to countries such as Africa, Dubai, Bangladesh and Nepal. Xenitis Group represents just one of the many thousands of modern Indian entrepreneurs have national and international growth ambitions.

& > A ctivity H :


Two types of actions taken by KOEL to respond to the new marketing environment who challenges are:

m.
1.12 MAJOR DIFFERENCES IN SUPPLIER-CUSTOMER INTERACTION
P

One of the major differences between consumer products and services and industrial products and services is the level of supplier-customer interaction. The nature of industrial products necessitates a high level of interaction between suppliers and customers. In fact, the future growth of industrial firms is highly dependent on the strength of its relationship with customers.

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Industrial Marketing

Table 1.3 : Levels of Supplier-customer interactions Level of Suppliercustomer Interaction

Low
1) 2) 3) 4) 5) Mass consumer products (e.g. personal products, packaged food) Mass consumer services (e.g. retail banking, life insurance) Mass industrial products (e.g. standards small engines or electric power drills.) Customized industrial products (e.g. airconditioning plants) Customized industrial products and services (e.g. large air-conditioning plants and installation and maintenance services) 1.13 SUMMARY

Medium

H igh

V V
V V

Industrial marketing represents an important branch of the Marketing discipline. It has special characteristics as can be seen from the comparison table with consumer product marketing. This unit attempts to highlight the special characteristics and features of industrial marketing in relation to the current Indian scenario of liberalisation and globalisation. It also focuses on two important aspects of this subject, i.e. cross-functional relationships and relationship marketing. These aspects will be elaborated in further units. This unit has also highlighted the importance of demand forces that give industrial marketing its special character.

1.14 KEYWORDS

22

Derived Demand: This term refers to the dependence of one product on the demand of another product. Demand for industrial products is generally derived from the demand for consumer products. Industrial Marketing: It consists of all the activities involved in the marketing of products and services to the organisation that uses these products and services for the

prod uctio n of other

consumer or industrial products and services. The other terms commonly used for

Industrial Marketing

2.1 INTRODUCTION Today, all organisations function in environments that affect their operations and position in various countries. The economic and business environment in India is quite different from of Malaysia and Thailand. This business environment is usually segregated and better understood as macro environment and micro environment. The macro environment includes the overall conditions under which all industrial and other companies operate. The micro environment is the immediate environment that is defined primarily by the firm's suppliers, customers and competitors. Both categories are important in assessing the firm's position and provide vital inputs to the strengths/weaknesses analysis. Overcoming competitive forces leads to competitive advantage. Industrial companies are constantly seeking a strong competitive advantage in order to protect their market position. The tools that are very helpful in analysing the competitive forces are, Porter's five-forces model and SWOT analysis. The environment in which the business functions can be divided in terms of the semi-controllable and uncontrollable environment. The semi-controllable environment, also known as the microenvironment, can be managed by the organisation. One of the tools used here by the organisation is its marketing mix (4 P's). The uncontrollable environment, also known as the external or macro environment, exists outside the organisation's purview and is not controllable by managers (though it can be influenced to a certain extent). We will discuss macro environment in the context of environmental dynamics. The external or uncontrollable components comprise political, legal, economic, technological, social, cultural and natural environment factors. In addition to the above, government influence on business is also an uncontrollable factor that needs to be understood by an industrial marketing manager. However, this will be discussed as a separate issue in industrial marketing, as the government is both a regulator of business and, in certain cases, a customer. We will also analyse the international modern trends in industrial marketing to get comprehensive understanding of environmental dynamics. 2.2 BUSINESS ENVIRONMENT______________________________________ Marketing does not occur in a vacuum. While preparing and implementing strategic plans, the marketing manager has to work with many variables in the broad marketing environment. As has been mentioned already, the marketing environment in industrial marketing falls into two basic categories26
\

u)

Unit 2

Industrial Marketing Environment

i)

M icr o -E n v ir o n m e n t
Publics: General public, employees, Media and press, financial investors, competitors Buyer-seller interface: facilitators such as suppliers, intermediaries and distributors, bank and insurance companies.

ii) M a c ro -E n v ir o n m en t
Economic, natural, cultural, social, technological and political trends and factors. General External Environment in which all companies operate

Fig. 2.1: The Company's Business Environment

2.3 M IC R O -E N V IR O N M E N T
This type of environment refers to the factors related to the immediate industry and competitive environment. The company's suppliers, customers, competitors, substitute products, distributors, financial investors, etc decide the factors pertaining to this environment. These factors are usually controllable by the company or the industry in which it operates.

Environment decided by the Company's Suppliers, Customers, Competitors,


27

Industrial Marketing

a)

Suppliers of Inputs

TJie inward flow of materials to the organisation is known as inputs. These materials are part of the factors of production. The factors of production, which include various inputs, raw material and parts, labour and capital, are supplied by the extractive and other industries to the companies for use in the production of industrial products and services. The success of any firm is highly dependent on its relationship with its suppliers. Interrelationships form the backbone of industrial growth of any nation. These relationships are very important as the work targets of one company are interlinked with those of other partners/associates, and also because the repercussions of production stoppage in one affects the overall industrial growth.

b)

Distributors

Distributors contact potential buyers and negotiate orders. In addition, they hold buffer stocks, provide credit to customers and offer technical assistance to buyers. They also bring together different products to meet joint demand. (The term joint demand is explained in detail in unit 1). The suppliers will also do business with distributors who complement the firm's product line with complementary products from other manufacturers, making a full product line at the distribution point. The distributors prefer to have a complete product line so as to maintain relationships with customers and serve the customer base of a company.

c)

Facilitators

The facilitators of the process of interactions between a buyer and a seller at the interface level are bankers, transport agencies, research and advertising firms. The advertising and public relation firms aid in the communication flow between the sellers and the buyers by t| formulating information and media strategies through promotional campaigns. Advertising is useful in reaching the multiple buying influencers present in industrial marketing. It is practically not possible for salespersons to contact all buying influencers. In this situation, advertising helps these salespeople to successfully close deals. kk Public relation firms help organisations in developing and enhancing their public image. P They develop and disseminate commercially significant news to boost the public image of their client's organisation. Trade journals are effectively used for this purpose. The other source of communication with the buyers is through publicity releases. Transportation agencies and warehouse companies facilitate the physical flow of industrial products. They aid in delivery of products in usable condition, to the industrial customers
28

e)

of a

Unit 2

Industrial Marketing Environment

as an d w h en th ey are req uired . If th e ab o v e fun ctio n is n o t p erfo rm ed p ro perly , th e b u yers m ay h av e to sto p th e ir p ro d u ctio n lin e s fo r lack o f tim e ly in p u ts. T h is m a k e s sa fe , tim e ly an d regular p hysical d istribu tion critical to ind ustrial m ark eting . T h ere is n eed for finan cing a n d in su ra n c e to m o v e p h y sic al re so u rce s fro m su p p lie r to b u y e rs. B a n k ers a n d fin a n c ia l institu tion s fa cilitate these finan cin g req uirem e n ts by p ro viding cre dit. In su ran ce ag enc ies p ro v id e in su ra n c e a g a in s t r is k r a n g in g fro m c o m p le te d a m a g e to th e p ro d u c t s to n o n d eliv ery an d un tim ely d elive ry o f prod uc ts to cu sto m ers. d) C om p etito rs A firm 's decisio n to o pe rate in a p articular m a rk et is in flu en ced b y th e co m pe tition p resen t i n t h a t m a r k e t . T h e c o m p e t i t o r s c a n b e d o m e s t i c a n d fo r e i g n . T h e y i n fl u e n c e t h e o rg an isa tio n 's d ecisio n reg ard in g ta rg et m a rk ets, p ro d u c t m ix , an d d istrib u to rs' ch an n els -in sh o rt, th e e n tire m a rk e tin g stra te g y . G a th e rin g in fo rm a tio n a b o u t th e c o m p e titio n h a s b e c o m e c ritic a l w ith th e in c re a sin g n u m b e r o f c o m p e tito rs, d e c lin in g m a rk e t sh a re s a n d g ro w in g m a tu rity o f cu sto m e rs. M o reo v er, c o m p e titio n is b e co m e in c re asin g ly g lo b al d u e to the liberalizatio n o f w orld 's econ om ies. T h e in c re a sin g m a tu rity lev el o f c u sto m e rs h a s m a d e b u y in g m o re te c h n ica l, lo g ic al an d e x p e rt o rie n te d . B u y in g in flu e n c e s th e b o tto m lin e o f a n o rg a n isa tio n th ro u g h in c re a se d costs and d ecreased produ ctivity. T h e in d u strial firm s are b o th sup pliers an d bu yers i.e . all th e firm s in in du strial m ark e ting are lin ked to one ano ther. T o effec tiv ely deal w ith these interrelation ship s and dep end ence,

in d u s trial firm s b u ild a lo n g term b u ye rselle r relati o n sh i p. T h ey

tak e part in in fo rm a tio n h a n g e b e tw e e n th e m a n u fa c tu re r a n d u se r o f th e p ro d u c ts in exc th e fie ld s o f re se a rc h , engineering and production. A sep arate sec tio n o n th e in flu e n c e o f co m p e titiv e fo rc e s o n c o m p an y stra te g y is g iv e n in section 2.6. e) P u b lic
Public includes distinct groups that have an actual or potential interest or impact on each firm's ability to achieve its respective goals. The interface levels between the organisation and the types of different public is given below: i) Financial public ii) Press iii) Public interest groups

2 9

Ind ustrial M arketin g

iv) General public v) -Internal public or employees

i)

Financial Public

The financial institutions that invest in an organisation constitute the financial public. The investment is different from the flow of products and services. At the interface level, the investing financial houses have minimal impact on organisational considerations. Institutional investors are more concerned with the operational efficiency of the organisation than with individual shareholders. They extend their influence by voting for or against management teams. This influence is exerted to make sure that the management acts in the best interests of the shareholders. In this context, achieving the support of the financial public is important as they influence the capital structure of the firm.

ii) Press
The press is an independent moderator of the image of the organisation. Industrial firms are sensitive to the role played by the mass media in achieving its marketing objectives. The publicity given by the press can be positive or negative. Not long ago, Non-banking Financial Corporations (NBFCs) received negative publicity from down-grading by credit rating agencies and imposition of RBI restrictions for collecting deposits. This resulted in the availablity of low interest capital for these institutions. Shell also received negative publicity from the press when one of its oil tankers had an oil spill in the ocean. The company had to invest in a long-term public relations program to overcome the bad image generated by the oil spill. in) Public Interest Groups Public interest groups are increasingly influencing business decisions in the industrial marketing area. These groups support environmental and ecological causes, women's rights and even minority welfare. The various public interest groups limit the freedom of suppliers and buyers in the industrial markets. Some organisations oppose these groups whereas some prefer to coordinate their plans and advocate their causes. Whether the organisation supports the group's cause or not, public interest groups clearly constitute a factor in strategic planning and cannot be ignored.

Unit 2

Industrial Marketing Environment

iv) General Public


The general public is not as coordinated and integrated as interest groups. But it will work towards a cause if it is sufficiently motivated. The general public is the target group for press and interest groups, as it comprises the end customers and the ultimate consumers in the business chain.

v) Internal Public
The employees working in an organisation constitute the internal public. This includes people from the top management (like the member of the board of directors) to the factory workers. These employees have to be motivated. They should feel happy working for the organisation. If employee morale is low, the organisation will suffer. Since the employees spend more than 60% of their time on the job, their attitude influences the general public. For example, The Jamshedpurbased Tata Steel plant has not been nationalised due to opposition from the employees. Their objection to nationalisation of the plant shows the level of satisfaction they have towards the management. The ultimate goal of business is to serve by serving its customers. To satisfy the various * types of public, an organisation should project the importance of the product to the society. If the organisation is not serving the customers, then the financiers will not support its operations, and its employees will be demoralized. Ultimately, the productivity of the firm will decline, forcing the company to seek financial support. Therefore, organisations should bear in mind their mission and also the public that evaluates the mission against the actual performance. The company should go in for advertisement and public relations campaigns to project a positive image of itself. ^Activity A; If you were a senior marketing manager of a large, Indian-based automobilemanufacturing firm, what three micro environment factors would you consider the most important? Why?

31

Industrial Marketing

2.4 MACRO-ENVIRONMENT The macro environment refers to the factors that influence the operations of businesses and companies. These factors include all influences that have an important bearing on the company's future direction outside the company's boundaries. These can include population demographics, governmental legislation jind policies^-economic policies, technological factors-SjeeiSTarid culturatfactors, etc. These factors are those on whichthecompany can exercise little or nocontrc The,macro environment includes six forces: 122. Political/Legal environment 123. Economic environment 124. Cultural environment 125. Technological environment 126. Natural environment 127. Demographic environment The participant at the interface level can mould his strategy in reaction to the environmental forces and meet the needs of others. But it is beyond the ability of a single firm to influence the macro environment. Some of the forces in the macro environmental are brought about by a combination of activities in the industrial arena, but others are purely beyond the control of organisation, and reactive mechanisms have to be developed to deal with them. The macro environment is dynamic and changes at a fast pace. Technologies influence industrial markets through its adoption, whereas economic changes influence the organisations, whether or not the industry adopts these economic changes. a) Political Environment Organisations across countries base their decisions on the government and the legal framework existing in a country. The political environment is distinct from governmental influences and comprises the personnel in charge of the government. Legal framework is related to the existing business and civil laws. The legal influences also include the regulatory environment of the country. Trade barriers, for example, form a part of the regulatory environment. Indigenous businesses are protected from foreign competition by the regulatory environment. Tariffs and quotas are used for this purpose by the government. The flip side of these protectionist measures is retaliatory steps from the organisations and from nations

32

Unit 2

Industrial Marketing Environment

5CS

the ion cal

affected by these measures. The latest economic framework under WTO calls for liberalised trade policies and also for non-interference from politicians on economic issues. Industrial markets are firmly regulated by government agencies and industries. These agencies have specific responsibilities to protect the participants at the interface level and the public. In the case of products like medical drugs, approval by a competent agency like the FDA in the USA is necessary before releasing them for public consumption. Regulatory influences exist for ensuring product safety and protection of the environment from pollution. Certification from pollution control boards is necessary to set up start and continue operations. These legislations and social pressures have placed the responsibility of pollution control on the companies. Firms should also carefully keep a watch on pending legislation that can change the macro environment drastically. They should work as pressure groups to interact with legislators and parliamentarians. Various trade associations like CT (confederation of Indian industries) can influence pending legislations and forthcoming budgets on behalf of the businesses.

lental icnce about id the them, aence : e the

b ) E conom ic Influences
Since the worldwide economic conditions influence the ability of organisations to buy and sell, emerging trends have to be closely monitored to take appropriate measures. The demand for industrial products is derived in nature, and the presence of derived demand forces industrial marketers to monitor the changes in consumer purchasing power and saving. If consumption by ultimate customers increases, the demand for raw materials and machinery required increases, and if consumption power declines, the demand for industrial products also declines. The effect of the economic environment is not uniform across industries and across nations. This calls for close monitoring by industrial groups having more than one industry. They should carefully monitor the influences of the economic environment on both the suppliers and buyers. Interest rate on capital is a good example of the influences of the economic environment on industry. If interest rates are high, capital expenditure is deferred and if the interest rates are low, optimum investment is made into building capital assets by the organisation.

5 legal mental vorkis alatory ilatory ulatory lip side nations

c ) C ultural Influences
The customs and traditions of organisations influence organisational structure and functioning. They also influence the interpersonal relationships between employees. Though culture
3 3

Industrial Marketing

hardly has any influence on product specifications, joint ventures with organisations from different cultures run the risk of cultural incompatibility. Since substantial cultural differences ..exist between Japanese and American organisations, any joint venture between these two countries has to frame clear human resources policies. The companies formed by joint venture should not be based on the whims and fancies of the top management. The corporate objectives of these companies have to be clearly defined. d) Technological Influences

Changes in technology affect both manufacturers and customers in the industrial marketing scenario. The manufacturers worry about the customers following up the technological advancement and maintaining derived demand for products; the customers worry about the impact of product design and the manufacturing process of the manufacturer on quality and costs. For example, CAD (computer aided design) and CAM (computer aided manufacturing) influence manufacturing systems. The Internet is influencing industrial marketing much more strongly than consumer product marketing. Industrial marketers should monitor the technological environment closely in order to adapt to it. e) Natural Environment

Environmental pollution is making the earth unsuitable for living quality life. To make natural resources pollution free, the major contributors to pollution, i.e., industrial firms, have to spruce up their production systems. Industries involved in the production of chemicals and pesticides have to devise safety measures to protect the environment. Disposal of waste material is also considered a basic responsibility of these firms as they are the culprits for the high levels of mercury and other poisonous substances in the oceans. Many industries throwing their waste into rivers posed a lot of problems to citizens. For example, Pune-based Pudumjee Paper Mills used to throw industry-waste into the Pawana river, which spread diseases in the town. The PCMC (local Government) threatened to close down the unit. Only then did the company undertake measures to treat the waste. The ability of firms to produce and market products and services for profit requires a favorable combination of inputs. Natural endowments such as raw materials, power, water and combination of inputs like skill management, labor and transportation confer advantages on an industrial firm to achieve the above objective. An industrial firm with a cost- effective combination has a competitive advantage over its rivals. In the era of liberalisation and globalisation, countries with political stability have greater chance of attracting investments from multinational companies. Location and transportation
34

Unit 2

Industrial Marketing Environment

5 from rences setwo y joint rporate

considerations influence the sourcing decisions of the organisation, as buyers prefer supplies from nearby vendors to control the transportation costs.
*

f) D em ographic Influences
Though demographics does not have a direct impact on industrial marketing, it has to be monitored closely, as the demand for industrial products is derived. Changing demographics influence consumer markets and the demand for raw materials for making them is also affected. The uneven growth of population across the world influences not only the markets, but also the availability of labor. Sufficient secondary data is available to monitor demographic trends and a strategy can be prepared to take advantage of these changes. One can see the dramatic influence of demographics in the heavy engineering, light engineering and IT industries. The huge availability of technical and engineering manpower in India is forcing foreign major companies to shift or relocate their units/departments that are primarily knowledge based. A company like FORD Motors is setting up an R & D center in India based on the easy availability technological manpower. Microsoft, Google and CISCO systems are also utilising the vast manpower resources of India by having their own development centers. J8$ Activity B: As the senior marketing manager of a large, Indian-based automobile-manufacturer, write down three macro environment factors likely to affect your growth in the next five years. 1.__________________________________________________________________

arketing ological ry about n quality ter aided ndustrial narketers

ake natural ns, have to jmicals and ;al of waste culprits for

Citizens. For >thePawana hreatenedto it the waste. fit requires a power, water fer advantages cost-effective ty have greater i transportation

3.

2.5 GO VERNM ENTAL INFLUENCES


Government performs various roles and responsibilities while discharging its duties. In the process of performing various activities, governments may hamper or facilitate the industries' marketing efforts. The laws and regulations framed by the government influence all participants at the interface level. The government performs various activities that influence industrial marketing such as framing regulations, protecting business from outside competition when necessary, and protecting the natural environment from industrial pollution.

3 5

Industrial Marketing

Businesses have to anticipate the Government's action and also influence them, if possible. TJiey should act in a united manner and as far as possible keep government out of the business environment, to prevent costly and premature legislation and rules from being thrust on them. The industrial firms should react, before the government, to any potential issue that may lead to regulations. This is achieved by framing serf-regulation and control bodies among trade associations. The advertising community in India has one such body that is proving useful in preventing the government from interfering. A company should try to influence the government as the government can influence or be influenced by the environment. However, the influences are two- way between the government and inner members of the environment. As the economic environment heralds an era of liberalisation and globalisation, the need for industrial firms to influence government action is also ever increasing. 2.6 COMPETITIVE FORCES The characteristics of competitive forces vary from one industry to another. A widely used tool for systematically diagnosing the main competitive forces in a market and assessing the strength and importance of each is Porter's five forces Model of competitive analysis. This method developed by Michael Porter, is depicted in Fig. 2.6. It holds that the competition in any industry is a combination of competitive pressures operating in five areas of the overall market: 1. Competition among the industry players 128.. Competition associated with the threat of new entrants entering the market

129. . Competition from companies of other industries entering with substitute products 130. . Competition arising from the bargaining power and supplier-seller relationship from suppliers 5. Competition arising from the bargaining power and supplier relationship from buyers The five forces model helps to: 131. Identify the specific competitive pressures associated with each of the five forces 132.Evaluate the strength of each of the forces c) Determine whether the combination of the pressures from the forces can weaken the | industry player

Unit 2

Industrial Marketing Environment

'

The challenge of industrial marketing managers and of the top management is to devise a competitive strategy that/ .

i) a llo w s th e ir c o m p a n y to w ith s ta n d th e c o m p e titio n i) stren g th en s th e ir stan d in g w ith b u y e r firm s iii) d eliv ers g o o d p ro fitab ility iv) p ro d u c e s a c o m p e titiv e a d v a n ta g e
Threat of new entrants MP3 Music CDs becoming a threat to conventional K audio CDs
Power of buyer

P urchase of P a ssen g er j a ir cr a fts 1

I Competition among industry , players

Power of Supplier I/ Crude oil.^ Suppliers to i, oil refinery

Threat of Substitutes Camera Phones becoming a threat f<K; to digital i

weaken the

Fig. 2.2 : Porter's Five-forces Model When one industrial firm makes a strategic move that produces good results, its competitors will generally respond with countermoves, shifting from one combination of product features to another, shifting marketing tactics or improving on design and manufacturing capabilities. A clear example of this shifting pattern is the PC industry where the industry players are forced to adapt to new product features due to the rapid changes in technology.

3 7

Industrial Marketing

1. Competition among Industry players


Typical responses of industry players, which increase competition among industrial product manufactures are: 133.Lower prices 134.More or different product features 135.Better product performance 136. Performance to internationally accepted standards (such as DEN, VDE, ASA, JIS, etc.) 137. Wider selection of types 138.Better customer service capabilities g) Stronger capabilities to provide custom-built

products h) Higher level of advertising i) j) Bigger and better dealer network Low interest rate financing/better credit terms

There are a few indicators of the strength of competition among industry members, and these are: i) Whether the manufacturers are rushing to provide better performance features, higher quality and improved service (eg. PC Industry); if) Increasing frequency of marketing tactics such as sales promotion, new advertising campaigns, low interest financing (Premium end consumer electronic products); iii) Increased action by manufacturers to build stronger dealer/distribution networks (strategy being followed by Samsung Electronics, LG and Hyundai Electronics) in India; iv) Rate at which industry players are introducing new and improved products (e.g. Philips)

38

v) The efforts made by companies to gain a market edge by developing expertise and capabilities that competitors find difficult to match (NOKIA in mobile handsets and Dell Computers in PCs)

Unit 2

Industrial Marketing Environment

The intensity of competition can be broadly classified as: STRONG - W hen the players are fighting for market share and profit margins are extremely thin. M ODERATE - W hen the players are relatively less aggressive in the market place and the markets permit the industry members to earn acceptable profits. W EAK- When most industrial companies are satisfied with their sales growth, marketshares and have comparatively attractive earnings.
2. Threat from new Entrants

Some of the most common factors that affect the strength of competitive threat ofentry for new player, are: i) Number of new entrants n) W hether entry barriers are high/low
I) Whether existing firms are earning good profits

iv) W hether the outlook in the industry is risky or bright v) W hether buyer demand is growing of declining vi) Regulatory policies vii) Tariff sand international trade restrictions
3. Competition from Substitute products

W hen buyers view the products of tw o industries as good substitutes, there is a strong incentive to switch over to substitute products. For example, power consumptionin the steel and aluminium industries is high and the cost becomes critical for the viability of the plant. It may become economical for the company to generate its own er (captive pow er) rather than purchase pow from the concerned State Electricity Board. A refinery can use one of its by-products (w aste gas) as fuel to generate electricity for consumption in one or more of its constituent plants. The strength of the competition from the substitute products will depend on: a) priced. W hether substitute products are readily available and attractively
39

Industrial Marketing

139. Whether the industrial buyers view the substitutes as being comparable or better in terms of quality, performance and other attributes (e.g., reinforced plastic bumpers for passenger cars instead of steel bumpers). 140. The costs of switching from one product or system to the substitute product or system. Switching cost can also include the time and inconvenience involved, cost of additional equipment, new technical expertise (if any) and employee retraining. As a rule, there is increased competitive pressure from a substitute product either due to lower price of substitute, or higher quality and performance, or lower switching costs. 4. Power of Suppliers The competition from supplier firms can be strong when they can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor. Both Microsoft and Intel Corporation can use their dominant market status not only to leverage prices with buyers (PC manufacturers) but also dominate future direction in technology. Crude oil suppliers to oil refineries around the world can virtually dictate the prices of their end products (such as petrol, diesel and aviation turbine fuel) in any country. In general, it is seen that supplier bargaining power is stronger when: i) High switching costs are involved in changing over to alternate suppliers.

n) Inputs needed by leading buyers are in short supply. iii) A supplier has a differentiated product that is critical in the buyers production process.

iv) They are very few suppliers around the world for the particular buyer's input, v) A supplier can integrate forward in the value chain. If the buyer-seller relationship is producing valuable benefits to both parties, it will last; if the supplier is falling behind alternative suppliers then the buyer is likely to switch suppliers and incur the costs and trouble of building close working ties with the new supplier.

40

Unit 2

Industrial Marketing Environment *

5. Power of Buyers
$fl Competition pressures can become strong when buyers have sufficient bargaining power to obtain price concessions and other favorable terms of sale and also on the strength of buyer -seller relationships existing in the industry. Motor and truck vehicle V manufacturers have strong bargaining powers in the purchase of items like tyres, batteries, electrical wires and fuel injection systems. ,; The Buyer bargaining power is stronger when: Buyer-switching costs to other suppliers or to substitute products are low. Buyers are large and can bargain volume discount with suppliers. >i Large volume purchase by buyer is important to seller firms. w Identity of buyer adds prestige to the seller's list of customers. Comprehensive information is available. Buyers have the power to postpone purchases forcing seller to revise existing prices. (This is a common occurrence in large Indian public sector projects where the delays can run into months and years). Some buyers can integrate backward and become a competitor to the selling firm in the short term. There are only few buyers.

i n d u s tr y a n d c o m p e ti ti v e c o n d it i o n s. S o m e d r i v i n g f o r c e s o

All the above competitive pressures bring home the point that the buyerseller relationship is the "crux of the matter" in industrial marketing- infinitely more important than in consumer product marketing. Industry conditions change because important forces are driving industry participants (competitors, customers or suppliers) to alter their actions. The driving forces in an industry are the major underlying causes of shifting

riginate from the macro environment and some originate from within a company's industry and competitive environment. A company's strategy becomes effective when it can analyze the above conditions and develop the resources to become a "Driver" in the industry.

41

Industrial Marketing *

& Activity C;
.Briefly enumerate the five competitive forces that a company of your choice will have to face in its survival and growth strategies.

6. SWOT Analysis
The key outputs of the macro environment analysis and the competitive environment can be summarized in the form of an analysis of strengths, weaknesses, opportunities and threat (SWOT). SWOT analysis summarises the key issues that are most likely to have an impact on strategy development. A SWOT analysis can focus discussion on future choices and the extent to which a I firm is capable of supporting these strategies. It is possible that the exercise may generate long lists of strength, weaknesses, opportunities and threats. The need is to j be clear about what is really important and what is less important in the present and future business scenario. A few examples of the SWOT factors are summarsed in Table 2.1. Table 2.1 : SWOT Factors

Strengths
Superior product features Strong brand image/company reputation Attractive and loyal customers base Superior technological and manufacturing skills Cost advantage over competitors

Weaknesses
Weak brand image or company reputation Weak customer services compared to competitors Weak dealer/Distribution Network Obsolete manufacturing facilities Too much under-utilized capacity

7.

Opportunities Sharply rising buyer demand Availability of new and upgraded products to meet new customer needs
42

Threats Increasing strength of competition Slow down in market growth Loss of sales to substitute products

Unit 2

Industrial Marketing Environment

/ill have to

Integrating forward or backward Falling tr^de barriers in foreign markets

Growing bargaining power of suppliers or buyers Trade restrictions by state/central government

environment opportunities re most likely enttowhicha exercise may The need is to he present and

It should be recognised that the SWOT exercise is a matching process. Ideally, the firm would like to match its strengths to the opportunities in the market place. This is not always possible because of the circumstances pertaining to the organisation and the state of the market environment. The case can arise when the weaknesses of the company are such that it cannot take advantage of the external opportunities. In such instances, it might have to seek some form of financial investments so that it can take such opportunities. The main strategic options that emerge from the SWOT analysis are summarised in the Table 2.2.

Table 2.2 : Strategic Options Option D o m in a n t P o sitio n s i) S tren g th s an d o p p o rtu n itie s Match strengths to opportunities

ii) W e a k n e ss a n d o p p o rtu n itie s iii) S tren g th s an d th re ats iv) W e a k n e s s e s a n d th re a ts

Seek help to eliminate weaknesses and take advantage of opportunities Move to new markets Divest or liquidate

company ces compared ition Network jig faculties ized capacity

jf competition et growth stitute products

7. Sources of Competitive Advantage The five forces model and SWOT analysis are just two techniques

that help the industrial product company give strategic direction. The firm can gain competitive advantage in many different ways by taking advantage of its superior skills, resources and competencies. Superior skills are distinct capabilities of staff and labor that make them different from those employed competitors. 3M Corp.(USA) has been able to attract creative persons over the years by building a culture and climate where innovation is encouraged, respected and rewarded. Other firms like Microsoft, Google and Infosys have been able to attract the brightest and the best IT-Driven individuals to remain in the forefront of computer and internet technologies. Superior resources or competencies remain a prime source of competitive advantage provided they are used and managed in the most productive manner.
4 3

Industrial Marketing

Some of the broad sources of competitive advantage are: i) i) Lower costs and higher production efficiencies A strong and well spread customer base

iii) Leading edge R & D capabilities iv) A culture of innovation, learning and service to customer v) Access to new technology vi) Superior pre-sales and customer service vii) Strong distribution network and enthusiastic channel partners viii) Partnership at many levels (e.g. with the defense sector) k) Differentiated product/service offering with clear segmentation x) Product portfolio matching customer's needs Competitive advantages, however, cannot be taken for granted as circumstances are constantly changing and product/services that are valuable today may not be considered so tomorrow.

2.7 THE INTERNATIONAL ENVIRONMENT

44

Though the international environment has many risks, there are attractive returns for industrial firms entering foreign markets. Since these markets are big and attractive, returns on capital investments are quick. The recovery of investment on technology and research and development is easy as many markets are served by

the same technol ogy. The invest ment on

technology will not yield sufficient result if the technology, that is, the product, is sold in only a few countries. For instance, investment in research for new pharmaceutical drugs is heavy, and it cannot be recouped if the company restricts the scope of marketing to a single country or a group.

Significant Macro-environmental Factors


Although there are many macro-environmental factors that affect international marketim of industrial products, a few important factors need to be reviewed:

Unit 2

Industrial Marketing Environment

5tances are considered

a) Economic Grow th Rate


This is the rate at which the overall wealth of the Economy is increasing (or if negative, decreasing). It is quoted as Gross Domestic Product (GDP) and Gross National Product (GNP). Typically, economic growth increases demand for industrial goods ! and an economic decline (also called a recession) reduces demand. Presently, India's GDP rate is projected at 6 to 8 percent p.a. over a five year period.

for industrial us on capital esearch and e investment luctjssoldin utical drugs is larketing to a

b ) Inflation Rate
Inflation is the rate at which money is falling in value or, under exceptional circumstances (if inflation is actually negative), increasing. Inflation usually has a negative impact on growth. For this reason, the national monetary authorities such as the Reserve Bank of India (RBI) in India have a Policy of keeping inflation under check by using the instrument ofJHterest rates. c)

^
The Interest rate is the fundamental cost of money in an economy and is the base rate at which^Central bahTr^ll offer capital. The base - lending rate is actually the cost of mFreelcapitaJTJrr^ractice, financial investors will ask a premium over the base for industrial companies and projects; this will depend on the investor's assessment of the risks involve. The higher the risk, the higher the rate of return demanded.

d) E x ch a n g e R ates
An exchan ge rate is the value of one rnal marketing

nation'scurrenry i" relation th that nf annjjigr country. It represents the rate at which one unit of currency can be converted to anothefTExchange rates are determine by a number of factors. A currency is said to be strong if it has a high value in relation to another. It is said to be weak if it has a relatively low value. Typically, the comparison is in relation to the US dollar, the world's reference currency. A number of factors have an impact on the value of a currency, and one of the more important is interest rate. The effect of interest on industrial firms will depend on the extent to which it imports raw materials (or Service) and exports its outputs.

45

Industrial Marketing

Table 2.3 : Effects of Exchange Rates


When Currency is 4 Strong

W eak
Company with High Imports Content & Low Exports Company with Low Imports Content & High Exports Cost of inputs Benefits in overall costs 1 Cost of inputs 1

Adverse impact on Overall costs

Cost of goods Adverse impact on Export sales

Cost of goods Benefits in overall costs

From Table 2.3 it may be argued that a country with a strong export base, having a weak currency would deliberately keep their currency weak in order to help companies to boost their exports. However, a weak currency will tend to push up import costs, so driving inflation. In the long run, inflation makes the business environment unpredictable and this makes management planning a difficult exercise.

b)

e) Employment Legislation
People are a critical resource in the success of a firm and governments often feel the need to legislate on the conditions under which people may be employed. There are rules and laws that govern minimum wages and benefits in most countries. The 11 of particular countries may also impact the way in which trade unions may organia and operate. Businesses operate in an increasingly globalized economy. Economic conditions ii one part of the world can have a rapid impact on those in another. A full assessn of the macro-environment factors which might affect the performance of the comp in the short term and long term must be considered before a strategy is developed j
c)

Forms of International M arket Entry


For successful penetration into foreign markets, a suitable strategy has to be keeping in view the various environmental factors. The various forms of entry available i as follows:

46

Unit 2

Industrial Marketing Environment

a) Indirect exporting D irect ex p o rtin g |c) Foreign licensing Joint ventures |e) Foreign production
Indirect Exporting It is the least risky of all options available and calls for export through intermediaries. This strategy is resorted to if the company lacks sufficient knowledge of the foreign markets and/or market is not sufficient for direct operations. The flipside is that organisations do not have control over marketing strategies and product image. Direct Exporting Though the investment and risks are higher than in the case of indirect exporting, it gives the organisation control over the activities. The company has to establish foreign distribution channels and increase production. The information available on foreign markets is minimum through the above two strategies, and an effective marketing mix cannot be planned. But direct exporting is more useful than indirect exporting as control on the functioning of the organisation is greater.

L icensing
Licensing involves agreement between a firm in one country with a firm in another country. The firm selling the product /technology is called the licensor. The firm purchasing the product/technology is called the licensee. Foreign licensing occurs when the government does not allow foreign firms to come and invest in the country. The licensees can be for technology or product. Maruti Udyog's plan in India has been to set up a manufacturing unit in Gurgaon under a licensing agreement from Suzuki Motors of Japan.

| Joint V entures
Joint ventures are the operations in which two or more firms share ownership and have control over operations. Joint ventures provide better knowledge of the host market and also share the risk. Joint ventures may be conditional due to the legal and political environment.

47

Industrial Marketing

e) Foreign Production This option refers to the setting up of manufacturing facilities in the foreign country either directly or through a subsidiary. Ford, Mitsubishi, General Motors, Toyota. Hyundai, Mercedes Benz are some of the automobile giants who have set up separate production bases in India. Komatsu and Hitachi, Japan (for hydraulic excavator and John Deere, USA (for tractors) have also set up units in India (initially through the joint venture route). Indian companies too have manufacturing units in foreign countries although a majority I of them are through joint ventures with local companies or through acquisitions of I local companies. Reliance Industries, ONGC, Tata Motors, and Mahindra & Mahindra 1 are some of the Indian companies that have established a strong presence in overseas! markets through their facilities. Large IT companies like Satyam, WIPRO and Infosys I have major development centers in multiple countries all over the world for software development and services.

$ ActivitvD;
Bharat Forge is expanding into foreign markets by collaborating with existing companies in Germany, USA and other countries. This form of entry into foreign markets would be called__________________. What else would you suggest to them to gain market sharei in exports?

a)

b)

48

2.8 MODERN TRENDS IN INDUSTRIAL MARKETING a. Business to Business Marketing


Business-to-business in marketing (B2B) is the comprehensive term used

f o r b e

t w e e n t w o

legal entries with no physical form of transactions. B2B denotes a part of the activities performed under industrial marketing. The term industrial is more comprehensive and can be used also for the individuals who perform servii or modify products on order. In India, many businesses are family concerns large number of them are private companies not listed on the stock exchani Industrial marketing encompasses this segment also and is thus more comprehe* than B2B marketing.

2.9

Unit 2

Industrial Marketing Environment

b. E-Commerce Industrial marketing can also be performed over the net. E-Commerce is an electronic form of processing transactions. The personal contact between buyer and supplier is low and the confidence generated is also less than usual. This concept can work for routine purchases where the impact of faulty decisions is negligible so far as the bottom line and profits are concerned. The purchase of machinery and other capital products is made only after personal contact and negotiation between the buyer and the seller has taken place. E-Commerce can help bring about contact as a promotional tool. The concept of E-Commerce is only to replace the conventional mode of information exchange and order processing. Physical delivery and installation of machinery are two strategic tools that cannot be performed over the Internet or any other electronic medium. f Activity E; Go to the website of the leading PC company, Dell Computers (www.dell.com). Write down the details that are required by the company for the placement of an order as: a) an individual customer:

a small enterprise:

for business otesamajor lal marketing orm services ncernsanda c exchanges. mpreriensive

IS THE INTERNET AGE Almost every industrial company has been affected or influenced by the Internet. It has brought into being a business revolution opening up all kinds of opportunities and threats. Ithas also forced sweeping changes in business practice including industrial marketing. Forexample, it has altered the ways industrial companies do business in the form of E4 9

Industrial Marketing

Unit 2

Commerce. The role and impact of Internet technologies has become critical in forming new business relationships across the world. > The application of the Internet and its associated technologies in E-Commerce for industrial companies is manifold. Some of these in the industrial marketing area are: Customer ordering (and dealer ordering) capabilities on the websites of companies Online product catalogs containing extensive products information and produci characteristics Online instruction manuals for application of industrial products Real time access to customer data for the industrial manufacturer Online price quotations and sales offerings Online marketing tailored to customer profiles and buying preferences of customers Online announcements of special cells, promotion and for new product information Online sales transactions E-Procurement software packages streamline the industrial product purchasing process by eliminating manual handling of data and substituting electronic communication for paper documents, such as requests for quotations, purchase orders. order acknowledgments and shipping details It can be customised in delivering customer service

Eurof such a in go\ teleco] entry o Signific reason \ supply i Compai them to MNCsd on world This give domestic marketinj Globalise economies in driving < Globalisat telecommi products ar Mahindra & with foreign

The Internet makes it possible for industrial firms to reach beyond their borders to find the best suppliers and further, to collaborate closely with them to achieve efficiency gains and cost savings.

2.10 TREND TOWARDS INCREASED GLOBALISATION Business across borders is increasingly becoming commonplace. The business economies. of many nations are witnessing upturn and downturn cycles. This is forcing most local! companies to look for business outside their national borders. This aspect is also being facilitated by the growth of the Internet and its associated worldwide usage.
Quite a few countries have decided to reduce trade barriers or opened up markets thai were once prohibited to private commercial enterprises. This is evident in many partsfl

This unit revi of industrial f types have be thegovernme tows and regu The five force industrial firm For internation

50

Unit 2

Industrial Marketing Environment

Europe, Latin America and Asia including India. The ongoing economic reforms in India such as tariffreductions, dejegulation of industries and allowing private sector participation in government-owned companies e.g. VSNL now partnering with TATA Group in telecommunications, Reliance group's involvement in oil exploration) are attracting the entry of global companies and multinational companies (MNCs). I Significant differences in labour in developing countries like India and China create a strong I reason for MNCs to locate or shift their manufacturing bases there and use the facilities to I supply market demand across the world. Both Hyundai Motors Company and Ford Motor JCompany are making automobiles in their plants in Chennai (in South India) and marketing em to countries in Europe and Asia. tfCs drive considerable cost advantages through economies of scale by concentrating i world-scale volumes as opposed to national-scale volumes. his gives them substantial advantages over local competitors who concentrate only on Omestic markets. In certain industries, MNCs have the ability to transfer their production, larketing and management know-how from country to country at a very low cost. ilobalised operations are therefore considered essential now for companies to gain #nomies of scale and market their products in many countries to get maximum advantage CT driving down costs. Debasing * lectron ^alisation can be seen making deep inroads into industries such as motor vehicles, jse oroe 'icornmunjcatjons (Mobile and long-distance services), Internet services, petroleum ducts and energy. Indian firms are also in the forefront with leading companies like lindra & Mahindra, Bharat Forge, Bajaj Auto setting up units or having joint ventures i foreign companies in markets outside India. :y *""

SUMMARY

unit reviews the role of en vironments and their impact on operations and performance lustrial firms and large business houses having domestic sales and exports. The major 'have been discussed under macro-environment and micro environment. Li addition, ,s gcono^vernment performs various activities that influence industrial marketing like framing ig most iQnd regulations. is also be re forces model and the SWOT analysis are just two techniques that are used by ial firms to give direction to their growth strategies. many pacrnational marketing of industrial products, conventional marketing strategies lik

Industrial Marketing

market segmentation, target marketing and marketing mix strategies may have to be adapted after consideration of the country's individual characteristics. Two significant trends that have direct and indirect implications on the firms marketing industrial products are globalisation and the Internet. Both these trends will influence industrial product companies in India and their performance in international markets in tremendous ways in the future.

2.12 KEYWORDS
Entering goods: These are primarily goods that are used for manufacturing the finished products. They can be raw materials and also manufactured items and parts that go into the assembly of the finished products. Foundation goods: these are the various goods that are necessary during installation and operation of the unit or the plant. They may consist of items that are generally classified as capital items that can be used as installation or accessory equipment. Facilitating goods: This refers to supplies and services that support the organisational and manufacturing operations. Original equipment manufacturer (OEM): This term is given to a manufacturertl purchases industrial goods to incorporate them into other products sold in the industrial)! consumer markets. For example, Maruti Suzuki is an OEM for some steering thats steering gear used in automobiles made by Maruti. Reseller market (replacement market): A term used to describe small companies t function as dealers or distributors and do not add any value to the product as recognisi customers. As against this, channel partner is a term that is used to describe a deala distributor that adds value before or after the product is sold to the customer.

I f
St r
3.1 3.2 3.3 3.4

3.5 3.6 3.7


by

2.13 SELF-ASSESSMENT QUESTIONS


Q1. How are Industrial companies in India entering foreign 3.8 i 3.9 Q2. Analyse the impact of technology in the telephone communications business in mr 3 JQ i What are the effects of mobile telephony on existing landline communications? *

Q3. What role do governments play in changing the economic and political environmeit 3.12 g for industrial companies? . ^ i J-13 Si Q4. Discuss the impact of globalisation on industrial companies in India.
52

3 . 1 4 Ki 3-J5 Se

idapted ids that icts are npanie s future.

INDUSTRIAL BUYER BEHAVIOUR


O b je ctiv e s A f t e r c o m p l e ti n g t h i s u n it , y o u w i l l b e a b l e t o :

finished t go into ition and ssified as lisational ;turerthat dustrialor i that sells panies that ecognised )e a dealer/

*" "

e x a m in e th e s c o p e o f o rg a n is a tio n a l b u y in g a c tiv itie s . a ss e s s th e in flu e n c e s a n d th e ty p ic a l b u y e r c h a ra c te ristic s .

< * " a n a ly s e th e p h a s e s in th e b u y in g p ro c e s s a n d th e ty p e s o f b u y in g situ a tio n s. "" d efin e th e ro le an d im p o rtan ce o f th e D M U (d e cision m ak in g u n it). " " e x p la in h o w ra tin g s a re a s sig n e d to s u p p lie rs . S tru c tu re 1 4 1 .In tro d u c tio n 1 4 2 .T h e B u y i n g P r o c e s s 1 4 3 .P u r c h a s e O b j e c t i v e s a n d G o a l s 1 4 4 .T y p e s o f I n d u s t r i a l O r g a n i s a t i o n s a n d I n d u s t r i a l B u y i n g C h a ra c te ris tic s 1 4 5 .P h a s e s i n t h e B u y i n g P r o c e s s 1 4 6 .B u y in g S itu a tio n s 1 4 7 .S w itc h in g C o s ts 1 4 8 .D e c i s i o n M a k i n g U n i t D M U o r B u y i n g C e n t e r 1 4 9 .G o v e r n m e n t P u r c h a s e s

less in India, cations? nvironments

1 5 0 .In stitu tio n a l B u y e rs 1 5 1 .T y p i c a l S u p p l i e r C h a r a c t e r i s t i c s i n M u l t i - S o u r c i n g 1 5 2 .E - P ro c u re m e n t 15 3.S um m ary 1 5 4 .K e y w o r d s 1 5 5 .S e l f - a s s e s s m e n t Q u e s ti o n s

Industrial Marketing

Una .<

3.1 INTRODUCTION

and con supplier technica Nationaj structure: structure. Other firn at these p divisions, .j The buyer are advant One-of the most important tasks of the industrial firm is to understand what goes on behind the scenes when other firms make their purchases. Success in industrial marketing is linked to a thorough investigation and analysis of the industrial purchasing system. I It is necessary to understand the purchase process in all types of industrial undertakings whether they be commercial enterprises, public/government organisations, institutions or companies in the co-operative sector. Each firm has its own set of goals and purchase objectives. Typical industrial buying characteristics help us to differentiate between the industrial product customer and the consumer product customer. There are several aspects to buying and influencers that determine buyer behavior. jt There are distinct phases in the buying process, and the steps that need to be crossed clearly point towards a long period of interaction between the buyer and the supplier before the order is 'in the bag'. Different criteria also apply to different types of buying situations. One also needs to obtain some clarity about the ways industrial firms rate suppliers so that the priorities of the purchasing firm can be defined. This helps the industrial marketer in developing appropriate responses to the buying firm.

3.2 THE BUYING PROCESS_______________________________ _ _


The buying or purchase process can vary widely among different types of industrial fin and in different markets. It will usually involve more than one person. It can take day months or years depending on the size, value, scope, of the products/services that art needed. To be successful, the supplier and its sales force needs to devote adequate tin and resources to understand the process involved. Organisations choose new suppliers for a variety of reasons. Some of these are: they may be starting a new business;

List twopossil 1.

they are not satisfied with the present supplier; they are constantly looking for innovative and/or competitively-priced products; the present supplier is unable to meet stringent quantity and delivery requirement

Buyers take both formal and informal approaches when looking for new suppliers. Purcb Managers will usually shortlist three or four known suppliers and ask them for compei bids against Themaindiffe agreed technical specifications or needs. This can be measured against weigh values such as practices are: benefit solutions, quality, price, service levels, delivery times, etc. For raj

Unit 3

Industrial Buyer Behaviour

and complex items (such as a sugar plant or cement machinery) the responsibility for supplier selection may be handed over to experts - either internal or external (for example, technical consultants). " National, international and global organisations and centralized/decentralised buying structures might determine the speed and complexity of the buying process. In a centralised structure, the firm might insist on all purchases from the head office. Other firms might negotiate the prices and buying terms centrally and allow localized ordering at these prices. Some firms may allow total autonomy on prices and products across divisions, SBUs (strategic business units) and subsidiary companies. The buyer will have the opportunity to source from single or multi-source suppliers. There are advantages and disadvantages in both approaches. Advantages of single sourcing include: i) close, cooperative relationships can be formed; i) the supplier will offer the buyer the best attention and services; i) it is useful where supplies are prone to scarcity or volatility. Advantages of multi-sourcing include: i) the firm can fall back on alternative suppliers, should one supplier run into problems (such as a strike); ii) it introduces competition into the process so that all suppliers work harder; iii) the firm has more opportunities to spot new product developments if using many suppliers. ^Activity A; List two possible disadvantages of multi-sourcing by industrial firms:

| The main differences between consumer product purchasing and organisational buying 1 practices are:

Industrial Marketing

i)

Organisational buying involves more buyers - more decision makers or contributors to portions of the decisions Participants in the Buying center are driven by specific needs of their

I)

professional responsibilities

Different types of decisions often occurr simultaneously in the process and often spread throughout the organisation.

3.3 PURCHASE OBJECTIVES AND GOALS


One of the foremost tasks of the industrial marketer is to understand not only the nature of Industrial purchases 6u( a/so the industrial buyer behavior. The purchase departments of industrial companies develop buying objectives and perform certain activities so as to maintain an adequate flow of goods and services into the operations. The objectives of the purchasing functions are as follows: Delivery/ availability: One of the prime considerations for selecting a firm (Vendor) is availability when desired, and delivery when required. It is therefore essential that the supplier's reliability on the delivery aspect is well established and that the supplier enjoys a favorable reputation and image. In many instances, delivery becomes a major point for negotiating large value orders. Product Quality: In most cases, the discerning buyer prepares a set of his own specifications or standards in setting a benchmark for product quality. Certain items need to conform to Indian or International standard specifications. Consistency in product quality is necessary from many viewpoints such as reducing cost of inspection, and interruptions in the production process due to rejections, causing delays in obtaining replacements. Lowest price: The industrial buyer usually selects the supplier whose prices are the lowest considering the availability and quality of product or equipment. Hence, for I complex items of machinery, plant or equipment, the purchasing firm carries out: detailed analysis to work out the landed cost. It is possible that a supplier who ha* the lowest basic ex-factory price is not the lowest when compared on the basis of

Unit 3

Industrial Buyer Behaviour

landed cost at the buyer's promises. For example, transportation costs for an item imported from Europe or Latin America could make a significant difference in the final comparison of landed costs. i In cases involving very high value capital equipment, another factor taken into consideration by the buyer firm is cash outflow particularly for items like built-toorder cement machinery or dairy equipment. Services: Industrial buyers need many types of services accompanying the purchase of goods. The scope of these services extends from the pre sales stage (e.g. preparation of technical specifications for new items); to the order execution stage (e.g. supply including installation services) and the post-sales stage (e.g. Spare-parts, repair and I maintenance training of buyer's personnel). Supplier relationship: is therefore required as a prerequisite for "preferred supplier" status. In addition to the purchasing objectives described above, there could be personal objectives of the members of buying centers of industrial buyers that may hinder or accelerate the purchase process.

Ahigh level of relationship raises the status of the "supplier" to a "partner". At this level CRM (Customer Relationship Management) processes need to be adapted by the vendor or supplier to ensure customer satisfaction and growth of business.

g > A c tiv ity B ;


a) T h e m a in t a s k o f t h e i n d u s t r ia l p r o d u c t m a r k e t e r i s t o b u il d a s a t i s f a c t o r y r e la ti o n s h i p w ith th e b u y e r firm so th a t it c a n b e c o m e a : D A cce p ta b le su p p lie r D A p re fe rre d su p p lie r D A lo cal su p p lier b) T h e r e a r e t h r e e s t a g e s w h e n a s u p p l i e r g e t s a c h a n c e t o r e n d e r v a r i o u s t y p e s o f , s e rv ic e s to a b u y e r. T h e se a re :

2.

3.

Purchase Goals To address the needs of industrial buyers, it is necessary to understand the goals that purchasing managers seek and how the purchase function contributes to the objectives of the organisation. Goals of Purchase Function Ensure uninterrupted flow of materials and services to provide undisturbed materials, supplies and services required for smooth operation Manage Inventory to minimise the investment in inventory. Improve quality to maintain and improve quality by carefully evaluating and choosing products and services. Develop and manage supplier relationships to find competent suppliers and strengthen productive relationships. Achieve lowest total cost to purchase required products and services at lowest total or landed cost. "Reduce administrative costs to accomplish purchasing objectives at the lowest possible administrative costs. Advance firm's competitive position to improve the firm's competitive position by reducing supply chain costs or capitalising on suppliers' capabilities.

The purchasing decision maker must balance a number of different objectives that often clash. For example, the component parts selected on the basis of the lowest price may not be acceptable if quality standards are not met or if the promised delivery is, for example, two weeks later than the desired date. In addition to controlling costs to the firm, improving quality, and keeping inventory costs to the minimum, purchasing assumes a central role in managing relationship with suppliers. This is where purchasing assumes a central role in supply chain management (SCM).

60

SCM is a technique for linking a manufacturer's operations with those of all its strategic suppliers and its important intermediaries and customers. The approach seeks to integrate

Unit 3

Industrial Buyer Behaviour

the relationships and operations of both immediate, first-level suppliers and those several tiers back in the supply chain, in order to assist second, third, fourth-tier suppliers in meeting requirements like quality, delivery and timely exchange of information. By managing supply chain costs and linking supplier capabilities to new product development, the purchasing function is advancing corporate performance in many industrial organisations. Honda Motor Co. Japan is among many hundreds of industrial organisations that have demonstrated the critical role that purchasing can assume in creating profit opportunities in their industries. Long recognized for purchasing excellence and its ability to sustain customer loyalty, Honda was able to reduce by 20% the costs of external purchases for their 'Accord' model. Understanding total cost To realise substantial savings and growth opportunities, the purchasing function needs to develop a strong understanding of the total cost and value of goods or service to the firm. Some of the other considerations which purchase managers need to take cognizance of (apart from the purchase price) are: i The factors that drive the cost by the product or service in the supply chain, such as transportation The cost of acquiring and managing product or services Quality, reliability and other features of a product or service over its complete life cycle The value of a product or service to a firm and its customers

For example, purchasing a high quality product and paying a premium price could be justified because the initial purchase cost may be offset by fewer manufacturing defects, lower inventory requirements and lower administrative costs. The total cost of ownership means understanding a range of cost-value relationships associated with individual purchases. 3.4 TYPES OF INDUSTRIAL ORGANISATIONS AND INDUSTRIAL BUYING CHARACTERISTICAS______________________ The main types of industrial organisations that carry out buying processes in a regular, systematic and routine manner making the purchase function critical to efficient operations can be classified as follows (Fig. 3.1):

Industrial Marketing

Example
1.

Commercial Enterprises

a) Industrial Distributors / Dealers

Industrial Wholesaler or Distributor of Pumpsets, small generators, electrical test instruments

Supplier's Items

b) OEMs (Original Equipment Manufacturers) Manufacturer buys Ite Item m 2

Leading Mfg. companies like Ashok Leyland, Thermax, Voltas, Videocon, Crompton Greaves Manufacturer sells finished/assembled product

Supplier's Items

c) Industrial Customers Manufacturer / Customer buys for own consumption Item 1 Ite m Item 3 Ind. Customers buy for own use e.g. Ranbaxy buys, LAN Networking system for use within their own units Indian Railways buys traction motors from Siemens India or Cromption Greaves

2. Government Customers &OEMs

156.Public Sector Companies 157.State Government Undertaking Partially owned Fully owned 158.Government - Owned 159.Privately - Owned

3. Institutional Customers

Colleges of Engineering purchase Industrial Machinery/ Test Instruments for their Laboratories/Workshops/ Research Departments Co-operatives sugar plant purchases hand tools/portable test equipment for

4. Co-operative Sector Customers

maintenance of in-house

machinery

62

Fig. 3.1: Types of Industrial Organisations

Some of the major characteristics that distinguish industrial buyers from others are described
Industrial Buyer Behaviour

below: Industrial Buyer Fewer buyers The industrial marketer deals with fewer buyers than the consumer product marketer. Indian tyre manufacturers like MRF, Ceat, Apollo, etc were earlier dependent on original equipment manufacturers (OEMs). During 1998, market research revealed that the replacement tyre market was 51 % while the OEM market had slipped to 49%. The tyre manufacturers therefore decided to open retail outlets to serve end-users. Hence, the market that was once controlled by a few auto manufacturers shifted into the hands of millions of end-users. Larger Buyers Many markets are characterised by a high buyer concentration ratio- a few large buyers do most of the purchases. In the Indian car industry, Maruti Udyog Ltd (MUL) is the single largest buyer of passenger car tyres (almost 70% of the total). Similarly, Tata Motors accounts for 80% of the total tyres for Heavy commercial vehicles. If an industrial supplier identifies three such heavy weight buyers and ensures continuity of supply through price and quality, it ensures a base offtake for its manufacturing unit. Business Relationship The power of buyers is dominant in industrial markets due to the facts mentioned above. Suppliers are frequently expected to customise their offerings to individual buyers' requirements. Orders are finalised with those suppliers who cooperate with the buyer on technical specifications and delivery schedule requirements. Forexample, during 1995, the Government of India sanctioned licenses to 12 new car manufacturers to face competition. MUL asked their battery supplier EXIDE to enhance the guarantee from one to three years without any increase in price. EXIDE could not agree to this clause in time. MUL therefore finalised the deal with Standard Batteries who offered a 2-year guarantee. Geographic concentration of buyers Hie heavy industrial buyers are normally concentrated in a particular area or region. For example, most of the automobile producers are from Pune like Bajaj Auto, Kinetic i Engineering, Tata Motors, Mercedes Benz India. Similarly, refinery producers are concentrated in and around Mumbai, examples are: BPCL, HPCL, IOCL, ONGC.

I Hi

Industrial Marketing

Likewise concentration of software business is around Bangalore, Hyderabad, Chennai, Pune, Gurgaon. A very large number of educational institutions are concentrated in and ground Pune. Professional purchasing Industrial goods are bought by trained purchase officers who have to display professionalism in buying goods according to the purchase goals of the organisation. Their professionalism and greater ability to evaluate various suppliers leads to more cost-effective buying. This means marketers from supplier firms have to provide a suitably tailored package of products and services and need greater justification of their prices since the buyer will only listen to rational propositions. Several buying influences The decision making unit for industrial purchases consists of many persons with wide experience and expertise. Buying committees comprise technical and commercial experts at senior and middle management levels. Hence, the communication mix needs to be designed carefully in such a way that all influencers get satisfied with the supplier's offer in all aspects. Other characteristics i) Direct purchasing: Industrial buyers prefer to buy directly from the producers. ii) Reciprocity: The buyer may give preference to such suppliers who also buy from them. 1) Leasing: Leasing or hire-purchase option can play a dominant role in purchase of expensive items of machinery or equipment. Buying Behaviour Influencers Type of Influencer

1. Environmental

: Level of demand, economic/business outlook, cost of funds; rate of technological change; political/ regulatory Developments; competitive scenario. : Authority, Mission/vision, goals, procedures. Organisational structures, internal systems. : Individual authority, status, empathy, persuasiveness

2. 3.

Organisational Interpersonal

b)

4. Individual

: Age, income, education, job position, personality. Risk attitudes, culture.

64

Unit3

Industrial Buyer Behaviour

For new product development or products required for pilot production or field trials, a cross-functional team involving personnel from purchase, R&D and production may form the core team to finalisejhe core technical requirements.

Stage 3 : Development of specifications of needed product


After stage 2, the buying organisation develops a precise statement of the characteristics of the product and/or service needed. During this stage, the purchase department takes the help of their technical personnel or, if required, other sources such as suppliers or consultants. Industrial marketers have a good opportunity here to help the buyer firm to develop product specifications and characteristics suited to its needs. This is therefore a crucial stage where the involvement of the seller firm can crystallize into a fruitful partnership. In many cases involving requirements of large buyer firms, technical consultants usually perform the task of preparing specifications for products, equipment or systems. The industrial marketer must then take the necessary initiative in assisting the consultant in framing the specifications. This form of presales service generally pays rich dividends in forming special bonds with the buyer organisation.

Stage 4 : Search for qualifications of potential suppliers


In this stage, the buying organisation looks around for acceptable suppliers (or vendors). The first step taken by the buyer is to obtain information on all the available suppliers and then choose the most acceptable or qualifying suppliers. The search for potential suppliers is based on the various sources of information which may be primary or secondary such as trade/industry journals, sales calls, manufacturer's catalogues, trade-shows, industrial directories, website information or just plain word-of-mouth. The qualifications of acceptable suppliers will depend on the type of buying organisation (Govt. organisations, private commercial firms or institutions), the buying situation (see following section) and the decision-making members (described later in this chapter). Generally, the factors such as quality of product or service, reliability in delivery and post-sales services are considered inpre-qualifying the suppliers and assessing their suitability.

Stage 5 : Obtaining and analysing supplier proposals


Once the qualified suppliers are decided, the buying organisation obtains the proposals by sending enquires to the qualified suppliers. A supplier's proposal can be in the form of a formal offer, quotation or a formal bid, submitted by the supplier to the buying organisation. It will include the product specification, price delivery period, payment terms, taxes and duties applicable, transportation (freight) cost, cost of transit insurance, and any other relevant cost or free service provided.

Unit 3

Industrial Buyer Behaviour

3. Engineering sample delivery performance 4. Response to fluctuating demands 5. Overall delivery rating III. PRICE (25%) 1. Price competitiveness 2. Absorption of economic price increases 3 . Submission of cost savings plans 4. Payment terms flexibility 5. Overall price rating IV. TECHNOLOGY (10%) 1. State of art component /materials technology 2. Sharing R&D capability 3. Responsiveness to engineering problems 4. Adoptability to new technology processes 5. Overall technology rating

Buver: Comments:

Fig. 3.2 : Supplier Rating Chart


An example of how a multinational company (MNC) 'grades' suppliers of electronic components is given in Fig.3.2 based on the weighted point plan. In this plan, the buyer gives weightage to each performance factor according to its relative performance. Quality might be given a weightage of 40%, delivery 25%, price 25% and technology 10%. This system gives the industrial marketer an indication of the nature and importance of the evaluative criteria used by a particular organisation. These criteria can help adjust the industrial marketer's total offering to fit the organisation's needs more precisely. If a buyer firm faces a make-or-buy decision, the supplier's proposals are compared with the cost of producing the needed item within the buying organisation. If it is decided to make the item within the buying organisation, the buying process gets terminated at this 69 stage.

Industrial Marketing

Stage 7 : Selection of an order routine


In this stage, the exact plan of exchange of goods between a buyer and a seller is worked out. The activities include: Placement of orders (purchase orders) Quantity to be purchased Frequency of order placement by buyers (for routine items) Levels of inventory needed Follow up of actual delivery to ensure compliance to delivery schedule Payment terms to be adhered to by the buyer Terms of performance guarantee and warranty conditions Post sales services required.

The user department would be satisfied only when the supplier delivers the required item as per delivery schedule and acceptable quality.

Stage 8 : Performance feedback and post purchase evaluation


In this stage, the buyer firm regarding the overall performance of the supplier undertakes a review. In case of default by the supplier on some count, the buyer firm may decide to forgo the same or arrange to cancel the order or in extreme cases, 'blacklist' the supplier (i.e. remove the supplier from the approved list). Hence, customer satisfaction is of paramount importance and the supplier needs to monitor and act on the negative feedback which may arise from the buyer firm. In many cases, the level of post-sales services provided by the supplier can become a crucial point in selection of the supplier, eg. a diesel generator set supplier who has committed to include a certain scope of services in the total contract like installation, testing and commissioning.

Activity D ;

a)

Receiving and analysing supplier proposals form a stage that precedes a search for and qualifying potential suppliers in the buying process. This statement is: D False

D True 70

Unit 3 Industrial Buyer Behaviour

b ) T h e a d d itio n a l fa c to r s , m a p a rt fr o m t h e b a s i c c o s t, th ao r t c o n t ri b u te to th e la n d e d c o s t e f o a p ro d u c t a r e : p e o pl e ar e 3 . 6 B U Y I N G S I T U A T I_________________________________________ O N in S v T h e re a re th re e c o m m o n ty p eo l s v o f b u y in g s it u a ti o n s . e d 1 6 0 .N e w p u r c h a s e ( N e w t a s k ) in d 1 6 1 .C h a n g e in s u p p lie r ec ( m o d i fi e d r e -b u y ) is io 1 6 2 .R e p e a t p u r c h a s e ( s t ra i g h n t m re -b u y) a ki a) N e w P u r c h a s e n In t h is s itu a tio n th .e g c o m p a n y is b u y in g th e ite m fo r th e firs t t im e . T h e nb) e d e m a y a r is e n a c c o u n t o f o C in t e r n a l o r e x te r n a l fa c to rs . h W h e n a f ir m , fo r e x a m p l e , a d iv e r s i fie s inntow p ro d u c t e n o r s e r v ic e s , it c a lls fo r g th e p u r c h a s e o f a v a rie t y o f e e w n ite m s . In th e n p u r c h a s e i n ew s it u a t io n s , th e b u y e r s mua y s h a v e l i m ite d c a p a b ili t yp o r la c k o f e x p e r ie n c e n eIn p l . w t a s k d e c i s i o n s , t h e r ii e k s s a re m o re , d e c is io n m a y r t a k e a l o n g e r ti m e , a n d

A m o d ifie d r e -b u y s itu a tio n o c c u rs w hen th e o rg a n is a tio n is n o t s a tis fie d w ith e x is tinsg p p l ie r s , o r u th e n e e d a r i s e s f o r c o s t r e d u c t io n or q u a li t y i m p r o v e m e n t . If t e c h n i c a l d e p a rtm e n ts li k e R&D re q u ir e c h a n g e s in th e c h a r a c te ri s tic s o r fe a tu r e s o f a n e x is tin g e m o r t h e it m a r k e t in g d e p a rt m e n t a s k s f o r a d d i ti o n a l f e a tu re s in th e p ro d u ct to gain a d v a n t a g e in t h e m a rk e t, a c h a n g e in th e s u p p lie r m a y becom e n ecessary. In fo r m a tio n s e a r c h on a lte rn a te s u p p lie rs b e co m e s e s se n tial o n th e p art o f th e b u ye r. T h is typ e o f situ a tio n o c cu rs m o stly w hen b u yin g firm s are d iss a tis fied w ith th e p e r fo r m a n c e o f th e e x is tin g s u p p lie rs .

7 1

Industrial Marketing

c)

Repeat Purchase

This situation occurs when the buying organisation requires certain products or services *\ on a continuous basis and when such items have been regularly purchased before. In such a case, the buyer firm reorders or places repeat orders with the suppliers who are currently supplying them such items. This implies that the product price, delivery and the payment terms will remain the same as per the original purchase order. This is a routine decision with low risk and less information needs - a decision that can be taken by a junior executive in the purchase department. Generally, buyer firms do not change the existing supplier if their performance on previously established criteria is satisfactory.

Product Types
The vast array of industrial purchase to be made by the buyer firm can also be grouped depending on the importance to the internal operations. Products of strategic importance: in terms of buyer's activities. They have a high level of both impact and importance. The supply market is complex. Product of critical importance in terms of the customer's activity. They too have a high level of impact and importance, but the supply market is typically not as complex. Bottleneck type products that typically have low impact and importance to the customer's actively, but the supply market is complex. This kind of situation exists with items like purchase of power from electricity distribution companies, raw materials (eg. Sheet steel for automobile manufacture). Non-critical parts have Low impact on customer activity and the supply market is not complex. The decisive criterion is usually the price.

JSX Activity E;

72

a) The three main types of buying situations are: 1. _____________________________________________________________

2.___________________________________
3 .

In a lo b) G ive two examples of bottleneck type products for purchase by an n industrial g organisation: " te r 1. m _______________________________________________________ s u 2. ___________; p _____________: pl ie c) The six major roles played by the DMU members of the industrial purchase team rare: b 1.________________ 2. ________________ u y 3. ________________ 4. ________________ er 5. _______________ 6. . re la ti 3.7 SW ITCH ING CO STS _________________________________ o These are costs incurred by an industrial buyer who wishes to change suppliers. n Companies generally evaluate these costs before they switch suppliers. The mores involved and complex product or item, the greater will be the uncertainty hi the associated with change. The typesswitching costs that can be incurred can include p, of the following: p r 1. Financial C osts o d The most prominent among the types is financial costs when changing a supplier. These will be the costs associated with investigating and evaluatingu alternative suppliers. These costs will of course be offset by better deals or prices ct b offered by a new supplier. e 2. R esou rce C osts n ef Sometimes there are buyer-seller resource commitments, eg,, training, IT facilities,transport and inventory equipment sharing, packaging, spares and soit s on. w Example: Consider a situation in which a power utility company (TATA ill Power) hasto augment its power generation equipment. In case it has already h installed Siemensmanufactured gas turbine generators previously, the utility a company will incur additional should it decide to buy from a new supplier v costs like GE-Alstom or Westinghouse. switching costs may or may not offset e The the revised equipment costs from original supplier. the b e 3. Product Costs e
Unit 3 Industrial Buyer Behaviour

to

n well tried and tested over the years. Products from a new supplier will have to be tried out and

73

U nit 3

Industrial B uyer B ehaviour

Buyers: This is the person who actually buys on behalf of the organisation. This member is generally an officiaHrom the purchase/materials departments. The major roles/functions are obtaining offers from suppliers, supplier evaluation and selection, negotiation, preparing purchase orders, expediting deliveries and implementing the purchase policies of the buyer firm. Users: Those who actually use the vendor's product. The influence of the users in purchasing decisions may vary from minor to major. They may define the technical specifications and attributes of the needed product. They may be Laboratory Technicians, software programmers, Maintenance Engineers. Influencers: Those individuals who may not be actual users but influence the buying decision. Such a person can be a senior official of the buyer firm or can be external to the firms (Engineering or design consultants, another customer of the same supplier). These officials exercise substantial influence on purchase decisions. Deciders: These are persons who actually make the buying decision. They have the power to commit the firm to the supplier. Identifying this 'decision-maker' is a major task for the supplier which is made even more difficult by the complexity of the organisations and the decisions to be made. Adding even more complexity is the fact that the decision makers are not necessarily the same individual in each phase of the decision making cycle. Generally, for routine purchases, the buyer may be decider. According to the situation the final decision by the DMU will be conditioned by: nature of relationship between all concerned individuals, personal objectives, personal backgrounds, buying experience, the extent of formalisation of the purchase strategy and procedures, and relationships with the supplier.

w i t h i n t h e b u y e r f i r m s . S o m e t i m e s t h e g a t e k e e

Gatekeepers: They are the persons who control the flow of information

pers can control the sales person's meetings with the buying center members. They can also become allies of suppliers who may require vital clues or information in the case of negotiated contracts. The main differences between B2B (Business-to-business) and B2C (Business-to-consumer) Markets are:

-m

Industrial Marketing

B2B Markets 163. Buyer group is homogenous 164. Few buyers/ high average value of orders 165. Buying decisions can take weeks, months, years 166. Buying decision can affect existence of suppliers 167. Buyers are limited and concentrated in specific regions/areas 168.Buyer personnel are more professional 169. Buying decisions are made on rational criteria 170. DMU consists of groups including directors, senior managers, knowledge workers, marketing and accounting professionals

B2C Markets Buyer decision is made by individuals, families, friends, etc, - hence heterogenous Large number of buyers/relatively low value of orders Buying decision usually taken in few days, or weeks No such affect likely on suppliers Buyers are not easily identifiable and widespread All buyers/suppliers may not be professional; they may have limited aims Buying decisions can be made on irrational or emotional criteria DMU likely to comprise individuals, friends with limited involvement of professionals

76

J&Z Activity F:

The six purchase team are: major 1.__________________________________________________________________ roles played by the DMU membe 6. rs of the industr ial 3.9 GOVERNMENT PURCHASES Central and state governments and government undertakings in the public sector usually generate the target volume of purchases of any customer category in India and elsewhere. 2.___________________________________________________

U nit 3

Industrial B uyer B ehaviour

They purchase virtually every category of goods and services whether it is office supplies, PCs, Furniture, Healthcare or military equipment. i i Another level of complexity added to the government purchase system is the wide-ranging influencer on this process. The 'Influencers' can be vast and the range of outside influences extends far beyond the originating agency. Most Government procurement at any level is based on laws that establish contractual guidelines. The Government has certain general contract provisions, which include stipulations about product inspection, payment methods, and action as a result of default and disputes among many others. An industrial product marketer needs to have a different strategy focus than does a firm that concentrates on the commercial sector. The seller to the Government needs to emphasize:

I)

Understanding of the complex rules and standards that must be met. Developing a systems to keep informed of each agency's procurement plans.

iii) Generating a strategy for product development and R & D that facilitates the firm's response to Government product needs that are quite different from those of commercial enterprises and institutional buyers. iv) Developing a communications strategy that focuses on how technology meets agency objectives. v) Generating a negotiation strategy to secure favorable terms regarding payment, contract completion and cost over-runs due to change in products specifications. Negotiating technique is one of the key factors which can unable the industrial marketer to clinch to deal with a Government undertaking. For the control Government in India, Director General of Supplies and Disposal (DOS & D) is the authority to purchase industrial goods, whereas the individual State Governments have their own purchase organisations under the respective ministries.

JS $ A c tivity G :
a) The influences in the purchase decision are more difficult to identify in the case of: D Private sector industrial firms D Government-owned industrial firms
77

b)

The DMU member most likely to know the technicalities of industrial products is the: * D the purchase official D theinfluencer D the initiator ,

3.10 INSTITUTIONAL BUYERS


"\\J jf"g

This class of buyers is ch; itvJnstitutianal_buyers are somewhere betw/eerrcornrnercial enterprises and t buyers in terms QtEfr characteristics, Government buyers in terms oft orientations andpurchasing processes. The policies about co-operative buying, preference to local vendors, and the delegations of purchasing responsibility for a variety of items are of particular importance. It is these characteristics that the industrial marketer needs to understand to fully develop effective strategies for the institutional customers. 3.11 TYPICAL SUPPLIER CHARACTERISTICS IN MULTI-SOURCING Example of market share allocation by buyer

78

Supplier 2

Intermediate prices Irregular delivery schedules Excellent technical assistance, possibility of common design work Assistance to manufacturing More expensive (plus 5 %) Quick delivery times, easily handles extra orders Sufficient technical competence to adopt to modifications required by customer

30

Supplier 1

Suppliers

20

Unit 3

Industrial Buyer Behaviour

The Buyer has recognised three different levels of status and allocated share of total purchases accordingly: f Supplier 1 is used because of their competitiveness and logistic reasons. Supplier 2 is used because of innovative capacity and technical adoptability Supplier 3 is used for flexibility and adaptability.

3.12 E -P R O C U R E M E __________________________________________ NT
Similar to the way consumers shop at amazon.com, purchasing managers for industrial products use the Internet to find new suppliers, communicate with existing suppliers, or place an order. In addition to the vast information content, purchasing over the Internet is also cost-effective. IBM is just one of the companies that has shifted all its purchasing operations to the Web and has created its own 'private exchange' that links together its suppliers. This private exchange allows the company to automate their purchases and collaborate in real time with a specially invited group of suppliers. The company has reportedly saved nearly US$ 400mn. per year by handling nearly all its invoices electronically by using its more efficient Web purchasing option. Purchase managers are also using the Internet to conduct online reverse auctions. In a conventional auction situation there is one seller and many buyers. In the reverse auction situation, there is one buyer who invites bids from several pre-qualified suppliers. For example, Freemarkets Inc.(through their website: www.freemarkets.com) offers an independently run auction site that enables buyers of industrial parts, raw materials, and services to find and screen suppliers and to negotiate with these suppliers through a dynamic, real-time competitive bidding process.

3.13 S U M M A R Y ______________________________

.___________

This unit has discussed the various dimensions of industrial buyer behaviour as well as the steps in the purchasing process. Clearly, industrial buyers have different considerations and criteria as compared to consumer product buyers. The goals of the purchase function, buying-behavior influencers and the different phases in the buying process have been projected in some detail. Most importantly, the role of the DMU and the different types of buying situations have been emphasised since they are the most dominating factors in understanding and analysing buying behavior.

Industrial Marketing

4.1 INTRODUCTION
Industrial markets, like their counterparts for consumer goods, are continuously evolving and changing, triggered primarily by the political, economic, social/legal and technological factors. The last-mentioned factor (technological developments) is the most dominant one that affects the industrial scenario. In such a situation, it becomes necessary for industrial firms to monitor and collect information on customers, competitors and the environment on a continual basis. Informed decisions can be taken only when updated information is available. This unit focuses on the purpose and nature of marketing research. It also highlights in which sub-areas of marketing the marketing research plays an important role. An overview of what constitutes the marketing research process is given along with the type of information that every industrial firm seeks to understand the competition. Examples of problem-solving research as applicable to industrial products have been provided. i The so-called traditional scope of marketing research has now been expanded with other components such as the Marketing Information System (MkJS) and Decision Suppori System (DSS). These three components comprise the Marketing Intelligence System (MS) where the marketing research process finds its maximum utility.

4.2 DEFINITION AND NATURE OF MARKETING RESEARCH__________


Marketing Research is defined as a systematic process of obtaining, analysing and reporting data (or information) for decision making in marketing. Marketing intelligence systems are an on-going method of providing updated information on markets, competitors and the business environment. When industrial market environments keep changing with new developments, it becomes necessary for industrial firms to continuously collect information on customers, competitors and the environment to support the decision-making system. The purposes of marketing research and marketing intelligence are: i) To collect data for specific objectives- Such as forecasting sales or market potential, competitive analysis, or for developing new product;.

84

ii) To collect data on market brands- Customer preferences, customer usage patterns, etc. iii) To provide data on competitor's products and marketing strategies.

Unit 4

Industrial Marketing Research

iy) To give directions in the search for new customers. All the above elements are'hecessary for preparing industrial organisations to respond to both the expected and the unexpected challenges and issues created by market forces.

Why Market Research?


There are numerous reasons why marketers seek to conduct research but, in general, these fall into three categories : Describe what is happening (Descriptive Research) ^-

The focus of descriptive research is to provide an accurate description andjter explanation for something that has occurred. For example, what group is biiyml^parficular brand for industrial spares, what is a product's market share in a specific geographic region, how many competitors does a company face, etc. This type of research is by far the most popular form of market research. But to be considered useful it must be conducted correctly, which means the marketers must adhere to a strict set of research requirements to capture relevant results. Examine Something that is Mostly Unknown (Exploratory Research) The Exploratory approach attempts to discover general information about some topic that is not well understood by the marketer. For instance, a marketer knows about a new Internet technology for marketing a product but the marketer doesn't know much about the technology. When gaining insight on an issue is the primary goal, exploratory research is used. The basic difference between exploratory and descriptive research is in the 'research design'. Exploratory research follows a format that is less structured and more flexible than descriptive research. This approach works well when the marketer doesn't have an understanding of the topic or the topic is new, and it is hard to pinpoint the research direction. The downside, however, is the results may not be as useful in aiding a marketing decision. So why use it? In addition to offering the marketer basic information on a topic, exploratory research may also provide direction for a more formal research effort. For instance, exploratory research may indicate who the key decision makers are in a particular market thus enabling a more structured descriptive study to be targeted to thisgroup. See How Something Affects Something Else (Causal Research) In this form of research the marketer tries to determine if one variable affects another variable. In essence, the marketer is conducting an experiment. To be effective the design of causal research is highly structured and controlled so that other factors do not affect

Industrial Marketing

those being studied. Marketers use this approach to test marketing scenarios such as what might happen to product sales if changes are made to the product's design. If causal research is performed well, the marketer may be able to use results to forecast what might Happen if the changes are made.

JJ*TA ctivity A ;
a) The three main types of market research are: 1. _____________________,__________________________________ _ _ 2. 3.

86

b) The two main purposes for which industrial companies have marketing research departments are: 1. 2.

4.3 THE MAR KETI NG RESE ARC H PROC ESS


The

ch Process consists of a series of steps which are given below: 171. Defining the problem 172.Developing research objectives 173. Research design formulation 174. Collection of information 175. Analysis of information 176. Presentation of findings

Market 1) ing Resear

Defining the problem


The first step in the research process is to identify the marketing problem or opportunity accurately, and define the objectives of marketing research. There needs to bean agreement between the marketing manager and the researcher about the problem

U nit 4

Industrial M arketing R esearch

and the objectives. If the decision makers are vague about the problem, a lot of effort goes waste or does not yield accurate results. E.g.: The problem definition-could be: How many auto component manufacturers are likely to purchase plastics processing machinery in the next 5 years?

2) D eveloping research objectives


Research objectives outline the aims of the above step. These objectives form the basis on which the research is conducted. If the research problem is to find demand for product X then the objectives can be multiple: Determining the number of firms in different industries that would require the product;

Estimating the consumption by these firms of similar products; Estimating the gross sales possible. Hence, a detailed review of objectives by the marketing manager and researcher helps to iron out differences in perception and defines the problem specifically and accurately.

3) R esearch D esign formulation


A research design is a framework or blueprint for conducting the MR project. It brings out the details and the procedures necessary for obtaining the required information. The research study will indicate the possible outcome, the depth of research required while providing the information necessary for decision- making. For example, the issue of how the data should be obtained from the respondents by conducting a survey or on experiment must be resolved. Briefly, the MR design involves: Definition of information needed Secondary data analysis Qualitative research Methods of collecting quantitative data (through survey, observation or experimentation)

87

Industrial Marketing

>

Measurement and scaling procedures Questionnaire design Sampling process and size Plan of data analysis

4) Information collection
Information collection is the fourth step in the marketing research process. Two basic sources of information are primary sources and secondary sources. Primary data is data that is specifically collected for the problem to aid the decisionmaking process. Secondary data refers to data that already exists and is published by various agencies. It is not specifically related to the problem. a) Primary Data Sources- are used only if the secondary data is not sufficient to find a solution to a research problem. It is generally not undertaken before exploring secondary data sources. It should also succeed the specific definition of the research problem. Many methods are available for collecting primary data such as surveys, observations and experimentation. However, the survey method is the most common approach for primary data collection in industrial markets. i) Conducting a survey involves the subjects (respondents) and collecting their responses through one-on-one interviews, telephone talks, or mailed questionnaires. The responses may be recorded by the respondents themselves or by the researchers based on the method used for carrying out the survey. Two types of surveys are: Unstructured surveys and Structured surveys. Unstructured Surveys Surveys in industrial markets are mostly unstructured and not disguised. This type of survey method requires asking the respondents open-ended questions. 'Not Disguised' refers to the use of straightforward open questions that do noi hide the purpose the survey. The cost of unstructured surveys depends upon the methodology used for data collection. Information sources for unstructured surveys include sales personnel.

ob i

ob i

0'

Unit 4

Industrial Marketing Research

' -

::

dealers, customers and various sections of public involved with the company. These sources are inexpensive to tap and fit into the low research budget of the industrial researcher. These sources can give valuable insights about customers and customer preferences and choices since they have considerable experience and expertise. Structured Surveys are quantifiable surveys. They seek specific quantifiable answers to questions. These surveys are used to measure awareness and knowledge, attitudes and opinions, and buyer behavior. Business magazines and journals as well as websites (e.g. Indiainfoline) make available their own primary research, compile the findings and present ' it as secondary data. An agency, which carries out primary research for an industrial company can charge fees varying from a few thousand rupees to a few lakhs, depending on the objectives, the depth of available required and the time available for completion. A large number of research findings are available on various web sites on the internet. b) Secondary data sources are the most commonly used sources by industrial companies because of their ready availability and low cost. The disadvantages are that the data or information may be out-dated, inaccurate or incomplete. Some of the general secondary data sources available in India include: i) Government publications Statistical information from Central Statistical Organisation (CSO) New Delhi; Census report by Census of India; Planning 1 Commission, New Delhi, RBI Bulletin (Reserve Bank of India); i) Non government agency publications include publications from CII (Confederation of Indian Industry); ASSOCHAM (Associated Chambers of Commerce & Industries); NASSCOM (National Association of Software Companies). iii) Most industrial companies are now using computerized data available as online information on specific websites, which are industry specific. Examples in India of these web sites are: India infoline.com; Indiamarkets.com; matexnet.com (Material stock exchange); ciionline.net. : iv) Commercial data that include marketing information by market research organisations (also called Syndicated research) can also be purchased. p Examples are ORG/MARG surveys; Businessmen's readership surveys; publications from business magazines such as Business world, Business

Industrial Marketing

90

India and Business Today. TRP (TV Rating Point) and rating

surveys customer segments, potential buying patterns and create plans for by marketing strategies by the organisation requiring the research IMRB information are 5) Analysis of information I mainly used by Computers can now be used to handle huge amounts of data for the consum purpose of analysis. Quantitative methods are extensively utilised for analysis. er Software programs are now available for applying these quantitative product techniques. SPSS is a standard statistical software package used by almost all compan the marketing research firms for better analysis. ies. " Processing of data includes editing, coding, classification and tabulation.

Many analytical techniques are available but normally exponential smoothening, Thes linear and multiple regressions, multi-discriminant analysis and inferential e analysis are used in industrial marketing research. seco ndar 6) Presentation of findings y Key aspects in presentation of findings are: data sour 177. The research findings should be relevant to the marketing research objectives. ces have 178. The research analyst should justify the choice of research method, data suffi collection j' cient method, data analysis techniques so that the research methodology is data clear. for Typical contents of the report can follow a sequence given below: carry ing i) Tide page out ii) Table of contents resea rch iii) Executive summary in the iv) Introduction (or Research Brief) areas of v) identifyi Problems formulations and research objectives ng new Research methodology vi)

Unit 4

Industrial Marketing Research

vii) Findings (or results) of the research vifi) Conclusions and recommendations ix) References and Biography

Customer Visits
Many leading industrial companies (IBM, HP, 3M in USA) include customer visits as an important element in market research. Customers are chosen according to a sampling plan. Customer visits provide valuable inputs on: i) identifying customer's needs; ii) identifying new market opportunities; iii) learning about the role a product assumes within a customer's operations and strategy; iv) building customer relationship. Considerable amount of information can be gained on application methodologies of the supplier's products by customers as well as on actual performance parameters. E.g., Acar air-conditioning manufacturer can gain valuable data and information from an actual performing system in a car in the presence of the consumer. This location will bring out any lacuna about the product, which can be used for product improvement before the information spreads in the market or to competitors. Table 4.1: Industrial Marketing Research vs. Consumer Marketing Research

E lem en t

Industrial Marketing Research More reliance on Secondary data, exploratory research and expert opinion method Normally, probability sampling method is used Sample size is small since industrial buyers are identifiable Researcher needs to obtain

Consumer Marketing Research More reliance on primary data, description research & sales forecasts by own staff. Invariably, probability sampling method is used. Sample size is large due to large sample universe and heterogeneity of buyers. Researcher needs to have technical background. No such technical background may be necessary since all information will be available with the marketing team.

1 . T yp e o f D a ta

179.Sam pling m eth o d 1 8 0 .S am p le size

4 . Im p o rta n c e technical inputs and of information from design, techn ical production and other
departments.

91 inputs

Industrial Marketing

181. Frequency 182. Acessing respondents. 183. Definition of sample 184.Types of Research

Research conducted less frequently. Seeking cooperation from sample respondents is difficult and time consuming. Understanding and defining sample is difficult because decisions are made by DMUS. For established product, more emphasis is given to descriptive method while researching, research is followed Identification of market segments is relatively difficult. Usually there is low level of product switching.

Research conducted more frequently. Relatively easy to contact respondents since they are mostly individuals. Understanding and defining sample or respondent is easy. For established new products. For new products, exploratory experimental research and observation research are used more frequently. Identification of market segments is relatively simple Usually, there is high level of brand or product switching.

9.

Research output

Activity B;
a) Developing research objectives should be preceded by research design formulation in the marketing research process. D b) True D False

The first step in the marketing research process is:

c)

Structured surveys and unstructured surveys are part of:

Unit 4

Industrial Marketing Research

d) Two examples of non-Go vernment publications that can serve as a secondary data source are:

2.
4.4 MARKET DEMAND ANALYSIS The industrial marketing manager needs to address two issues in market demand analysis. i) What is the highest possible market demand that may accrue to all manufacturers in a particular industry in a particular time period? I) What is the level of sales or market share that the seller firm expects to achieve given, a particular level of marketing efforts and a particular set of environmental conditions? The answer to the first question constitutes the market potential for an industrial product and the answer to the second question constitutes the firm's sales forecast. Market potential is the maximum possible sales of all seller firms of a given product in a defined market in a specified time period. Maximum sales opportunities for a product of an individual company are referred to as sales potential. It denotes the maximum share of market potential an industrial company might expect for a specific product or product time. Example: Let us assume the manufacturers of industrial exhaust fans generated total sales of Rs 10 mn. in one financial year . The level of market potential for the next year is projected at Rs. 12 mn. (Rs. 10x1 .20) if the demand growth is estimated to be 20%. Out of this potential, an industrial firm may target 22% share based on current market share, anticipated marketing efforts, increased production capacity, etc. The firm's sales potential will therefore be Rs. 2.64 mn ( 1 2 x 0.22) for the next year. However, in a number of cases involving industrial products, market potential may not be converted to demand for a number of reasons. The funds from buyer firms may not be adequate, the new industry's plans of setting up firms may be postponed or the product mix pattern may shift to higher capacity fans. Similarly sales potential figures are based on acertain level of competitive activity, Government sector will continue the level of purchases into the next year and so on. Hence, market potential and sales potential figures in industrial marketing represent opportunities. 93

Industrial Marketing

The primary application of market and sales potential information is in the planning and control of marketing strategy by market segment, (segmentation is covered in a separate chapter). Once the sales potential for each segment is determined, the marketing manager can allocate expenditure on the basis of the potential sales volume. There is no benefit in spending huge amounts on sales promotion in segments where the market opportunity is low. Expenditure has to be based on both market potential and competition. Actual sales in each segment can also be compared with potential sales taking into account the level of competition in order to evaluate the effectiveness of the marketing program.

Sales forecast
The sales forecast represents industrial firms' best estimate of the sales revenue expected i to be generated by a predetermined market strategy. The forecast will usually be less than the sales potential .The sales forecast is an aid in the allocation of resources and in the measurement of performance.

Role of market potential and sales forecast


Market potential provides the direction which the industrial firm can take, by identifying specific opportunities. These estimates can be used to determine the areas where the firm's attention should be focused, the levels of expenditure to apply to each opportunity and the benchmarks for evaluating performance. The sales forecast provides direction for the short term, tactical decisions. It is usually the starting point for most management staff in planning production, estimating purchases, setting inventory levels scheduling transportation and warehousing work force, estimating working capital requirements and estimating short term expenditures in advertising and sales promotion. The sales forecast helps in deciding the timing of short terms expenditure and provides the basis for long term expenditure on capital items like new plant and machinery.

J & >A c tiv ity C ;


Tick the right option: a) An analysis of customer satisfaction levels is considered D Not important

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Im p o rta n t w h ile c o lle c tin g in fo rm a tio n o n c o m p e titio n in th e c a s e o f in d u s tria l p ro d u c ts .

4 .5 S C O P E O F IN D U S T R IA L M A R K E T IN G R E S E A R C H __________________________________________________________ ' In d u s tria l firm s c a rry o u t m a rk e tin g re se a rc h in m a n y a re a s a n d fo r a v a rie ty o f p u rp o s e sThese are identified as: . 1 8 5 .M a rk e t p o te n tia l a n d s a le s fo re c a s ts 1 8 6 .S a le s a n a ly sis a n d fo re c a stin g 1 8 7 .M a rk e t sh a re a n a ly sis 1 8 8 .C o m p etitiv e tren d an aly sis 1 8 9 .N e w p ro d u c t in tro d u c tio n 1) M a r k e t p o t e n t i a l a n d s a l e s f o r e c a s t S A s d e s c r ib e d in th e p re v io u s s e c tio n s , in d u s tr ia l m a r k e te r s n e e d in fo r m a tio n o n s a le s / p ro fit p o ssib ilitie s o f v ario u s p ro d u cts an d fro m all m a rk e ts. T h is is re q u ired n o t o n ly fo r th e p re se n t co n d itio n s b u t a lso fo r th e fu tu re . T h is in fo rm a tio n is u se fu l in d e c id in g I I \ i ) th e a l l o c a tio n o f r e s o u r c e s to t h e e x i s t i n g p r o d u c t l in e s , ii ) w h e t h e r s o m e o f t h eex istin g p ro d u c ts n ee d to b e e lim in a ted fro m th e ran g e , a n d iii) w h e th e r n e w p ro d u co r p ro d u c t v a ria tio n s w o u ld b rin g b e tte r re s u lts . ts 2) S a l e s a n a l y s i s a n d f o r e c a s t i n g S a l e s , c o s t s a n d m a r g i n s a r e w o r k e d o u t a c c o r d i n g to p r o d u c t c a t e g o r ie s , p r o d u c t lin e, territo ry , sa le s p erso n , m ark et seg m e n t an d cu sto m er ty p e . T h e ac tu a l p erfo rm an c e I is c o m p a r e d w ith th e g o a ls (a s s a le s ta rg e ts ) o n a re g u la r b a s is . T h is a n a ly s is h e lp s th e in d u s tria l m a rk e tin g m a n a g e r in id e n tify in g th e p ro b le m a re a s a n d ta k e c o rre c tiv e ,t m e a s u r e s . 95 O n e o f th e k e y in p u ts in th is an aly sis is th e q u an tu m o f o rd ers lo st to e ach co m p e tito r.

Industrial Marketing

This helps to arrive at the market share of leading competitors and the total available business decided during the period. 3) Market share analysis The market shares of industrial companies undergo constant change as a result of new environmental conditions, new competitive forces, changes in customer requirements and specifications and changes in external environment such as economic and political conditions. Market share is the single most significant factor that determines the dominance of the firms in the industry. The market share figure decides whether the firm is a market leader or follower in a specific industry. Maruti Suzuki's present market share is around 55% of the total passenger market. However, when viewed as a trend in the last 3 years, its market share has come down from 71 %. So, even though the absolute figure of market share is high, there is a declining trend in its market share in the last 3 years mainly on account of the new players and their growth in this industry. 4) Competitive trend analysis A marketing research study is generally undertaken to understand the customer's perceptions to competitors' product quality, services pricing and promotion compared to the company's products. This information helps in analysing the competitors' strengths and weakness. In addition, there is continuous monitoring of leading competitor's market share. II it shows a declining trend, it may indicate that new competitors are entering the fray and biting away market share. If it shows an upward trend, the company needs to rethink its marketing focus and strategies and plan counter moves. In highly competitive markets, the industrial marketer would have to create more value for the customer with its offering and look for new market opportunities faster than what its competitors are working on. Competitor's analysis is the most important input for a company in deciding its marketing policies and putting in place new and effective strategies. Although it is not possible to develop a complete list of heading under which competitive information should be collected, there are principal areas under which the information can play a key role in deciding a firm's competitive strategy.

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Industrial Marketing Research

Table 4.2 : Information on Competition 1. SALES 6. SERVICES AND SUPPORT SYSTEMS N um ber of units sold Pre sales Services provided - Post Sales by product line sales serviced Provided Service Sales trends Contract Policies Service man Power - M arket it shares (direct &through Distributor channel Share trends Service revenue earned - Perfo rm ance guarantees and warranties E m ergen cy serv ices p rovid ed 7. PRICE 2. C U S T O M E R S Cost levelsCost Customer profiles Structures - Patterns of usage - List Prices and Discount by product & N ew buyers customers typeSpecial Terms L o st accounts/b uyers po rtion P ro of repeat business stom ers Cu satisfaction w ith P rod uct design an d quality; Special relationships w ith specific customers 8. FINANCE 3. PR O D U C T S Performance Levels B read th a nd d ep th o f prod uct - Margins range Depth of financial resources C o m pa rative field perfo rm ance- Patterns of ownership & financial Investm ent in R & D flexibility N ew pro duct policies N ew pro duct intro duction/ modifications Size assortm ents N ew packaging 9. M A N A G EM EN T 4. A D V E R T IS IN G A N D - Objectives (short term and long term) P R O M O T IO N Philosophy and culture E xpenditure levels an d patterns Expectations E ffectiveness of advertising Attitudes to risk Product literature Identify of key executives Sales promotions
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Customers brand preferences Image Levels of recognition Organisational structures Key success factors.

Competitive strategies Skills and special expertise Investment plans

5. DISTRIBUTIONAND SALES 10. OTHERS FORCES

Sales per employee Types of distribution network Plant capacity utilisation Relationships with distribution Cost Emergency level structures flexibility in distribution arrangements and in pricing; Special Labour rates & relationships Purchasing Methods terms and existence of agreements Principal Suppliers Dealer objectives Distributors' performance levels. Size and caliber of Commitments to Market Sectors sales force Sales force customer coverage Levels of Technical assistance available Dealer's support levels and capabilities Stock levels Location of warehouses Degree of customer satisfaction

5)

New product introduction

98

New product testing (whether in concept or prototype form) is usually carried out in industrial marketing - as in the case of consumer products. Sometimes called field testing, involving application of the product at the buyer firm's plants, this type of research helps determine initial customer responses on product usage. Based on the

initi al react ion, the sales pote ntial and acce ptan ce level

of the customers are assessed. This helps the seller firm to decide whether long term investments should be made for the new product. Marketing research at this stage reduces the level of risk particularly financial risk, since the failure rate for new industrial products can be high. Problem identification research is undertaken to help identify problem that are perhaps not apparent on the surface and yet exist or are likely to arise in future. Problem solving research is undertaken to arrive at a solution once a problem or

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Industrial Marketing Research

2.

Problem solving Research

opportunity has been identified. The findings in this research are used in making decision that will solve specific marketing problems. * Further examples of problem solving research are given in Table 4.4. Table 4.3 : Differences between types of Marketing Research Marketing Research 1. Problem identification Research Examples: Market potential research Market share research Image research Market characteristics research Sales analysis research Examples: Segmentation research Product Research Pricing Research Promotion Research Distribution Research Forecasting research

a.

Business trends research

b.

Table 4.4: Examples in problem solving research Segmentation research Determine basis of segmentations Establish market potential Select target markets and create usage, demography and product image characteristics.

Product research
Concept testing Optimal product design

New product introduction/product modifications Brand positioning and repositioning Test marketing

Pricing research
Pricing policies Product line pricing Price elasticity of demand Response to price changes

Industrial Marketing

Response to other commercial terms d. Promotional research Optimal promotional budget Optimum promotional mix Media decision Claim substantiation Evaluation of advertising effectiveness Distribution research Type of distribution Responses of channel members Distribution coverage Location of new outlets Response to price changes

e.

4.6 TYPES OF MARKETING RESEARCH

100

Marketing research falls into one of two categories: 1) Primary Research and 2) Since Secondary research. there is a 1. Primary Research great deal of When an industrial firm conducts research to collect original data it is referred to as market primary marketing research. This process involves designing a research plan, er collecting information, inputting the data, and producing and analysing results.

involv may be much more relevant to the firm's situation and, consequently, more ement, useful. primar In general there are two basic types of primary research methodsy researc Quantitative and Qualitative. h is often a) Quantitative Research very Information gathered using quantitative means are often open to expens evaluation using statistical analysis. It should be understood that data ive to collected following a structured and well controlled scientific research undert design can yield numerical values that can be analysed using statistics. Such ake analysis may prove very relevant and even results from and do well. But with market er control ling the proces s, the results

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Industrial Marketing Research

a small number of collection points may be used in determining characteristics of a larger group (e.g. a small group of industrial customers as a sample). < Quantitative research comes in many forms but the most popular forms are surveys, tracking^and-cxBeriments.
f^Thkjjietbftffr^pTTtrps respnrt^f"f infnrmitinn thrniirh ttip input rf

responseslo^research instnmien^suerfas a questionnaire. Information can be at eiSieFby therespondentethemselves (e.g. Complete online survey) or the 'researcher can input the data (e.g. Phone survey). The main methods for ^distributing surveys are via postal mail, phone website or in person. However, newer technologies are creative additional delivery options including through wireless devices, such as PDA's and cell phones. Tracking - With tracking, research marketers are able to monitor the behavior of buyer firms as they engage in regular purchase or information gathering activities. Possibly the most well known example of tracking research is used by websites as they track customer visits. But tracking research also has offline applications, especially when point-of-purchase scanners are employed, such as tracking product purchases at grocery stores and automated collections on toll roads. This method of research is expected to grow significantly as more devices that provide means for tracking are introduced. However, some customers may see tracking devices as intrusive and many privacy advocates have raised concerns about certain tracking methods especially if these are not disclosed to customers. iii) Experiments - Marketers often undertake experiments to gauge how the manipulation of one marketing variable will affect another (casual research). The use of causal research has applications for many marketing decision areas including product testing, advertising, design, setting price points, and creating packaging. Unfortunately, performing highly controlled experiments can be quite costly. Some researchers have found that computer simulations can work nearly as well as experiments and may be less expensive, though the number of application of simulation for marketing decision is still fairly limited. b) Qualitative Research Qualitative Research gathers information that requires researchers to interpret the information being gathered, most often without the benefit of statistical support. If the researcher is well trained in interpreting respondents' comments and activities, this

m form of researc h can offer very good inform ation. Howe ver, it may not hold the same
wl

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level of relevance as quantitative research, due to the lack of scientific controls that are often associated with this data collection method. For example, a researcher may - want to know more about how customers make purchase decisions. One way to do this is to sit and talk with customers using one-on-one interviews. However, if the interview process allows the researcher to vary what questions are asked (eg., Not all respondent are asked the same questions), then this type of research may lack controls needed to follow a scientific approach. An additional drawback of qualitative research is that it can be a time consuming and expensive undertaking and consequently, only a very small portion of the total population generally participat in the research. Due to the lack of strong controls in the research design (e.g. not as well structured, fewer participants), using results to estimate characteristics of a larger group is more difficult. This is not to say qualitative research is not useful, it is very useful if its limitations are understood and it is widely employed for marketing research. i) Individual Interviews - Talking to someone one-on-one allows a researcher to cover more ground than may be covered if a respondent was completing a survey. The reasons lies with the researcher's ability to dig deeper into a respondent's comments to find out additional details that may not emerge from initial responses. Unfortunately, individual interviewing can be quite expensive and may be considered as intimidation by some who are not comfortable sharing details with a researcher. ii) Focus Groups - To overcome the drawbacks associated with individual interviews, marketers can turn to a focus group. Under this research format, a group of respondents (generally numbering 8-12) are guided through discussion by a moderator. The power of focus groups as a research tool rests with the environment created by the interaction of the participants. In well-run sessions, members of the group are stimulated to respond by the comments and the support of others in the group. In this way, the depth of information offered by a respondent may be much greater than that obtained through individual interviews. However, focus groups can be very expensive to conduct especially if participants must be paid (often the case in B2B research). To help reduce costs, online options for focus groups have emerged. While there are many positive aspects to online focus groups, the fact that respondents are not physically present diminishes the benefits gained by group dynamics. However, as technology improves, in particular, video conferencing, the online focus group could become a major research option. Online focus group represents a powerful medium for industrial marketing research.

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iii) Observational Research - Watching customers as they perform activities can be a very useful research method, especially when customers are observed in a natural setting. *

2. Secondary R esearch
By far the most widely used research method is collecting data through secondary research. This process involves collecting data from either the originator or a distributor of primary research. In other words, accessing information that others have already gathered. In most cases this means finding information from third party sources such as marketing research reports, consulting firm white papers, magazine articles, and other sources. But in reality any information previously gathered, whether from sources external to the marketer or from internal sources, such as accessing material from previous market research carried out by the marketer, fall under the heading of secondary research. Compared to primary research there are several advantages to the secondary approach, including ease of access and generally lower cost for acquiring the information. But there are also major advantages that may limit the usefulness of the research including the fact that the information may not be exactly what the marketer needs, results may be out-ofdate, or the research design poorly constructed. Sources for secondary research are quite extensive. In the past accessing good secondary research required marketers to visit a library or spend large sums of money accessing proprietary electronic databases. However, the internet has changed how secondary research is accessed by offering convenience, accessibility to a large array of information sources, and generally low cost. In fact, the web links have a collection of over 1000 secondary research sources. The need for good research is critical in carrying out a successful industrial marketing effort. Table 4.5 : Comparison of Qualitative and Quantitative Research

Param eter . Objective

Qualitative Research
To gain qualitative understanding of underlying reasons

Quantitative Research
To quantity data and generalize results from sample to the target groups Large number of representative cases -hence more suitable for industrial product research

2. Sample

Small number of non representative cases

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3. Data collections Unstructured 4. Data analysis 5. Outcome 6. Usage Non statistical Develop an initial understanding Less for industrial products

Structured Statistical Recommend a final course of action Extensively used for industrial products

Research Design Classification


Research Design

Exploratory Research Design

Conclusive Research Design

104

Fig. 4.1: Classification of Research Designs Exploratory research

The ant leads and an understanding of the problem confronting the researcher. primar Exploratory research is used in cases when you need to define the problem more y closely, identify relevant courses of action or gain additional leads before an objecti approach can be developed. The information needed is loosely defined at this stage, ve of and the research process that is adopted is flexible and unstructured. As an example, it explor may consist of personal interviews with industry experts on the availability of product atory range from domestic manufacturers. The sample selected to generate further researc approaches is small and non- representative. The primary data is qualitative in nature and h is to are analysed accordingly. Given these characteristics of the research process, the provid finding of exploratory research should be regarded as pointers and input for further e detailed research process. Such research is usually followed by further exploratory import or conclusive research.

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Industrial Marketing Research

E x p lo ra to ry re se a rc h c o u ld b e u se d fo r th e fo llo w in g p u rp o se s: 1) F o rm u la te a p ro b le m o r d e fin e a p ro b le m m o re p re c ise ly (e g . S o u rc e s o f c u sto m e rs issa tisfa c tio n w ith in d u strial p ro d u c t p erfo rm a n c e ) d

ii) Id en tify a ltern a tiv e co u rses o f ac tion


I) Develop hypotheses

iv) Iso la te k e y v a ria b le s a n d re la tio n sh ip fo r fu rth e r e x a m in a tio n v) G a in le a d s to d e v e lo p in g a n a p p ro a c h to th e p ro b le m vi) E sta b lish p rio ritie s fo r fu rth e r re se arc h C o n c lu sivree se a r c h C o n c lu s iv e re s e a rc h is t y p ic a lly m o re fo r m a l a n d st ru c tu re d th a n e x p lo ra to ry re s e a rc h T h e o b je c tiv e h e re is to te st re le v a n t h y p o th e se s a n d e x a m in e sp e c ific . re la tio n sh ip s. It is b a se d o n la rg e re p re se n ta tiv e sa m p le s a n d th e d a ta o b ta in e d a re su b je c te d to q u a n tita a nalysis. T he fin d in g s fro m th is re se arc h are c on sid ere d to b e tiv e co n clu siv e in n ature a nd areey th activ ely con sidered for m anagerial decisio n-m aking . H ow ev er, fro m th e basic philosophy ce , n o th in g c an b e p ro v en a n d n o th in g is o f scien co n c lu siv e . C o n c lu siv e re se a rc h c a n b e d e sc rip tiv e ty p e o r c a u sa l ty p e . a ) D e s c rip tiv e re s e a r c h is c o n d u c te d fo r th e fo llo w in g re a s o n s w i th th e o b je c tiv e odfe sc rib in g in d u stria l m a rk e t ch arac te ristic s an d fu n ctio n s: i) ii ) T o d e sc rib e th e c h a ra c te ristic s o f re le v a n t g ro u p s, su c h a s k e y c u sto m e rs, a c tu a lu s e r s , O E M s , G o v e r n m e n t c u s t o m e r s o r m a rk e t a re a s . T o e s ti m a te th e p e rc e n ta g e o f u n its i n a s p e c if ie d s e g m e n t . E .g ., w e m a y b e in te re s te d in e s ti m a tin g th e p e rc e n ta g e o f h e a v y u s e r s o f b u s i n e s s e d u c a t io n so ftw a re.

in ) T o d e te rm in e th e p e rc e p tio n o f p ro d u c t c h a ra c te ristic s. E .g ., w h a t p ro p o rtio nosf ind ustrial firm s requ ire fre ezers fo r sto ra ge o f item s be lo w zero d egree s C elsiu s. ^ iv ) T o d e te rm in e th e d e g re e to w h ic h m a r k e tin g v a ria b le s a re a sso c ia te d . v ) T o m a k e s p e c ific p re d ic tio n s.

tos

Industrial Marketing

b) Causal Research is used to obtain cause-and-effect relationships. Industrial marketing firms usually take decision based on assumed causal relationships. These assumptions /- may not be justifiable and the validity of the causal relationship should be probed via formal research. For example, a common assumption of an increase in price leading to decreased sales and market share does not hold true for certain industrial products and in certain markets. Causal research may be considered for the following purposes: f) To understand which variables are the cause and which variable are the effects of a phenomenon.

ii) To determine the nature of the relationship between the causal variables and the effect to be predicted.

4.7 THE MARKETING INFORMATION SYSTEM (MKIS)


The information obtained through marketing research and sources such as internal records and marketing intelligence becomes an integral part of the firm's marketing information systems (MkIS). A MkIS is a formalised set of procedures for generating, analysing storing and distributing information to marketing decision makers on an ongoing basis. MIS is similar to marketing research except that MkIS provides information continuously rather than on the basis of ad hoc research studies. MkIS is limited in the amount and nature of information it provides and the way this information can be used by the decision maker. This is because the information is rigidly structured and cannot be easily manipulated. Decision support systems (DSS) were developed to overcome the limitation of MkIS. They are integrated systems including hardware, communications network, databases, model base, software base, and the DSS user who collects and interprets information for decision-making. DSS combines the use of models or analytical techniques with the traditional access and retrieval functions of MIS. In addition to improving efficiency, DSS can also enhance decision-making effectiveness by using 'What if analysis. One of the largest US based MNCs, Fedex Corp., has achieved great success with the adoption of an advanced worldwide DSS that provide information on customers such as ordering, billing, tracking and tracing of packages for courier service.

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A range of internal information is essential to industrial marketing managers in the successful performance of their jobs. Examples of information that can be obtained internally that help foster and strengthen relationships with buyers and sellers are: Information on buyers overall sales and profit figures number of customers, the highest value buyers and the least value buyers which customers offer the best and the least sales potential which customers buy across the whole range and which buy selectively

Information on suppliers which suppliers are reliable on the delivery aspect how supplier prices vary with value which suppliers are cost-effective which suppliers also sell to competitors and what is their proportion of off take.

The marketing department needs to analyse and coordinate the internal information obtained from different personnel, areas and companies. This will help the organisation to in monitoring yearly and monthly trends in order to identify how the markets are performing and more importantly, in assessing the likely competition in the future. 4.8 MARKETING INTELLIGENCE SYSTEM

Marketing Research System

Marketing Intelligence System

Fig. 4. 2 : Components of Marketing Intelligence System

Industrial Marketing

,' . .

..

A marketing intelligence system comprises the three main components: Marketing Research System, Marketing Information System and Decision Support System. The marketing intelligence system provides a systematic approach to collection, storage and dissemination of internal marketing information. The creation of such a system plays a significant role in improving the knowledge and skills of the industrial marketing unit in both large and small firms. The difference between marketing research system and the marketing intelligence system is that the former is need-based and carried out for specific purposes while the latter is an ongoing activity that goes on all the time. Information is continuously required so that the firm can benchmark its processes and systems with the best in the industry. This will help in the delivery of optimum customer value to the buyer firm. Modern business firms also extend the same methodology to their suppliers so that the whole chain can operate effectively to achieve substantial advantage over competitors.

& Activity D :
a) Expand the following abbreviations: 1. SPSS - ' _____________________________________________________________ 190.MkIS 191.DSS b) Define the following: 1. Marketing research system:

2. Marketing intelligence system:

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C)

Promotion research and distribution research are two examples of problem identification research. False Identify two possible reasons why Fiat India (Premier Automobiles) was not able to penetrate the Indian market with passenger cars. 1._____________________________________________________________

True

d)

2.

International M arketing R esearch


Globalisation of companies is the trend today. Whether going online or setting up physical operations in a foreign country, research must be conducted so that relevant environmental factors are taken into consideration when going global. Many companies have encountered big failures because they did not take into account the differences between their country and the country with which they want to enter. Companies need to take the local environmental factors into account before attempting to gain sales and customers in other countries. Despite the complexity involved, international market research is expected to grow at a faster rate than domestic research due to the ever increasing trends towards globalization and business to business e-commerce.

O nline M arketing R esearch


The Internet has become one of the most important media for marketing research. Greenfield Online Research Center, a Division of the Greenfield Consulting Groups (USA) is one of the many online research companies that conduct focus groups, surveys and polls over the Internet. It has a base of more than 2 lakh Internet users from which it draws survey samples. The samples are used for descriptive as well as causal research. In addition to conducting research studies, the company also offers a product that allows marketers to brainstorm with potential consumers on new products or product designs. The product allows targeted participants to respond to their questions, concepts and statements allowing for in-depth responses. This cuts down drastically the cost of exploratory research. ino

Industrial Marketing

The increasing role of Management Consultants


Both marketing research and marketing agencies are now facing stiff competition from management consultancy firms entering the market. Management consultants offer a range of professional and consultant business services in both the private and public sectors including the following: Marketing and corporate communications; economic and environmental studies; production and services management; e-business; information to help corporate and marketing planning and marketing research projects. Some of the largest consultancy firms operating in many international countries are: Price, Waterhouse Coopers; Accenture; Deloitte, Touche & Tomatsu; KPMG Consultants; Mckinseylnc.

x^T Activity E:
Datamonitor is one of the world's leading providers of online data analytic and forecasting platforms for key sectors in business and industry. It helps 5,000 of the world's largest companies covering seven major industry sectors. Their reports provide key data and detailed analysis of markets, issues and trends. They provide the latest industry figures plus forecasts in database format. The entire information is on a fully interactive online format. Go to its website: www.datamonitor.com and analyse the suite of research information and services available from the company. Mention the two most important aspects in the package of features that you believe are essential for industrial marketing companies.

2.

4.9 SUMMARY
This unit has covered the needs and nature of marketing research. As can be gathered, the scope of marketing research and its importance to the marketing intelligence system is vast. Industrial companies that are in the forefront of technology are investing huge amounts

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Industrial Marketing Research

in the marketing research, MkIS and DSS to keep the Marketing Intelligence Systems fully updated. / . The applications of marketing research have been briefly covered in order to understand its implications in the industrial marketing function. Some of these areas are sales analysis, sales forecasting, market share analysis and competitive trend analysis. The differences between industrial product marketing research and consumer product marketing research have been summarised in a tabular format. The necessity of having a marketing intelligence system has been briefly covered along with the types of marketing research. The creation of a marketing intelligence system is crucial to both large and small industrial firms to improve their marketing skills. 4.10 KEYWORDS Collaborative Exchange: It refers to the process of exchange of goods and services that involve long term goals and agreed actions for taking the relationship to the next level in future. Customer Relationship Management (CRM): It refers to a cross functional process forachieving: i) a continuing dialogue with customers across all their contact and access points; ii) personalised treatment of the most valuable customers; iiij customer retention Negotiation: It refers to the process of arriving at a settlement between the buyer and clleron mutually agreed terms for the purchase of goods and services. In an ideal situation, negotiation maximises the benefit to both the buyer and the seller. Marketing Intelligence System (MIS): This system refers to the ongoing method of providing updated information on market competitors and business environment. Marketing Information System (MkIS): This term refers to a formal set of procedures for generating analysing, storing and distributing information to marketing decision makers on an ongoing basis. Transactional Exchange: It refers to the process of exchange of goods and services that involve short-term goals on the part of both parties with little or no expectation from the relationship in future.

Industrial Marketing

5.1 INTRODUCTION
A successful marketing plan calls for selection of marketing strategies. To develop marketing ' strategies, it is necessary to understand trie characteristics or market forces and analyse where the market potential as well as the major customers lie. Market segmentation, targeting and positioning constitute the heart of marketing strategy development. In the case of industrial product buyers, there are many similarities among various industry groups and sub-groups. An analysis of purchase-related behaviors and buying patterns forms the basis of industrial product segmentation. Identification of the purchase-related dynamics helps to determine the target segments. This becomes necessary to concentrate marketing efforts and resources by the industrial product sellers. Finally, the seller firm needs to position its products and services in order to highlight the distinctive benefits and separate its offering from its competitors. This unit brings into focus the underlying concepts of the segmentation, targeting and positioning processes as applied to the industrial product scenario.

116

5.2 PURPOSE OF INDUSTRIAL MARKET SEGMENTATION


Industrial Markets are characterised by strong competitive forces in all countries. The trend towards globalisation of market is making the competitive situation take deep root since competition in countries is not only from domestic manufacturers but also from foreign companies, big and small. There is no industry where some form of

co mp etiti on doe s not exis t; this situ atio n is forc ing ind ustr ial fir ms to und erst and

their customers and their requirements going far beyond transactions based relationships. The growth-oriented companies, both large and small, are achieving success by: Selecting a defined groups potentially profitable customers. Developing processes to create greater value to customers by their offering (Products * and Services) that meets customer's needs better than their competitors. , Focusing marketing resources on acquiring, developing and retaining the more ~ profitable customers.

The industrial markets broadly consist of the 3 broad sectors of commercial enterprises, institutions and government. Each sector has many sub-segments that generate unique needs and therefore unique marketing strategies. For example, some customers of truck tyres (e.g. transport companies) demonstrate attractive profit potential and are open to a relationship strategy while other customers (i.e. retail users of car tyres) adopt a short term

1 I

Unit 5

Market Segmentation, Targeting and Positioning

focus. The industrial marketer, who recognizes these needs of the various market segments, has the tough job of isolating the more profitable groups and responding to them with effective marketing strategies. Not all market segments can be served by individual firms. The alternative is therefore to concentrate on specific market segments after a through understanding of their needs and requirements combined with the prospects of making satisfactory profit. The purposes of segmentation are to: i) Identify clearly the needs of a diverse group of customers n) Plan strategies to match each and every customers need I) Develop suitable products and product variations that match customers needs iv) Deliver total customer satisfaction v) Identify new opportunities in existing markets and potential new markets vi) Help distinguish between a customer group's real needs and artificial needs. Focused organisational benefits can only be offered when segmentation exercise is completed in all aspects to determine who the valued customers are. E.g. - Volvo segments the vehicle market as follows: International fleet; sales- tourist; diplomatic; armored; emergency; executive; police; service; taxi; ambulance; hearse; limousine and special variants that are custom-built to suit individual customer's requirements. E.g. In its company brochure, IBM states it is the largest SERVICE business in the world. IBM Global Services offers product support services, professional consulting services and networking computing services around the globe. Among the major industry sectors the company caters to are: Aerospace & Defense; automotive; banking; Chemicals & petroleum; education; electronics; energy & utilities; financial markets; Government; healthcare; insurance; life sciences; media & entertainment; telecom; travel & transport.

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Industrial Marketing

$ Activity A;
a) There is no difference in customer needs between users of batteries for cars and batteries for trucks. D b) True D False

The two main purposes of market segmentation are: 1. ,

2.______________________________

5.3 BENEFITS OF PRODUCT SEGMENTATION_______________________


The Industrial firms that carry out a segmentation analysis stand to benefit in many ways. Among them are: i) The attempt to segment the markets itself forces the firm to become tuned to the unique needs of every customers or customer group.

ii) Knowledge of the particular segments helps the firm to concentrate its energies and resources on product development, profitable pricing and channel distribution. in) It provides the firm with guidelines that are of significant value in allocating marketing f resources. iv) It helps the firm to monitor the relative attractiveness and performance of segments periodically. v) It provides the basic inputs for implementation of customer relationship management. There are certain limitations in segmentation too: i) Problems in segmenting customers due to divergent purchase practices, customers characteristics, product applications, disproportionate service requirements, and

ii) differences in benefits sought by decision making centers of buyers' firms.

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However, the importance of segmentation has been recognised the world over by industrial firms and its relevance to marketing planning and control of resources is tremendous.

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Market Segmentation, Targeting and Positioning

4. A cc es si bi lit yT hi s re fe rs to th e de gr ee to w hi ch th e fir m ca n ef fe ct iv el y fo cu s its m ar ke ti n g

i & Activity B :
Abetter understanding of specific customers' needs is obtained through segmentation. I D True D False

5.4 ESSENTIAL REQUIREMENTS OF MARKET SEGMENTATION EVALUATION ___________________________________________________________


Five general criteria are used to evaluate the selection of variables in segmentation. 192. Substantiality- The segments should be large enough in terms of sales potential and profitability to be worth considering for separate attention by the marketing department E.g. the junior executive (newly employed with less than 5 years' work experience) in the non-metro cities is one of the more important segments for the motorcycle manufacturers in India. In general industrial firms categorise their customer under large, medium, and small depending on the customers' order sizes. 193. Compatibility- This represents the degree to which the firms marketing strengths match the present and anticipated competitive position of the market. For exampleit would not make sense for a new entrant in the Indian petrol and diesel retail industry if it cannot operate on a nationwide basis and compete with the established giants, HPandBR 3. Responsiveness- This represents the degree to which the segments respond differentially to different marketing mix elements, such as pricing and product features; 4 powder coating of metal enclosures is preferred by large manufacturers of automobiles over conventional liquid paints in view of low wastage and better coverage of bends - and sharp areas. This is in spite of the fact that powder coating in more expensive than conventional liquid paint.

efforts on chosen segments. For example- Government customers represent a huge chunk of market for many industrial firms. However, many Government customers and departments may not be easily approachable for information and data; in fact there are many departments within large government organisations which actively discourage long term relationship with private sector suppliers, firms in India. In such cases, that cost of retaining a customer becomes prohibitive, even though feasibility may exist.

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Measurability- No doubt, the first variable that needs to be kept in mind for evaluation is the degree to which information on the particular buyers,' characteristics can be obtained. If this information is not forthcoming from the buyers firms, it should be possible for the industrial marketing person to make his/her assessment of the sales potential or quantity of purchase. For example, the segmentation for HOPE (high density polyethylene) would be based on different end user industries, such as light engineering, consumer goods, and automotive. This information can be obtained through primary and/or secondary research.

$ Activity C:
Identify the criteria that are used in industrial market evaluation: D Customer manpower resources D D D Compatibility Customers' financial performance Accessibility

D Measurability D Responsiveness

5.5 SEGMENTATION PROCESS Identifying Bases


The consumer goods marketer approaches the segmentation process on the basis of profiles of individuals (demographics, typestyles, benefits sought, ego satisfaction). The industrial goods marketer arrives at the customer profiles on the basis of organisation size (turnover /no of employees) and other parameters. The industrial market segmentation is broadly classified under the two categories: Macro segmentation and micro segmentation.

Macro Segmentation
Macro-segmentation focuses on the characteristics of buyer organisations and the buying situation and divides the market by such organisational characteristics as size, geographic location; SIC (Standard Industry Classification) category and organisational structure.

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Table 5.1: Macro-level Bases of Segmentation


Variables 1. Organisation characteristics f) Size (representing the scale of operations) n) Geographic location Representative segments Small, medium, large; based on sales turnover or number of employees. Maharastra, South Gujarat, State Industry Development Zones (e.g. MIDC, GIDC, TIDCO); Surat - Vapi industrial belt. Non-user, light user (e.g. Rs. 5 lacs per order); Moderate user companies, heavy users, regular users; One-time users Centralized, decentralised. Varies by product or service (automotive sector, automobile components sector, steel sector, cement sector) Varies by product or service High or low

in) Usage rate

iv) Purchase structure 2. Product/Service application i) SIC (Standard Industry Classification) Category ii) End market served iii) Value in use 3. Purchase situation characteristic i) Buying situation emergency ii) Stage in purchase decision process i) Project purchase

New task, modified rebuy, straight rebuy, Early stage (e.g. for items); late stage (e.g. for industrial consumables). For specific project expansion; For bundling with buyer's products to third party (i.e. customer's customer) located within or outside the country.

A further improvement on the single dimension variables analysis (as illustrated in Table 5.1) can be a two dimension at analysis. Example: PC Hardware supplier Segmentation based on a) application and b) user classification

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Table 5.2 : Two-dimensional Analysis Segment Based on application based on user classification Small office SMEs home office 1 . Sewage and storage 2. Assembled PCs for work station 3 . Notebook and laptops 4. For networking 5. Handheld PDAs The above segmentation basis has been used most effectively by Dell Computers to develop a one-to-one relationship with buyer firms through customised and secure websites that are essentially customer-specific stores. Over 1 lakh business and institutional customers have used the customised Web page to do business online with the company. Large Large State Central Go's Govt. Govt. Go's (private) (public)

Macro-level bases a) Characteristics of buyer firms


The industrial marketer will find it useful to divide the market by size of potential buying organisations. Large buyer firms may process unique requirements and may respond differently to the offering of seller firms than smaller buyers. In many cases of large buyer firms that are decentralised and have multiple purchase locations, the seller firm will have to customize the offering to suit the characteristics and needs of the different DMUs. Usage rate constitutes another macro level variable. Buyers are classified ranging from nonuser to heavy user. Heavy users may place more value on technical delivery support and post sales services than the moderate or low users. Similarly, opportunities may exist to convert moderate users into heavy users through adjustments in the product or service mix The structure of the purchase function also constitutes important macro level characteristics. Firms with a centralised purchase function give significant weightage

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ig

to long-term supply availability. D ecentralised buyer firm s m ay em phasize short term cost efficiency. M any large project oriented purchases m ay have m ultiple D M U locations such as p ro ject lo catio n (eg . A sso ciated C em en t C o rp o ratio n (A C C )'s ce m en t w o rk s at W adi, K arnataka) and H Q (A C C 's head office in M um bai, M aharastra). In addition, an ex tern al tech n ical co n su ltan cy firm th at m ay b e resp o n sib le fo r all p reten d er specifications of the industrial products and equipm ent to be purchasedthird be in a m ay location. b) P rod u ct / S ervice app lication Specific end use application is another w ay to divide the m arket because industrial good s are often used in a v ariety of app licatio ns. F o r ex am p le, diesel eng in es are u sed in tracto rs; th ey are also used w ith g enerato rs to fo rm D G (diesel g enerato r)

ige

sets. The ind ustr y clas sifi cati on syst em exis ts in m os t cou ntri es. The rela ted

inform ation sources are valuable w hen segm enting the m arket on the basis of end use. By dividing and identifying th e specialised need s of each user group , the supp lier firm is in a better position to differentiate custom er requirem ents and evaluate new opportunities. c) Purchasing Situation A further division of markets is possible for industrial products by analysing the purchase situation. First tim e buyers have perceptions and inform ation needs that differ from those of the repeat buyers. So buying organisations are classified according to the stages in the procurem ent process such as new task buying, straight rebuy or modified rebuy. The position of the firm in the procurem ent decision processor or its position on the buying situation w ill decide the m arketing strategy. O ther m acro level bases m ay fit the specific situation m ore precisely. O ne of the key benefits of segm entation is that it forces the m arketing departm ent to search for bases that explain sim ilarities and differences am ong buyer firm s. M icro-segm entation O nce the m acro segm ents have been identified, the groups can be further divided into smaller m icro segm ents that represent hom ogeneous custom er groups or subgroups w ith sim ilar characteristics in purchase situations. It is necessary to base the decision on the im portance to the seller firm or the custom er factors under consideration. A ll buyer firms 1 2 3

exhibit distinct ways of behaving and some of the forms of industrial buying behavior that could have important effects on the buying situation are given below:
/

194.Present or past user or non-user 195. Heavy medium or light user 196.Centralised or decentralised purchase systems 197. Single source or multiple source user 198.National basis for purchase 199.Product/services benefits 200.Partnering and reciprocal relationships 201.One-off buyers or repeat buyers 202. Buy situations 203.Payment record 204. Purchasing policies

1.

Present, past or non-user


There are firms that might have used products or services in the past but now no longer purchase .It needs to be determined whether there is a genuine cause for this development such as a substitute product finding on entry. There are other firms that have never purchased but still show potential for the seller's products or items. This can be an important lead for development of a new segment. Suitable CRM and MIS systems can highlight such cases when past users might be in the market for products and services. Targeted promotions might help under such circumstances. It is therefore essential that all types of users and non-users are captured on the radar screen of the seller firm.

2.

Heavy medium or light user


Most businesses will have heavy users. CRM schemes are now an essential aspect of the industrial marketer's agenda so that loyal and large spending customers can be targeted. Data mining can identify those customers who are the most profitable and those that are not so.

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3. Centralised or decentralised buying Whether a customer has a centralised or decentralised approach to purchasing will also dictate segmentation strategy. If it has a policy of centralised buying, all sales approaches will have to be made through the head office. If the policy is one of decentralised buying, then separate sales approaches will need to be adopted to all purchasing divisions. In many companies, the decision on centralized or decentralised buying is dependent on the complexity of products, items, equipment or systems, and consequently on the extent of customer interaction needs,

\\\\\\\\\\\\\\\\\\\\\\\\\\\\\
Preorder Customer Interaction Period

Case 1: for Capital Goods

no this that Phis and tfor


2S.lt

BUY DECISION

\\\\\\\\\\\\\\
BUY DECISIO Preorder Customer Interaction Period ORDERIN Fig. 5.1 : Differences in Preorder Customer Interactions 4. Single source or multiple Source user

G DE CI SI ON

adar

spect :anbe i leand

Some firms in particular those companies in the public sector, will buy from more than one company, while others might depend on a sole supplier. A supplier firm usually targets a company that is a willing to buy its entire needs from one source. However, to find such a company in these times of intense competition is extremely difficult unless there are extraordinary circumstances of purchase (such as in the case A of emergency purchase).

O R D

ERING DECISION

Case 2: for Routine Purchase or Repeat Purchase

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5.

National Accounts " Many large companies buy for the whole company through a centralised head office. This helps both the buyer and the seller- the buyer gains by getting volume discounts on list prices and the seller gains by enhancing the order value for customers. For very large companies operating on the basis of SBUs (strategic business units), the purchase decisions are usually decentralised on the basis of the plant locations. Purchases by the defense sector (such as Indian Navy) are usually centralised.

6.

Product/Service benefits Services play a major role in segmenting markets and classes of buyer firms. In fact many large and reputed organisations select a seller firm on the basis of its ability to render both preorder and post order services. There have been numerous cases when the selection by the buyer firm is carried out based not just on the last product performance but on the break record of services rendered.

7.

Partnering and reciprocal relationships Many associations among buyers and sellers are often strengthened through cooperative relationships. This may take the forms of formal partnerships, joint ventures and strategic alliances or through verbal informal agreements. This route has the formidable advantage of entering new markets (such as a foreign country) on the strength of the last association and the willingness of both parties to commit a certain level of resources for joint marketing efforts. Seller firms are often buyers of industrial product and services. This leads to reciprocal arrangements where one company will buy from another on the understanding that the seller will then buy its products; for example, a PC manufacturer and an office furniture manufacturer can have a reciprocal arrangement not only for exchange between themselves, but also a partnership arrangement on bidding for business from a large third party.

8.

One-off or repeat buyers One-off buyers will usually purchase infrequently. One transaction may terminate a relationship that may get reactivated only when a future need arises. This might happen because a supplier is only used when the main supplier is unable to supply or if the product or service is seldom used. It may therefore become necessary for the supplier to maintain the relationship through a unique range of post sales services that encourages frequent usage.

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Market Segmentation, Targeting and Positioning

Repeat buyers will buy the same products and services on a regular basis. Supplier firms need to ensure there is no fall in standards of performance and quality on account of complacency.

9. Buy situations
Buying situations or buy phases can also be another criterion for segmenting the customer groups; for example, main equipment purchases (i.e. Machinery) may necessitate the purchase of spares (routine and maintenance) on a more frequent basis. The extent and frequency of spares purchases can form a basis for segmentation. It is a well accepted fact that continuous process industries (eg. Cement production) will generally stock a higher volume of spares than general or light engineering industries.

10. Payment record


Industrial firms generally have a different reputation with regard to timely payments to supplier firms. There are firms that demand extra payment time as part of the deal, some are slow payers whatever the deal and some go to the extent of 'never pay'. Suppliers usually factor in the payment delay in their pricing strategy, particularly for custom - built items. Suppliers firms usually make a quick analysis of the capabilities of new customers to make timely payments. They are particularly careful when dealing with government customers, who are also repeat purchasers. Companies that are financially weak may be attracted by longer credit terms with zero advance payments as compared to product quality or delivery factors. Some buyers' firms may operate very low inventories, in which case they may look "f for supplier firms that give prompt and fast delivery.

11. Purchasing Policy


Purchasing policies is another micro variable used to segment customers based on the history of purchase practices. The government firms have a standard purchase policy of # tender bidding and orders are placed on lowest price bids. Large and small private firms show considerable discretion in deciding the best bidder apart from the price. V Purchasing criteria can also be another way of segmentation. If products are standard and for mass consumption, economic criteria such as price, payment terms, inventory a costs, inspection and rejection costs may become the dominant factors. For complex and custom built items equipment, performance, quality and application criteria may become dominant factors in the purchase decision.
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Industrial Marketing

Segmenting by group and individual buying behaviour

While organisational buying patterns need to be studied and investigated, it is equally important to analyse the roles of groups and individuals, who are ultimately responsible for the purchase process. a) Characteristics of purchase situation New purchases increase the level of difficulty on the part of the buyer. It might pertain to a new purchase (and its associated risks), a modified repurchase or a simple repurchase (reordering products already in use). The seller needs to identify the appropriate benefits under each type of purchase that will appeal to the buyer firm's representatives. Many buying situations can take a very long time before a decision is made and the contract is signed. The process can vary from a couple of weeks to a couple of years. Purchasing agreements might also be renegotiable after specific time periods. The industrial marketer needs to have a good grasp of the purchase cycle times of each customer. All companies will have buying policies related to such areas as base, rental, price setting, price negotiation, and terms of payment. In some companies, purchases will not even be considered until a qualifying process puts a seller or an approved vendor list. Almost all industrial firms have many persons within the organisation in the purchasing decision, depending on the criticality of the purchase item. Identification of the roles played by the various DMU (Decision Making Unit) members, those with the most influence and the primary decision makers, must be part of the segmentations and sales process. b) Group buyer Characteristics All groups exhibit many types of buying behavior according to the group's constituent characteristics, organisational demands and the types of buying decision to be made. Other group factors that can influence decision making will include who the members are, the role and position of the member in the organisation who has the power to make decisions, etc. The industrial marketer's function here is to identify the specialists and the influencers so that advance action can be taken to enable favourable decision from the DMU.

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Market Segmentation, Targeting and Positioning

c) Individual Buyer characteristics


In spite of the standardisation of organisational systems, process and procedures, buyers will bring their own style and ways of working to the purchase process. This will vary according to many factors such as age, whether new to the job, confidence, the need to impress others, etc. There are many examples of companies losing all its business when a new purchase official takes over from an old one. When dealing with single owner firms or SMEs, the decision to purchase or not rests with the whims and fancies of a single individual. In these situations, understanding human nature and motivation driving the purchase situation become critical. Personality and attitude can plan a vital role in shaping an individual buyer's characteristic responses to buying situations. Some of the other factors responsible for individual buyer behavior are: ambition, experience, self-image, risk tolerance, decision making cognitive style and job responsibility.

& >A c tiv ity D ;


a) The following bases of segmentation would apply to both industrial products and consumer product companies D Size D Purchase structure D Buying situation D D D Geographic location Usage Rate Stage in purchase decision process

b) Purchase situation characteristics are a variable used in: D Macro segmentation D Micro segmentation

5.6 MARKET SEGMENTATION EVALUATION


An industrial firm needs to evaluate the different segments identified through the market segmentation process. Various approaches are adopted to determine the attractiveness of market segments. One approach consists of assigning weightage and ratings against selected parameters and arriving at a score. This makes comparative evaluation easier. The parameters generally considered for evaluation can be grouped under the following three broad headings:
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Table 5.3 : Evaluating Market Segments Type 1 factors (Country related)


Government regulations Economic stability Government laws and procedures Environmental issues

Type 2 factors (Industry related)


Size of market Segment Growth prospects Profitability Prospects Barriers to entry Level of competition Number of buyers firms Price Levels

Type 3 factors (Company related)


Product range & Selection offered

Costs Channel Structures Marketing Research Database - Levels of Promotion required - Technical & Managerial skills availability The scores arrived from evaluation criteria can then be mapped in a 2 X 2 matrix or 3X3 matrix based on the two variables of company strengths and segment attractiveness. Company Strength HIGH HIGH LOW

1 Segment \

Product 1 Product 2

Attractiveness

, .. .. . ,-

LOW Fig. 5.2 : The Segment for Product 1 is more attractive than Product 2
The Company's objectives, goals and resources should be aligned to each potential market segment, which has been evaluated and targeted. In other words the company's strength should be compatible with the key success factors for the chosen market segment. For example- if Product 2 in the above figure is evaluated and lies in the upper right quadrant, the company's resources need to be rebooked and reassessed to determine whether the weakness can be overcome.

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^ Activity E;
The three broad facjprs, usually termed Type 1, Type 2, Type 3 factors, for evaluation of market segments are:

w o

1.___________________________________________________________________ o 2 t . h e 3 . r

5.7 TARGET SEGMENTS

Segment selection needs to be carried out on a careful evaluation process for a market segments as indicated in the previous sections. The relationship between buyers and sellers call for long term commitments with heavy resources that may be j difficult to withdraw at a later stage. o Market profiles should then be drawn up for each selected segment giving more details about the types and sizes of potential buyer firms along with the product r benefits required. These profiles make the task of product benefit development, product positioning and customer communication for the seller firm a lot simpler. The customer profile i can include the following characteristics: n Geographic location of all potential buyer firms in the target segments; p Product and services sold and bought u Relative importance of benefits like price, quality, delivery, past experience t and post sales services Average size of organisations in terms of sales volume or company turnover; Buying patterns Competitors currently serving the customers Existing relationship with existing suppliers t h a s

t will help finalize the selection process are i) Competition Profile

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Industrial Marketing

i)

Demand forecasting

Competition profile will cover factors such as present market share product portfolio and benefits offered, costs, prices and likely profitability pattern and supply chain relationship. Demand forecasting is necessary to assess the sales and profit potential. Many new seller firms also resort to discussions with potential buyer firms before targeting the marketer segment in order to ' get a feel'. This gives the industrial marketer a great advantage over the consumer product marketer since clear guidelines to enter market segments can be drawn up before committing large resources. Knowledge of the selection criteria used by buyers and their importance in the choice of a supplier can give a supplier firm a distinct advantage. Target market implementation strategies Segmentation strategies that the firm can adopt fall into 3 broad categories: i) Concentrated Marketing; ii) iv) Differentiated Marketing; Niche Marketing 1) Undifferentiated Marketing; i) Concentrated Marketing

132

Usually the most widely used strategy by smaller companies is concentrated marketing which consists of diverting all marketing efforts to a single or relatively few, defined segments. Firms whose resources are restricted generally carry it out.

Typica lly, its narrow produc t range and service s are strengt hened by high quality , high price

and highly selective promotional and distribution strategies. Its share of business grew as the firm acquires more knowledge of its target segments and tailors its offering better than competitors. Concentrated marketing strategy involves great risks since the chosen market segments are very few and hence the firm becomes vulnerable to attack by larger competitors. This type of strategy may work well in the short term, but the industrial firm that is looking for high growth in market share, will generally spread its net much wider. ii) Differentiated Marketing

In this type of strategy a firm targets several segments whose needs and requirements are substantially different. The seller firm develops separate marketing strategies for each of its chosen segments. Although this has the effect of increasing overall costs in areas such as product development or modifications, promotion, production and distribution, its objective is to achieve higher sale volume and a stronger position in the chosen segments. Differentiated

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Market Segmentation, Targeting and Positioning

strategy has the advantage of spreading the marketing risks, and its adoption leads to higher sales and higher costs. In the case of customised industrial products and services, differentiated marketing is more of a necessity than an option. A construction company will necessarily have to adopt different marketing approaches when targeting a software park or a road bridge. Even when targeting the same segment, say a software park, the company will need different strategies in terms of pricing, promotion and level of services if it were to build at two different locations, say at Cochin and Navi Mumbai. This is because the needs and requirements of the two customers (State Governments of Kerala and Maharashtra) would be quite different. Differentiated Marketing would also become a necessity for firms whose marketing shares are declining either due to increased competition or due to poor investments by existing industries.

iii) U ndifferen tiated M arketin g


Undifferentiated Marketing refers to a single marketing plan by firms that are common to all segments or customer groups. This strategy may be a result of lack of customer research and analysis or marketing planning. It could also be a conscious decision of offering standardized products or services to a market, which does not lend itself to easy segmentation analysis. The advantage of Undifferentiated strategy is that it controls the total costs of marketing such as market research, inventory and production. But in a highly competitive market, the firm that does not differentiate its strategies, can face a sharp decline in market shares, particularly when competitors are aggressive.

iv) N iche M arketing


The first level of segmentation determines large customer groups or homogeneous customers. When extended to a further level of segmentation, smaller defined groups of customers emerge called 'niches'. This subgroup needs products or services specially designed or custom built to different specifications. For example, Indian Navy can be a segment and naval ships can be a sub-segment or a 'Niche market'. Niche marketing refers to the marketing strategies directed at such specific subgroups of customers having their own unique requirements, standards of performance and services needs. It is a strategy option that is finding increasing popularity in industrial marketing competitive markets.

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Industrial Marketing

Both Volkswagen and Toyota used niche marketing when they first entered the North American Market. Their strategy was to enter with small cars at a time when American Companies like GM, Chrysler and Ford were not even considering this product line. The Niche segments grew so big that the big 3 auto giants in USA were forced to reconsider their marketing strategies, but by that time both Volkswagen & Toyota had gained substantial growth in market shares. Volvo identified a niche market in Europe that wanted a safe, functional and long-lasting passenger car. The main advantage of niche marketing is that it offers scope for premium pricing and above average profit margins. The disadvantages are that the demand of a niche market may decline or a large competitor can quickly attack this market. One way by which a seller firm can overcome this disadvantage is to keep working on the creation of new niche segments instead of relying on only one time. This can offset the losses in one particular niche market. The final segmentation decision faced by the industrial firm is concerned with which and how many segments to enter. Briefly, the choices are: i) Single segment concentration (Concentrated marketing)

i) Selective specialisation (Differentiated marketing) iii) Product specialisation iv) Market specialisation (Niche marketing) v) Full market coverage

JS$ Activity F:
a) The four broad implementation strategies for target segments are: 1. __________________________________________________________
2.

3. 4.

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b) Single segment concentration is rarely practiced by industrial companies. D True D False

Unit 5

Market Segmentation, Targeting and Positioning

5.8 POSITIONING
Having chosen the market segments, the seller firm needs to position its products and services. Positioning refers to the activities of placing the corporate brand, product and service in the market place with distinctive benefits that separate its offering from its competitors. If the product service benefits are inferior or equivalent to those offered by competitors there would be no compulsion for the customer to switch. In industrial markets, corporate branding assumes an important role as compared to consumer markets. Examples of corporate branding are Reliance Industries and Tata Steel. There are three generic categories under which benefits can be slotted vis-a-vis the competition: i) Product superiority ii) Lower price iii) Differentiating attributes

Product comparisons of competing firms have been made a lot easier with the advent of the Internet. In the past, customers were forced to rely on formals, exhibitions, magazines other print media and word of mouth in obtaining and selecting suitable suppliers for industrial products. Multiple options from around the world can now be obtained through a search engine. Developing a positioning strategy involves: i) Identifying the target customers' needs and the major benefits or attributes applicable in buyer behavior iii) Selecting one or more major attributes or benefits for differentiation based on the seller firms strength in) Communicating the firm's positioning to the target markets. Several variables are used to differentiate the firm's products from competitor's products of which the most common types pertain to i) the product, ii) the services and iii) the image.

i) P ro d u ct v ariab les
For standard off-the-shelf industrial products, the variations may be small but emphasis can be given to product performance, quality, ease of maintenance, etc. of ISO 9000 Certification. However, the certification has now become more of a necessity for companies to enter foreign markets and also to ensure they remain qualified as potential suppliers.
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Industrial Marketing

Optional features on products and equipment are also used as a differentiating factor emphasize the choices available to customers .A variety of such features are now " available in products aimed at end users, eg. in 4 wheeler passenger cars.

ii)

Service variables
Perhaps the most sought after differentiating variable is the range of services available from manufacturers and services providers. The range courses the spectrum of: a) Pre-sales services (before order placement such as helping the customers frame appropriate technical specifications and characteristics, b) during sales services (during order execution such as timely delivery); c) post sales services (such as installation, repair and maintenance services). Even PC hardware manufacturers offer a host of post-sales services to both customers at the retail level and at the company level. Service variables offer a key advantage when products of competing firms are very similar.

iii) Image variables


The ways in which customers perceive seller firms affects its image. If it is favorable, the firms enjoy a 'good image and reputation. In general, the buyer firms respond positively to firms, that have a good image, have a corporate brand and have a reputation of consistent quality. Tata Steel regularly runs promotional campaigns on industrial TV and Print media to maintain and enhance its corporate image. The most important factors seller firms need to keep in mind while deciding the positioning strategy are: 205. Attributes that target customers consider important when taking the purchase decision. 206.The ways target customers perceive the project /service offering. 207.The ways target customers perceive the competitor's product/service offerings on the same attributes.

Unit 5

Market Segmentation, Targeting and Positioning

Position map is a common tool for deciding and implementing position strategies.

I
Firm A

High Quality Services

FirmB *FirmC

Fast Delivery

FirmD

Slow Delivery

Firm E

Low Quality Services

Fig. 5. 3 : Position Mapping


Product position maps are often used to identify 'benefit' gaps in the market that can be filled by a firm and/or product in a particular market segment. In the figure 5.3, it can be seen that there is a wide gap between the product /services offering of firm B and the other firms; firms D and E can and need to concentrate their efforts in improving the quality service in order to catch up with the enviable position that firm B enjoys, while firms A and C require considerable improvements in timely or faster deliveries without sacrificing the level of services.

5.9 COMMUNICATING THE COMPANY'S POSITIONING_______________


After deciding the positioning strategy, the industrial firm needs to communicate the same effectively to the target markets. For industrial projects, this is generally carried out through the sales force (personal selling), sales promotion (trade shows, exhibitions and direct mail to target customers) and advertising (business dailies, magazines and industry publications). In brief, the main steps in the segmentation, targeting and positioning processes can be summarised as below:

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Industrial Marketing

Market Segmentation i 1. Identify Bases for market Segmentation.


T

Target ** Segmentation ^r 3. Evaluate market attractiveness of segment. 4. Select one or more segment. Fig. 5.4

Product ~^ Positioning
1 r

5.

Identify productpositioning possibilities.

2. Determine important Characteristics of each segment

6. Develop market mix strategies for each segment.

Branding
A question that often arises is whether branding should be adopted by industrial firms. No doubt the intense competition in the industrial product field has forced marketers to look at all possible positioning strategies. By and large, it would appear that branding creates a positioning advantage for the firm when: i) the firm is involved in both B2B and B2C (business to consumer) markets.

ii) the firm is relatively known as an entity in their industry. in) the firm has definite plans to enter foreign markets at some point in future. iv) the firm has entered or wants to enter an entirely new field of activity (e.g. Videocon entering the field of oil exploration) with which it has never been associated. Some of the examples of companies that have used branding as an important element of their overall strategy are: Videocon, Reliance Industries, Dow Chemical, INTEL, Tata group, Birla group, Wipro, and IBM (see example below).
i

Strategy and Rebranding at IBM Since the late 1990s, efforts had been underway at IBM to simplify a complex set of product lines for customers and drive efficiency in marketing and business operations. This reorganisation was the next big step.
Three organisations were now one: the IBM ThinkPad notebook computer group, the IBM NetVista desktop computer team and the monitors and options area. From a

Unit 5

Market Segmentation, Targeting and Positioning

usiness strategy and brand strategy standpoint, this consolidation of talent and resources osedboth opportunities and challenges. Tie question at hand was: should the new consolidated organisation go to market with ne identity or continue with multiple identities and positioning strategies in the marketplace? lie branding and marketing strategy team saw the potential for a new branding approach mt would strengthen the positioning of the IBM PC portfolio in the marketplace and ignal strategic differentiation. Yet the current brands had varying levels of strength, and tood for different things in buyers' minds. TiinkPad was by far the strongest brand. Announced in 1992, the IBM ThinkPad stood or quality and innovation. Its classic black design was recognized throughout the industry and had won hundreds of design awards. Research showed that customers believed that liinkPad users tended to be serious business leaders who had achieved success in their leld. These factors translated into high awareness, consideration and purchase for the liinkPad line of notebook computers. The IBM NetVista desktop PC line was less well known. Announced only the prior year, t had not yet had the ability to build brand equity and become known in the marketplace, ieyond the branding issues, other factors also needed to be considered. The PC industry lad grown up, placing high importance on having the latest technology, yet as hardware capabilities outpaced the demands of software applications, PCs became "good enough". ^ower prices and stable offerings had become more important than new hardware technology to business buyers, IBM's major target. Two questions intertwined - "how should IBM differentiate itself given the new industry dynamics?" and "how might a new branding approach help communicate this new strategy?" The IBM PC team's innovation focus was beginning to shift beyond the benefits provided to end users to include the information technology department and the business overall. These innovations were in areas such as enabling wireless mobile computing, enhancing notebook security, and making back up and restoration of data easier and more fail-safe. This shift in strategy was profound, enabling IBM to position itself more effectively against competitors whose value proposition could be summed up as "lower purchase prices for vanilla technology". Yet, to create awareness of an alternative, IBM needed to communicate its new value proposition - innovation for business advantage - to customers. 139

Marketing strategists pondered if there was a way to address both the branding issues facing the PC division while simultaneously communicating the new value proposition for customers. The most appealing plan was to build off the strength of the ThinkPad brand, extending its name and equity to the other product lines. Beyond ThinkPad's positive associations and high awareness, the word 'Think" itself had a long history and association with IBM, going back to its original founder, Thomas J. Watson Sr. Back in the early 1900s, T.J. Watson made "Think" the motto of IBM, saying, "Thought has been the father of every advance since time began. Knowledge is the result of thought, and thought is the keynote of success in this business." Watson was also responsible for creating Think magazine, an internal and external IBM publication focused on innovation, and for the proliferation of "Think" signs on the desks of IBM employees. This tie to 'Think" was linked to IBM's heritage for innovation and was such a prominent part of IBM's culture that it became linked to IBM in customers' minds as well. Given favourable market input and corporate support, the next step was to solidify the brand architecture and link it to the business strategy. Extending the ThinkPad brand name, the NetVista desktop line was renamed ThinkCentre and the monitor line was named the Think Vision. Grouping these formerly disparate products under an "umbrella brand" enabled IBM to communicate in shorthand the key differentiators of its personal computers. The Think strategy was announced In 2002 in events in 12 major countries. Then, in the first quarter of 2003 IBM released the "Thinkers" ad campaign, featuring real-life successful people who used company offerings to gain business advantage. As 2003 continued, the new offerings from the Think family were released. Uniting the branding and business strategies had a significant positive effect on market perceptions and business results. Organisationally, the PC Division's innovation for business advantage strategy also links well to corporate IBM's new On Demand strategy, which was announced in October 30, just before the Think announcement. The On Demand strategy is focused on making businesses more productive and responsive through IBM's business consulting and technology offerings. Just as importantly, the Think strategy re-energized the IBM PC team, renewing purpose and intent.
140

j |
1

The advertising campaign was well received, testing extremely well among readers and : increasing awareness of selected Think family products significantly in 2003. More importantly, the Think message and promise of value has resonated with customers, leading them to reconsider their purchase criteria for personal computers.

Sales, of course.

Unit 5

impor tant comp are the ultimate test. W hile the new ThinkCentre products have won several onent industry accolades, it is still too early to determine long-term success. However, of by October of 2003 sales of the ThinkPad had reached 20 m illion - more mark than any other notebook brand. Significantly, while the first 10 million unit sales took eting eight years (1992 to 2000) second 10 million took only three years (2000strate the to 2003). gy as can S ource : (C ondensed fro m 'IB M : M a king B rand ing a nd stra tegy be c o u n t', seen from M anagementfirst.com) the study & A c tiv ity G ; of the a) Large industrial companies usually adopt one of the following in their growt h of positioning comp anies strategy: like D Service Relia branding D nce Indus Product branding tries, D C orporate Tata Steel, branding MIC b) Among the variables available for differentiating an industrial firm's offering from O and those INTE of competitors, the most valuable is: L. D Product This variable D unit expla Image variable ins D Service the conc variable epts relate 5.10 SUMMARY ____________________________________ d to segm A thorough analysis of the purchase-related behaviours and buying patterns of entati industrial organisations is necessary for the segmentation process to be effective. on Clearly, there are different dimensions in the purchase behaviours of industrial product customers than for consumer product customers, although some of and the ident macro-variables may be common for both branches of marketing. Industrial firms ifyin have been found to be successful when they employ market segmentation as an
Market Segmentation, Targeting and Positioning

g target markets. The process of industrial market segmentation has been explained. A subsequent section has with the evaluation of market segmentation in order dealt to decide the target markets.

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Industrial Marketing

The aspects of positioning and branding are now increasingly becoming as important to industrial products as they are for consumer products as observed from the last section. The foregoing units set the stage for Product Planning and Development.

5.11 KEYWORDS

____________________________________________

Macro-segmentation: It refers to the process of segmentation of a market that uses variables such as organisation characteristics, product or service application, and purchase situation characteristics. Micro-segmentation: it refers to the process of a further breakdown of the segmentation carried out at the macro level. It tends to group customers having similar behaviour patterns in purchase situations. It uses variables such as: heavy, medium or high users; single source or multiple source users; one-off buyer or repeat buyer. Market segmentation valuation: It refers to the process of evaluation market segments on the bases of macro-level and micro-level segmentation. Niche Marketing: It refers to the marketing strategies directed at specific groups and sub-groups of customers having their own unique needs requirements from suppliers. Positioning: It refers to the various activities of placing the corporate brand, or product or services in the market place with distinctive benefits that separate its offering from its competitors.

5.12 SELF-ASSESSMENT QUESTIONS

________

Ql. What are the essential differences between macro-segmentation and microsegmentation? Q2. How will you select the target segments for institutional buyers of mobile phones? Q3. Discuss the relative importance of the three variables used by industrial firms to differentiate their offerings from those of competitors. Identify the variables used by an Indian automobile manufacturer. Q4. Identify the various purposes and benefits of market segmentation. Q5. Identify the variables used in macro Segmentation and micro Segmentation.

Unit 5

Market Segmentation, Targeting and Positioning

,31

Q6. How will you carry out the segmentation process for a medium-scale manufacturer of PC hardware?
*

Q7. Describe the importance of partnering and reciprocal relationship in micro-segmentation.

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Industrial Marketing

6.1 INTRODUCTION
Product planning is the determination of the company's basic product policies regarding the products that the industrial firm will make and sell according to the specifications desired by customers. Developing product strategies requires analysis and understanding of the alignment process of the product mix with the overall company and marketing objectives as well as the customer's changing needs. The ability of the seller firm to put together a comprehensive package of products and services that provides superior value to customers is most essential for industrial product management. The first 'F in the marketing mix (Product) is as significant in industrial product marketing as in consumer product marketing but its dimensions and elements are not necessarily the same. The concept of value addition needs to be understood in the context of industrial product/ market scenario. Most of the value additions that industrial companies derive in the present market situation of heavy competition can be analysed under primary and secondary additions. Different marketing strategies need to be adopted in the different marketing stages of the PLC (Product Life Cycle) depending on the type of product, technology and market segments. The approach to the new product development process and its elements also forms an important part of the industrial marketer's plans. The last subsection includes some of the basic issues concerned with strategy involved in high technology products.

6.2 TYPES OF PRODUCT LINES


Product lines of industrial firms differ from those of consumer product firms. Product lines can be broadly classified under four types: 208.Proprietary or Catalog Products: These items are offered only in certain configuration and produced in anticipation of orders. They are usually available off the shelf or with low lead times for deb'very. Product line decisions concern the addition, deletion or repositioning of products within the range. 209. Custom Built Products: These items are offered as a set of basic units with numerous accessories or options. For example, hardware for computer networking solutions in a commercial enterprise or a large plant will differ in scope, quantity and options that will have to be adapted to suit a specific application. Product line decisions will center on the proper mix of options, accessories and features.

Unit 6

Product Planning and Development

210. Custom designed products: These items have to be developed to suit the needs of one or a small group of customers. Sometimes the product is a unique unit, such as a power plant for a Zinc Smelter or a large unit manufacturing compressors. For some items, the designs have to be specifically developed to ensure the suitability of the equipment that may consist of combinations of discrete products. The design of a jumbo passenger aircraft would involve extensive design engineering based on the customer's (in this case an airline's) technical and commercial requirements. 211.Industrial Services : Instead of a physical product the buyer is purchasing a company's capability in an area such as maintenance, technical services, and legal or management consultancy. Post-purchase services are especially important to buyers in many industrial product categories ranging from computers and machine tools to customer-designed component parts, Responsibility for service support is often scattered in various departments, such as application engineering, customer relation or plant maintenance. The industrial marketer can maximise customer value by managing and coordinating product, sales and service.

^ A ctiv ity A ;
A power plant for a Zinc Smelter (an important part of a unit manufacturing Zinc) would fall under the category of: D Catalog products D Custom-built products Custom-designed products Industrial services

6.3 PRODUCT POLICY AND STRATEGY


This involves a set of decisions concerning the products and services that the company offers. Through product policy, a seller firm is attempting to satisfy customer needs and build competitive advantage by capitalising on its core competencies. An accurate definition of the product market is necessary to evolve product policy. Product strategy: Product strategies deal with such matters as number and diversity of products, product innovations, product scope and product design. The implementation of product strategies requires the cooperation and active involvement of personnel from different functional areas such as R & D, Finance, Corporate Management and Marketing.

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Industrial Marketing

Product Strategy alternatives


Some of the main strategy alternatives considered for industrial products are: i) Product repositioning strategy for existing customers for new users for new uses/applications Product-overlap strategy competing brands private labeling; dealing with OEMs (original equipment manufactures)

a)

iii) Product-scope strategy single product multiple products systems of products iv) Product design strategy standard mass-manufactured items custom-built products standard products with modifications v) Product-rationalisation strategy eliminating unprofitable products reduction in variety in same products harvesting vi) New product strategy product improvement/modification product imitation Product innovation vii) Value marketing strategy based on quality strategy based on customer services time based

Unit 6

Product Planning and Development

With the trend towards globalisation and the dependence of industrial firms on many market sectors, companies and MNCs have to compete on a worldwide basis. For this, an assessment of global or product market opportunities is required.

Table 6.1 : Global product-market opportunities


Product configuration Same Same Market needs Different

I
Different

Global Product Product Segmentation

Market Segmentation Tailored -to- country product

5, Competition of firms involved in the telecom, computer, agricultural equipment, automobile and aerospace industries exists on a global scale. E.g. Canon, Japan adopted a strategy that exploited the similarities in buyers' needs across country markets. If decided to forego its ability to precisely meet the needs of the domestic market in order to maximize its position in the global market. Apple Computers and Sony offer standardised products but employ different positioning, promotional and distribution strategies in each company. Ford Motors, USA may sell the same basic passenger car models in India but has to adapt the product to Indian conditions and for the Indian customer. For example, left hand drive vehicles need to be converted to right-hand drive vehicles. Nokia, Sweden has chosen to develop specific models of mobile handsets for India considering the vast hinterland and the roughness in usage required, by Indian consumers.

jg? Activity B; a) The four quadrants in the global product-market needs matrix are:

1. _____________________'.________;__________
2 . 3 . 4 .

.a.

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Industrial Marketing

b) Multiple products comprising a full product range would fall under the category of product strategy alternative: D Product-overlap strategy D Product-rationalisation strategy D D Product-scope strategy New product strategy

6.4 INDUSTRIAL PRODUCT LIFE CYCLE (PLC)

_______________

The product life cycle (PLC) concept has been a subject of great importance in marketing theory and has as much relevance to industrial products as it has to customer products. According to this concept, products go through 4 different stages, each stage being affected by different competitive conditions. These stages require different marketing strategies at different times if profitability is to be maintained.

Sales

Sales

Stages I - Introduction I GGrowth M-Maturity D-Decline

Fig. 6.1 (a): PLC (typical) for Industrial products

D >l
Sales Sale

Fig. 6.1 (6) : PLC (typical) for consumer products

Unit 6

Product Planning and Development

A lth o u g h th e re c an n o t b e a n y v a lid c o rrelatio n b etw e en th e P L C c u rv e s fo r in d u stria l a n d c o n su m e r p ro d u c ts, so m e v e ry g e n e ra l tre n d s a re : i) T h e in tro d u c tio n an d g ro w th (I & G in fig .0 1 ) stag es fo r in d u stria l p ro d u c ts are u su a lly n g e r th a n th o s e o b s e rv e d fo r c o n su m e r p ro d u c ts ; lo ii) T h e o v e ra ll life c y c le (I+ G + M + D ) fo r tra d itio n a l a n d h e a v y e n g in e e rin g ite m s (su c h a s tu rb in e s , g e n e ra to r s , n o n -e le c tro n ic ite m s ) is lo n g e r c o m p a re d to m o d e r n , lig h tn g in e e rin g ite m s p a rtic u la rly th o se b a se d o n e le c tro n ic s a n d e m ic ro e le c tro n ic s. in ) N e w p ro d u c t d e v e lo p m e n t sta g e - p rio r to th e I-sta g e is u su a lly lo n g e r fo r in d u stria l p ro d u c ts th a n fo r c o n su m e r p ro d u c ts.

N o t a ll p ro d u c ts fo llo w th e S sh ap ed cu rv e . V a rio u s P L C p a ttern s h av e b ee n id e n tified fo riffe re n t p ro d u cts, b u sin e sse s a n d in d u strie s. F o r e x a m p le , th e ce m e n t d in d u stry is h ig hcly yclical an d d ep en de nt o n season s- h enc e, th e P L C c urve or p attern w ill be q uite d ifferent. I-In tro du ctio n stag e T h is is th e p e rio d d u rin g w h ic h in itia l m a rk e t a c c o rd a n c e is in d o u b t. H e n c e , th is is a period of slow gro w th. P ro fits are alm ost nil because o f high m ark eting and oth er ex penses. a rk e tin g s tra te g y in th is s ta g e is b a s e d o n d iffe r e n t c o m b in a tio n s o f M p ro d u c t, p ricpero m o tio n a n d d istrib u tio n . P ric e a n d p ro m o tio n v a ria b le s c a n b e c o m b in e d to g e n e ra te follow ing strategy alternatives: i) high price/high prom otion; the ii) high price/ low prom otion;lo w p rice/ hig h p ro m o tio n; iv ) low price/ lo w iii) pro m o tio n. G - G row th stage S u rv iv o rs o f th e in tro d u ctio n stag e g en erally en jo y a p erio d o f rap id g ro w th . D u rin g th is stag e , th ere is su b stan tia l p ro fit im p ro v e m e n t. S tra te g ie s in th is sta g e m a y b e c o n sid e re from the following: d 2 1 2 .p ro d u c t im p ro v e m e n t-a d d itio n o f m o d e ls, fe a tu re d , b e n e fits 213 .developm ent of new m arket segm ents- eg . E x pand ing the use of bearing in auto m ob iles to m otor-pum p 214.add ition of new distribution ch annels 215.selective dem and stim ulation; 151 2 1 6 .p ric e re d u c tio n s to a ttra c t n e w c u sto m e rs a n d to g e n e ra te p ro d u c tio n e ffic ie n c y .

Unit 6

Product Planning and Development

ii) Hold the firm's investment level until the uncertainties about the industry are resolved. i) Harvest the firm's investment to recover cash quickly.
/

ivj Decrease the investment level in unprofitable products or product groups. v) Divest the business quickly by disposing off its assets. In the case of technology-based industrial products, technological developments usually dictate the speed of the decline stage. In some instances like the microprocessor industry, each decline stage of the INTEL make model has been preceded by the growth of a new one having technological superiority over the previous generation (see Fig. 6.2). Y Sales + Year Pentium Fig. 6.2 : Typical life cycle of INTEL microprocessor models The pricing pattern across the product life cycle may be summarised as below:

Stage O ption
I G M 4. D - Low price for market penetration; high price for premium product in view of low competition Maintain price as market grows increase profits through economies of scale; lower price /add value in line with competition Offer special prices to existing or new outlets; lower price selectively to defend market share. Lower price to phase out the product. Reposition product in new segment.

I
153

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Product Planning and Development

6.5 DELIVERING SUPERIOR VALUE


A n in d u stria l p ro d u c t re p re s e n ts th e to ta l p a c k a g e .o f b e n e fits th a t c u s to m e rs re c e iv e w h e n th e y p u r c h a s e a n d u s e it. D e liv e r in g c u s to m e r v a lu e n o w d o e s n o t m e a n m e r e l y p r o d u c t q u a lity . S u c c e s s f u l f ir m s h a v e r e a lis e d th a t c u s to m e r s d e m a n d s o m e th in g m o r e th a np ro e u c t a n d p ro d u c t p e rf o r m a n c e . It c a n in c lu d e a ll o r a th d c o m b in a tio n o f th e fo llo w in g : i) P h y s i c a l a n d p e r f o r m a n c e a t tr ib u te s o f th e p r o d u c t i) P re - s a le s te c h n ic a l s e r v ic e s in) P o s t- s a le s s e r v ic e s c o v e r in g r e p a ir s e r v ic e s , m a in te n a n c e a n d tr a in in g iv) T im e ly d e liv e ry su p p o rt v) B e n e fits d e r iv e d fr o m re p u ta tio n o f th e s e lle r T h e b e n e f its m ig h t in c lu d e th e b u y e r - s e lle r r e la tio n s h ip its e lf w h e n c lo s e in te r p e r s o n a l la tio n s h ip s d e v e lo p a m o n g k e y p e rs o n n e l in th e b u y e r a n d s e lle r re firm s . T h e s u m to ta lth e f s a tis f a c tio n th a t a c u s to m e r d e r iv e s a t b o th th e o o r g a n is a tio n a l a n d p e r s o n a l leree ls is v presentativ e o f 'v alu e'. A k e y fu n c tio n o f th e in d u stria l m a rk e tin g d e p a rtm e n t is to m a k e th e o rg a n isa tio n fo c u s o n e l iv e r in g s u p e r io r v a l u e to c u s to m e r s . A n u m b e r o f c o m p o n e n t s o f d s e l le r 's m a r k e t inro g ra m s (a s m e n tio n e d in th e p re c e d in g p a ra g ra p h ) a re c ritic a lly pg e v a lu a te d b y th e b u y e r . T h is c a n b e a c h ie v e d o n ly th ro u g h c a re fu l c o o rd in a tio n o f firm a c tiv itie s a m o n g p e rsoinn e lro d u c t m a n a g em e n t, sa le s a n d se rv ic e. F o r ex a m p le, n p c u sto m isin g a p ro d u c t an d d esliv e ryu le fo r a n im p o rta n t c u s to m e r re q u ire s c lo s e ch d c o o rd in a tio n a m o n g p ro d u c t, loanis tic s staff. S o m e cu sto m ers m igh t req u ire g d sales sp ecial en gin eerin g , in stallation and eqsuipm en t o r o n -s ite te s tin g , th e re b y u p p o rt in c re a s in g th e re q u ire d c o o rd in a tio n b e tw e e nservice units. s a le s a n d

6.6 VALUE ADDED PROCESS


The basic concept of value addition is derived from the principle that there is a basic to all products around which benefits are then added in response to the buyer's secondary needs. The three components of value added addition can be described as under: 217. Value from the core product 218. Value from primary additions

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Industrial Marketing

3. Value from secondary additions

Core Product
Functional Benefits

Primary Additions
Product range, price, Payment terms, leasing, Franchising, licensing Customised Product, options, consultancy Additional customer

Secondary Addition
Delivery, Installation Policies for return CRM Systems Repairs, Maintenance contracts, management contracts Guarantees, Warranties

Fig. 6.3 : Value additions for industrial products 1. Core Product All industrial products and services have some basic form of core that is the starting point for the value-added process. The core product is applicable to the basic product having the least benefits and features without which it would become unacceptable to the customer.

2. Primary added value


In response to the customer's needs and demands and to the benefits offered by competitors, the seller needs to add more benefits to the product or service. Primary added value benefits can include the following: Product innovations New Product/services development Choice of product- whether customised, standardised or integrated Additional features or benefits (over the competitor's products); Technical help, advice or consultancy Product quality Price, payment terms, leasing and other options for commercial terms Locations and point of purchase Promotions, communication and corporate reputation Branding Packaging

Unit 6

Product Planning and Development

3. Supplementary added value

M ost industrial com panies realise that responsibility does not end w ith the purchase and delivery of products. C ustom ers w ant and expect m uch m ore after the purchase and receipt of m aterials. This is particularly true for industrial products. The level of post-purchase involvem ent w ill vary to a very large extent according to the product and service sold and the type of relationsh ip that had been entered into. Supplem entary added value benefits can include the follow ing: i) C ustom er relationship system s ii) Special services for installation, testing and com m issioning
I) Management and consultancy services

iv) Service contracts v) Q uality, perform ance level guarantees vi) Policies for returns (if any) vii) A ccess to add -o n p ro du cts an d services. W e can see that the industrial firm can add value to its products and services in m any w ays in response to the custom er's changing dem ands and requirem ents. The industrial m arketingm anager can build com petitive advantage for the com pany by adding the m ost suitable com binations of these factors under the concepts of prim ary and supplem entary added value to the core product or service. The selection of the factors in developing a competitive d u c t p o rtfo lio w ill d e p e n d o n in d u stry a n d m a rk e t p ro c o n d itio n s a n d o rg a n isa tio n a l competencies and strengths.
& Activity D:
:

S .

a) Identify tw o V alue addition m easures undertaken by 2 industrial com panies, w hich characterise the concept of'V alue through supplem en tary additions'.
Company 1: Company 2:

15 7

Industrial Marketing

b) Commercial terms of payment can be one option of: -D Primary added value D Supplementary added value

6.7 PRODUCT/MARKET STRATEGIC DEVELOPMENT

The Ansoff matrix model depicted in Fig. 6.4 provides a useful tool in identifying and building strategy development directions. This product/market matrix helps in identifying directions for both existing and new products as well as existing and new markets. It brings out the strategic options available to an industrial firm in terms of product and market coverage, taking into account the strategic capability of the company and the expectations of the stockholders. Products Existing New

Market

Existing

Q
MARKET PENETRATION MARKET

(D
PRODUCT DEVELOPMENT DIVERSIFICATION

ti
New

DEVELOPMENT

158

Fig. 6.4 : The Ansof Matrix Model Market penetration: selling existing products to existing markets/ Market segment

Market extension: Extending existing products to new markets/ market segments

Product development: Developing new products for existing markets/market segments

Unit 6

Product Planning and Development

Diversification: developing new products for new market segments.

LESS RISKY

VERY RISKY

Fig. 6.5 : Strategy direction


Market penetration Within the category of protecting a company's position, there may be opportunities for market penetration- meaning that there is an increase in market share. This strategy will only be possible if there is market growth and/or one company is able to take sales from another supplier. It is usually more difficult to gain more market share in an industrial market than in a consumer product market because of limited buyers, existing loyalties and almost instant information being available regarding competitor's developments. Product development The second alternative is to develop new products/services and provide better benefits to existing customers. Industrial buyers will always welcome new solutions as long as they offer more productive ways of running a business. For example, Bajaj Auto has been developing newer models of motorbikes in the Indian market and phasing out the older ones considering a primary need for fuel efficient bikes generated by the rising fuel costs. Market development The third alternative is to find new markets for existing products. This might involve opening up new market segments, new market territories, and new applications with new capabilities. New market opportunities have arisen as a result of the growth of the Internet on a worldwide basis. Diversification The fourth alternative is to develop an initially new product portfolio or a product for 159

Industrial Marketing

new markets. This is generally considered to be the most risky because of the risk involved in developing both new markets and new products at the same time. The - risks may be lessened by the strategic option of alliances and partnerships. Even small companies or single business organisations can find themselves in circumstances where diversification may be a real option - or even a necessity.

& Activity E;
Define the following terms: 1. Market

penetration: _

2.

Diversification:

6.8 NEW PRODUCT DEVELOPMENT (NPD) An industrial firm may have the following reasons for an NPD program: i) to take advantage of new technology

ii) to be in the forefront in the development of new markets gaining market share iii) to defend market share iv) to maintain market position and reputation as an innovative supplier v) to optimise resources, including production and supply chain management and to gain a competitive edge vi) to offer greater customer value and satisfaction The process by which potential products ideas are generated, evaluated and turned into products is called the NPD process. There are several stages in this process as can be seen in Table 6.2.
160

Unit 6

Product Planning and Development

Table 6.2 : New Product Development Process Overview


1. Idea generation

I
2. Initial screening assessment 4. Detailed market study

3. Preliminary technical 5. Business/Financial > analysis 6. Product development ^ 1. In house Product testing

219. Customer tests on product 220. Field testing with larger customer group 10. Trial production 11. Pre-commercialisation business analysis Go/No Go Decision Stage 14. Market launch Control by: Marketing 221.Production startup 222. B atch production

Technical/Engineering

Finance

At the head of the table lies the idea generation stage. New product ideas may be conceived by sales persons, customers, distributors, suppliers, R& D, engineers or managers in all departments across various functions. In industrial products, the customers remain a prime source for new product ideas. Although the Table 6.2 indicates 14 steps in the development of products that are dominated by technology, engineering expertise and longer duration question periods, a broad overview can comprise 7 steps: Idea generation - Screen ideas against new product strategy

1 6 1

Industrial Marketing

2.

Concept development and

Test concepts internally and externally evaluation Test for feasibility and profitability Conduct prototype tests Test product and other marketing mix elements Launch product into markets in a phased manner Evaluate the results of performance and customer feedback

3r Business analysis 223.Product development and testing 224. Market field testing 225. Commercialization 226. Evaluation

1. Idea generation
The new product strategy and specific new product ideas must fit within the larger strategic picture of the organisation. One way to formulate a new product strategy is to use the ANSOFF matrix as a framework (Fig. 6.4). The framework allows an industrial firm to identify possible directions for growth and can be helpful in evaluation of new product ideas. TACO Bell (in the USA) has used the matrix very effectively ji in pursuing growth options in all four areas to become one of the fastest-growing
T

food chains in the country.

||

Many methods are followed for searching out new product ideas. Some of the j common approaches are formal brainstorming, soliciting ideas from employees and customers, lead user research and assessing the lead competitor's offerings. Whether the source of a new idea is inside or outside the industrial firm, a mechanism should j exist for ensuring a continuous flow of new product ideas.

2. Concept development and evaluation


Once screened and regarded as a good fit with the business and new product strategies. the idea is ready for development. Concept development involves formulating the basic product description and presenting the concept to potential customers to get their reactions. After a clear definition of the concept, it is necessary to produce a description of the product that represents its specific features, characteristics and benefits to determine initial responses. The new product concept would then be evaluated by asking respondents whether the product idea was understood, whether they were favorable to the concept and whether they felt it would satisfy their needs in a better way.

Unit 6

Product Planning and Development

3. Business analysis
Assuming the industrial concept is favorably evaluated by the respondents, the next step is to determine its feasibility and potential profit implications. Demand analysis, revenue projections, cost analyses, and operational feasibility are assessed at this stage. This stage will involve preliminary assumptions about the costs of additional material requirements, new components, new raw material requirements, new components suppliers to be located; technical training costs and other projected operations costs. If the minimum requirements of financial parameters (such as profitability and ROT) are met, the company can then proceed to the implementation phase of the new product development process.

4. Product development and testing


This stage involves the construction of product prototypes and testing for customer accer^aRceTUsTiafly, it is theITSTi^ department that is the most active in this stage. Th^prototype develogmfiatis'avery crucial phase since this part of the process establjshertheTEbllltyof the firm to produce the product within a previously established set of cost estimates and operational parameters. In today's market conditions, developing a new product is not enough. The time factor has become more crucial than ever before. World leaders in automobiles such as Ford Motors, Toyota & Honda have such enormous data banks and advanced '5f engineering skills that a new car model prototype can be assembled within two to three months as compared to Indian companies that are known to take 8 to 12 months. Shorter product development cycles mean faster product launches that help an industrial firm gain the first-mover advantage.

5. Market field-testing
Sometimes called test marketing, this stage involves extensive trials of the new product with limited customers to determine the acceptance in the market place. It is also important of this stage to establish the smoothness of pilot runs. \ Alpha testing consists of testing the products internally in the company. If the results are satisfactory, the company may go for Beta testing, which consists of testing the products at the customer's end. If the number of actual users for the new product is

6 3

Industrial Marketing

small, product testing at a few customer locations may suffice. If there is a large variety (ie. more heterogeneity) in the customer group, the number of customer's - installations will have to be more widespread.

6. Commercialisation
In this stage, the product is launched after ensuring successful completion of field-testing. The product is produced on a commercial scale after a thorough "debugging" exercise on all the activities involved in regular production. The activities include training the sales force, publishing product catalogs, maintenance manuals, price lists, initial advertisements and other customer benefits. The company also needs to have adequate stocks of the product at its warehouses and with dealers/distributors, trained personnel for customer service and availability of technical personnel to promote the product with appropriate emphasis on new benefits. A product portfolio strategy and a defined organisational structure for new product/ service development are critical factors that lay the foundation for success of new products. Among other things, the marketing plan for new industrial products should cover: geographical areas for coverage target market segments and OEMs Marketing objectives and goals Timing of product launch Marketing mix strategies

Product Innovation at DuPont

Product innovation strategy includes introducing a new product to replace an existing product to satisfy a need in an entirely different way or to provide a new approach to satisfy an existing or latent need. However, product innovation does not come easily to industrial firms. Millions and billions of dollars are required to be invested in R&D for the innovation to see the light of day. Besides involving huge financial commitments, it requires prolonged hours of managerial time to cut across organisational lines. Even after the commitment of resources, the innovation may still fail to create the desired impact in the market. One of the hugely successful firms with a 200-year plus history of product innovations is DuPont, (USA). It took the firm 25 years and an investment of USD 900 million to

164

Unit 6

Product Planning and Development

commercialize a super tough fiber (patented under the trade name of KEVLAR) that is lightweight, but five times stronger than steel for the same weight. The company spent more time andjnoney developing this product than on any other single product till that time. Among the thousands of applications for the fiber from DuPont is the recent one for automotive racing tires manufactured by Goodyear. The technology incorporates a sound- and shock-absorbing InsuLayer made with Kevlar, to help provide a smooth, quiet ride, along with promoting even tread wear. The tire is also reinforced with a carbon fiber insert for stiffness. The layer helps absorb road noise and lessen vibration from road imperfections for a smooth, quiet ride. "This tire is just one example of how DuPont is working with customers to use Kevlar in new and innovative ways," said Bill Harvey, vice president and general manager, DuPont Advanced Fiber Systems. "Kevlar technology allows Goodyear designers to do more than offer a new tire; it helps them provide drivers with a smooth and quiet ride." (Adopted from website: www.dupont.com) \ & Activity F;

a) The R & D department is most active during the following stage in the NPD process: D Business analysis
1 D Com mercialisation D Product

developm ent and testing b) Two types of market field testing are:

2. c) The finance department is not involved in the new product development process for industrial products. D True
D

False 1 6 5

Industrial Marketing

6.9 MANAGING PRODUCTS IN HIGH TECHNOLOGY INDUSTRIES The long run competitive position of most industrial companies depends on their ability to manage, increase and exploit their technology base. Large MNCs like Eastman Kodak, IBM and other corporations failed to recognize the major technological opportunity that xerographic copying presented. These corporations were among the many that turned down the chance to participate with the small and unknown Haloid Company in refining and commercializing this technology. In the end, Haloid Company decided to follow its own path and transformed this technological opportunity into the Xerox Corporation. There are different forms that technology-centered development projects take. Some projects center on improving the manufacturing process, some on improving products and others on both process and product improvements. All of these represent commercial development projects. Development projects may be classified as : a) Derivative projects- which center on product improvements (for example, a new feature), incremental process improvements (for example, a lower cost manufacturing process), or incremental changes in both dimensions. Example: a feature improvement or a cost-reduced scanner-copier-printer machine. b) Platform projects- which create the design and components that are shared by a set of products. These projects often involve a number of changes both in the product and in the manufacturing process. Example: a common electric motor in all power handtools; multiple applications of the INTEL microprocessor. 227.Breakthrough projects- which establish new core products and core products and new core processes that differ fundamentally from those of previous generations. 228. Research and development-which concerns with the creation of knowledge on new materials and technologies that eventually lead to commercial development. High-tech companies that can get their products to become the standard leaders of the market have enormous influence over the future direction of that market. For example, all PC based software has to be Microsoft- compatible and INTEL-

166

compa Compaq enjoy. tible. All networ king solutio ns must be compa tible with Cisco system s standa rds; all printer s must be Hewle tt Packar d compa tible. This is the domin ant power in hightech marke ts that firms such as Micro soft, INTE L, Cisco Syste ms and HP-

Unit 6

Product Planning and Development

The Internet presents an explosive area of growth in many sectors of the high-tech market as firms square off to gain a leadership position in e-procurement, sales force automation, supply chain integration and web-focused security. Two aspects contribute a great deal to the technological uncertainties hindering product acceptance. These are: i) Service factor - Mature technologies like automobiles or desktop PCs have several years of experience with after-sales service problems and solutions that reduce uncertainty about resolving breakdown problems. But new technologies have no track record and hence there is uncertainty on the level and quality of customer support services. ^ Obsolescence factor - uncertainty can occur because of technological obsolescence. Newer TV technologies like LCD sets and plasma sets threaten to make the conventional CRT based picture tube technology for the TV set obsolete. The VCD/ DVD players now available in the markets around the world have already made the Video Cassette recorder (VCR) obsolete. Digital cameras are making conventional film roll-based cameras obsolete. Rapidly changing high-tech markets present special opportunities and challenges for the industrial marketing managers. By developing a strong brand that industrial buyers come to know and trust, the industrial firm can gain a competitive advantage in the high-tech market.

It

Technology development as Core function


At the 3M Corporations, USA technology experts from more than 100 laboratories across the world work cooperatively in creating new technologies for new product applications. The management has formed a technology council comprising the heads of major laboratories. The council meets monthly and has a 3-day annual retreat to discuss ways of improving cross-unit transfer of technology and other issued of common interest. In addition, the management created a technical forum composed of scientist and technical experts chosen as representatives, to facilitate grassroots communications among employees in all the labs. One of the forum's responsibilities is to organise employees with similar technical interest from all the labs into chapters; Chapter members attend regular seminars with experts from outside the company. There is also a 3-day technology fair at which 3M scientists showcase their latest findings for colleagues and expand their network of contacts. As aresult of these collaborative efforts, 3 M has developed a portfolio of more than 100 technologies and created the capability to routinely use these technologies in product applications in 3 different divisions that each serves multiple markets.

167

Industrial Marketing

6.10 QUALITY FUNCTION DEPLOYMENT (QFD)_______________________ One of the recent approaches to new product development and strategy is Quantity function Deployment or QFD. l|| Cooperation among marketing, manufacturing, engineering and R&D is at the core of new product success and more profitable products. Quality function deployment has been defined as a system for translating customer requirements into appropriate company requirements at every stage, from research through production design and development to manufacture; distribution; installation; and marketing, sales and services. As the definition implies, QFD is used as a means of integrating marketing and engineering personnel in the development process. It is used to identify critical customer attributes and product design attributes. This necessitates cross-functional communication between engineering, manufacturing, R&D and Quality control. This approach has been widely adopted by Japanese, US and European firms. The first step in QFD is to identify customer needs, which are expressions in the customers' own words of the benefits they want the product to deliver. Particular attention should be given to the primary level needs to set in motion the strategies direction for the product. Small firms, for example, could be looking for the following attributes in a photocopier: reliable, low-cost, compact, quiet and fast. This would possibly cover nearly 90 percent of the small business segment's needs. Customer's viewpoints and opinions on competitor's current products also provide a valuable indication of their primary needs. The strength of QFD comes from translating customer needs into product design attributes. These design parameters should be measurable requirements that are tied to customer attributes. For example, increasing the power of the motor in a powered hand tool influences the time required for drilling. Increasing the power of the motor will have a positive impact on reduction of drilling time but a negative impact on 'low cost' and 'quiet operation'. An evaluation of the relationship draws on information from customers, engineering experience and from development tests. QFD provides a mechanism for exposing and tackling difficult design trade-offs that inevitably appear in the new product development process. In some applications, QFD has reduced design time by 40 percent and design costs by 60 percent while maintaining or enhancing design quality. f j

Unit 6

Product Planning and Development

New products in global marketing


In today's dynamic, competitive market environment, many companies realise that continuous development, improvement and introduction of new products are keys to survival and growth. Some of the well-known companies that have excelled at these activities are: Honda, Toyota, HP-Compaq, Motorola, Canon, Boeing, Microsoft, Intel, DuPont, GE andABB. Certain common characteristics exhibited by these global companies are given below: i) They are global companies that pursue opportunities in global markets in which competition is fierce, thus ensuring that new products will be world class.

S) They focus on one or only a few businesses. I) Senior management is actively involved in defining and improving the product development process. iv) They understand that speed in bringing new products to market reinforces product quality. v) They have the ability to recruit and retain the best and brightest people in their fields.

6.11 SU M M A R Y ________________________________________________
The 'product' represents the total package benefits that the customer receives when the product is purchased. This includes the functional utility, technical services related to the product and the assurance that the product will be delivered when and where it is needed and in the right quantity. In this unit, an overview of product planning, basic strategies applicable during the life cycle and the NPD process have been presented. The importance of the PLC concept has been explained along with the main differences of the industrial PLC and the consumer PLC. Akey portion has been devoted to the concept of value addition and the relevance of the Ansoff Matrix model. The role of multiple functional areas and departments has been highlighted under the NPD process. This Unit concludes with a brief explanation of one of the recent approaches to NPD strategy, namely quality function deployment.

169

Industrial Marketing

7.1 INTRODUCTION
Communication plays as significant a role for industrial products as for consumer products. Even the best of products require a strong and focused communication strategy. It is essential that the benefits, usage, problem solutions and cost efficiency of industrial products are effectively communicated to all the individuals in a buyer firm who influence the purchase decision. Considering the complexity of products, the number of buyers (usually identifiable), and the negotiation element, the main vehicle in the industrial marketing interactions is the sales person. However, non-personal methods of communication including advertising, catalogues, the Internet, trade shows- all have a special and crucial role in the communication process. A vivid example of this can be seen from the IBM ads. From the last few years it has concentrated its prime message in print, TV, online, direct mail, telemarketing and other media on one broad corporate business: e-business. Industrial product advertising may be less visible than consumer product advertising, but its importance in communication is no less significant. An important task of advertising is to communicate with the influencers in the DMUs of industrial firms apart from the purchase officials. Creating a favorable attitude is particularly desirable because it increases the possibility of obtaining new and loyal customers in the seller's fold. Direct mail is one medium of advertising that can accomplish almost all of the advertising functions. The communications mix broadly consists of personal and impersonal communication. With the growth of the internet, the communications portfolio has expanded and internet marketing communications is fast becoming a specialized discipline - particularly in the field of EMC. Some specific elements of sales promotions need to be understood in the context of industrial products. A brief overview of advantages of branding in industrial products has been included although this merits attention as a separate subject by itself.

7.2 DEFINITION OF IMC_________________________________________


Integrated marketing communications (IMC) means that all corporate messages. positioning, images and identities are coordinated across all media. It means that the company's public relations (PR) materials say the same things as the direct mail campaigns. It also implies that 'the feel and the look' of the Company's website is recreated at all points of interaction and in other communication channels.

174

Unit 7

Integrated Marketing Communications (IMC)

The advertising, online media and sales promotion tools should be integrated - that means, a comprehensive program of media and sales promotions methods must be coordinated to achieve the desired/esults.

7.3 ROLE OF ADVERTISING


Advertising and sales promotions are not employed as stand-alone components in industrial markets, but as useful adjuncts to personal selling in the overall communication strategy. The main task of the industrial marketing manager is to create an advertising and promotion strategy that blends with the personal selling efforts in order to achieve sales and profit objectives. The primary role of industrial advertising is to enhance the reputation of the supplier besides increasing its company and product awareness. Advertising also contributes to increased sales efficiency. Increased expenditure on advertising leads to greater brand awareness for industrial products, which translates into bigger market shares and more profit.

1. Increased sales efficiency


Industrial suppliers need to make new customers aware of their product and services as well as to constantly remind actual and potential buyers, not only of their products, but also of their capabilities. One might consider personal selling for accomplishing this, but the cost of reaching a large number of potential customers would become prohibitive. To reach five influential buyers, the cost of reaching them through advertising will be a fraction of the cost of reaching them through sales persons. In addition, advertising helps to promote overall capabilities of a seller firm very effectively. Hence, there is a distinct improvement in overall efficiency of the marketing program.

2. From unawareness to preferred supplier


The purchase process can be considered to be a process of taking a buyer firm from unawareness to awareness to preferred supplier status. This is borne out by independent studies on the response pattern of technical personnel to industrial advertising, whether in the print media or in the electronic media. It also helps to boost the company image, project a new image or create, a new corporate identity. IBM, Dell Computers as well as service companies like State Bank of Bank, ICICI Bank rely heavily on projecting products as well as corporate identity.

175

Industrial Marketing

Preferred Supplier Advertising

Awareness

Unawareness

'

i'

Fig. 7.1 : From Unawareness to Preferred Supplier


3. Interactive marketing communications

The Internet has altered the very nature of marketing communications- from a one-way to a two-way process. Buyers and new industrial firms receive information by navigating websites, specifying their preferences and communicating with industrial marketing departments. Such communications have enabled firms to provide personalized emails and information, customized service solutions, or links to other firms providing complementary products and services. For example, a technical consultant involved in design engineering experience of thermal power plants can post all relevant details of the last prestigious project carried out. The Internet allows industrial firms to create value by customising their communication material, facilitating the customer's desire for specific complementary products or services, and gathering information about consumer preferences to improve future product strategy. However, the industrial marketing managers need to understand the limitations of industrial advertising. It cannot substitute for effective personal selling. It can only supplement and support that effort. Personal selling, by the same token, becomes cost ineffective when it comes to creating awareness or communicating information- tasks that can be performed well by advertising. Convincing customers and actual purchase can only be ensured through personal selling. Advertising is therefore to be considered as a means of uncovering important leads to the sales person.

4.

Support to Channel members

When intermediaries exist for industrial product distribution, advertising plays a useful role in

supporting them in their selling efforts. The industrial firm needs to realize this vit;

Unit 7

Integrated Marketing Communications (IMC)

component while creating the advertising campaign or sales promotions aids. In fact, the intermediaries' contribution in creating such campaigns and materials should not be overlooked by the industrial firm. Their participation can enhance the effectiveness of the entire advertising effort.

^ A ctiv ity A ;
a) Two methods of non-personal communication commonly used by industrial firms are: 1.___________________________________________
2. _____________________________________________________________

b)
product s.

_is the most effective method of selling industrial

7.4 DECISION STAGES IN DEVELOPING ADVERTISING PROGRAMS


Set

objectives Define target market

4 Develop Message

6 Evaluate
advertising effectiveness

3 Allocate
advertising expenditure

Fig. 7.2 : Decision Stages for Developing Advertising Programs Fig.7.2: shows the basic elements in formulating an advertising strategy for industrial products.

1. A dvertisin g O bjectives
Setting of objectives enables managers to determine an advertising budget more accurately and helps in evaluating the effectiveness of advertising. The marketing manager needs to keep in mind:

Industrial Marketing

f ill

229. that the advertising must fulfill a marketing strategy objective, and the goals set for advertising must reflect the general purpose of the entire strategy; 230. that the objectives of the advertising program must be responsive to the roles for which advertising is suited: creating awareness, providing information, influencing attitudes and reminding buyer firms of the seller firm's product attributes and advantages. The objectives must speak of an expected outcome, should be measurable besides specifying what is required to be achieved. Realistic objectives help the firm set standards against which the advertising performance can be evaluated.

ITS

For example: an objective for an automobile component manufacturer can be: 'To improve the awareness level among design engineers of all OEMs for automobile manufacturers from the present 15% to 50% of a new fuel injection system'. The objective helps the marketing manager to create the message related to the major product benefits using media that will reach design engineers. However, it is impossible in most cases to link advertising directly to sales. Price, product performance, personal selling and competitive actions have a more direct relationship to sales levels. Advertising goals are typically stated in terms of communication goals, e.g. brand awareness, recognition and buyer attitudes. 231. Target markets: The next task is to define the target market groups to be reached. This is extremely important because the advertising content has to reach the influential persons or of buyer firms who may or may not be accessible to the sales person. Each group of buying influential is concerned with distinct product and service attributes and criteria - hence, the advertising must focus on these. An assessment of the 'target groups', current image of the seller firm, its products and how they rate with the competition is essential in order to decide the desired positioning level.

232.Allocate advertising expenditure


Industrial marketers usually rely on a mixture of judgment, experience and only occasionally, on more advanced decision-oriented techniques to determine advertising budgets. Some of these techniques most commonly used are percentage-of-sales method, competition-parity method and the objective-task method.

a)

Percentage-of-sales method
This is very commonly used in industrial firms-more so since the expenditure on

Unit 7

Integrated Marketing Communications (IMC)

advertising for industrial products is usually much lower than that for consumer products. The allocation will generally vary from 0.5 percent to 4 percent of sales, while for consumer products, the allocation will vary from 5 percent to 12 percent of sales. However, this method can give rise to misleading policies. Percentage-ofsales method suggests that the advertiser reduces the advertising when sales decline, whereas what may be more appropriate is more spending.

b) C om petition-parity m ethod
This method, as the name implies, refers to the allocation of expenditure based on the same (or as percent of sales) as that of competitors. This is based on the presumption that the average expenditure of the competitors would be representative of the collective thinking of the industry. This may not be valid since companies within the same industry will have different objectives, resources and opportunities.

c) O bjective-task m ethod
The objective-task method for working out advertising expenditures is an attempt to relate advertising costs to the objectives that advertising attempts to accomplish. The O-T method is applied by evaluating the tasks to be performed by advertising, analysing the costs associated with each task, by advertising and summing up the costs in order to arrive at a final budget. The process usually consists of the following four steps: establish specific marketing objectives for the product in terms of sales volume, market share, profit contribution and market segments; assess the communication functions that must be performed in order to realise the marketing objectives and then determine the role of advertising; define specific goals of advertising in terms of the measurable communication response required to meet marketing objectives;

t estimate the budget needed to accomplish the advertising goals. The O-T method helps managers allocate funds necessary to accomplish a specific objective rather than allocating some percentage of sales on an arbitrary basis. With clear objectives and budgetary allocations, the next step is to design effective advertising messages.

179

Industrial Marketing

4. Developing the advertising message


Message development is a crucial task in industrial product advertising. Finalizing the objectives, selecting the target market groups and assessing the buyers' criteria should precede the creation of advertising messages. Conveying the message in an appealing manner is crucial in successful communication. The advertising rupees are wasted if they are spent on messages which are not appropriate, for the language, graphics, style and format all are essential elements in creating the appropriate message in an effective way. Two points need to be borne in mind while developing communication or advertising messages for industrial products: 233. The typical industrial buyer is knowledgeable and well informed. Hence, attention needs to be paid to the technical suitability and correctness of the message. 234. The message must focus on product benefits (rather than on product features) that are desired by the buyer firms. Examples of such benefits could be: quicker delivery time, better product quality established through tests conducted at independent testing laboratories/institutes, easier maintenance/serviceability. The development of affective advertising messages requires wide ranging market research to fully understand the buying criteria of each influencer in each of the firm's different target segments.

5.

Selecting advertising media


As much as development of the advertising message is important, the medium through which it is presented remains an equally important factor. Selection of the appropriate media depends upon the target groups to be reached the communication objectives and the advertising budget. The first decision is whether to use trade publications, direct mail or e-direct mail or a combination. The companies that have existed before the advent of electronic media have traditionally preferred trade publications. Business publications can be either horizontal type-those that are directed at a specific task, technology or function in industry (e.^ Advertising Age, Purchasing, Materials handling, Engineering) - or Vertical type- i those that can be read by all persons, irrespective of their position in the hierarchy 1 within a specific industry (e.g. Glass Industry, Automotive world).

IK)

Unit 7

Integrated Marketing Communications (IMC)

If the industrial product from a seller firm has only a few applications, vertical publications would be a logical choice. In a case where many industries are potential users of the produclalong with specific functions, a horizontal publication would be more effective. Hence, a complete analysis of the range of purchase decision criteria and the influencing decisions by the decision making unit (DMU) of buyer firms is necessary to decide the choice of publication. Cost Considerations : Allocations to various media options will vary with the company situation and the advertising objectives. The allocation of the publication budget among various journals will depend on their relative- effectiveness and efficiency, usually measured in cost per thousand (ie. the cost required to reach 1000 persons) using the following formula: Cost per thousand = Cost in Rupees Circulation (in thousands)

Comparing two publications on the basis of their page rates would be misleading since the publications with the lower circulation will usually be less costly. It would be more appropriate to use the basis of the circulations as the target, audience and not the total audience. Some publications may be appear to be high on a cost per thousand basis, but may, in fact, be cost-effective considering a percentage of wasted circulation. Some publications also have popular Web sites that advertisers can use to create integrated marketing communications. The largest telecom service provider in the USA spends more than US$1 Omn annually on Internet advertising. Along with magazines and TV advertising, it obtains a Web-presence as part of the package. Due the nature of industrial products, one-time ads are not generally effective. There is a time period required for the message to 'sink in' and therefore multiple insertions are necessary.

6. M easuring advertising effectiveness


! Advertising is created to bring awareness and stimulate loyalty to the company or to foster a favourable attitude toward a product. Even though advertising is not expected to result directly in a purchase decision, the results of advertising need to be assessed and measured. Specifically the advertiser attempts to assess the advertising's ability to influence an individual through the purchase decision process. This approach
i*

Industrial Marketing

assumes that conversion into a favourable attitude in the decision process from one step to the next increases the probability of purchase. Apart from advertising, many other factors (e.g. word-of-mouth communication) and elements in the communications mix play an important role in the purchase decision. The basic areas for advertising evaluation include i) markets, ii) motives, iii) messages, iv) media, v) results.
AREA FOCUS OF MEASUREMENT

1. Target market coverage> egree to w hich advertising succeeded D D Medium Low in reaching target groups d M e dD H g h 2. Buying motives 3. M essage effectiveness 4. M edia Factors that triggered purchase decisions. Degree to which message registered with buying influencers in defined market segment * Degree to which various media were successful in reaching defined segments Degree to which advertising accomplished its defined objectives D L owD MediumD High D L ow D Medium D High

nLOW
D M e d iu m D H igh D Low D M e d iu m D H igh

5. Overall

F ig. 7.3 : P rim ary A reas for A ssessm en t of A dvertisin g

The evaluation of advertising effectiveness is demanding and complex, but also essent Normally, the limiting factor in carrying out assessments is the budget. When determin the effectiveness of the campaign, the evaluation will measure knowledge, recogniti recall, awareness, preference and motivation.
JS$ Activity B;

The objectives-task method helps the marketer to work out

Unit 7

Integrated Marketing Communications (IMC)

7.5 DIRECT MARKETING USING DIRECT MAIL Direct mail and email are two of the most widely used media in industrial product communications. Direct mail can accomplish almost all of the advertising functions. Its real utility lies in conveying the message to the exact prospect that the industrial seller wishes to influence. Direct mail is widely used for corporate image promotion, product and service promotion, reinforcing quality initiatives taken by the company, distribution channel communication revised price information and reinforcing messages that are used in other advertising media. In promoting the corporate image, direct mails are helpful in establishing a firm's reputation of technological or industry leadership. Direct mail is also widely used to notify potential customers of the locations of local distributors and service centers or service franchisees. It is also applicable in special situations such as identifying new customers and markets, meeting or countering competitor claims, and promoting items that are not receiving enough sales support. It is a preferred advertising medium by all industrial firms when potential buyers and influencers can be clearly identified and easily reached through the mail. When combined with telemarketing follow-up, even those buying center members who are not easily reachable or accessible can be exposed to promotional efforts. Direct mail also makes it easy for the buyer to respond-usually a reply-paid post card is included or the name, address and phone number of the local distributor are provided. Direct e-mail Marketing is an offshoot of the direct mail medium that has become even more cost effective than the simple direct mail. It has been found that e-mail campaigns yield higher responses than direct mail campaigns. The results are also generated much faster. Firms that plan to integrate direct e-mail into their integrated communications strategy should make special efforts to build a comprehensive list of useful contacts. This information is usually available from the firm's CRM system. If a customer responds to an e-mail or direct mail campaign, the CRM system captures that information in a centralized information database for all contract personnel (sales persons, call center employees or marketing managers) to retrieve. Other ways by which e-mail lists are created are: offering an e-mail alert service or e-mail newsletter, asking for e-mail addresses at trade fairs or exhibition. However, the response time to e-mail inquiries should be immediate. Any delay can lead to a lost opportunity.

Industrial Marketing

7.6 THE COMMUNICATIONS MIX Communications mix


Personal Communication Impersonal Communications

Personal Selling

Advertising

Customer Service

Sales Promotion

Training

Publicity & Public relation

Telemarketing

Instructional materials

Word-of-mouth (through other customer

Corporate design

Fig. 7.4 : Elements of the Communications mix


The communications strategy involves the selection of the communication mix and a wide variety of elements make up the elements of the mix. Numerous forms of communication are available to the industrial marketer that are collectively called the communication mix. Very broadly, the two main arms of the mix are: Personal communication and | Impersonal communication. j Personal communication involves personalized messages that move in both directioi i> s between the two parties- such as personal selling, telemarketing, customer training, customer service and word-of-mouth. i Impersonal communication involve messages that move in only one direction and are generally targeted at a large group of customers and prospects rather than an individual. These comprise advertising, sales promotion, publicity and public relations, instructional materials and corporate design.

Industrial Marketing

7.6 THE COMMUNICATIONS MIX Communications mix


Personal Communication Impersonal Communications

Personal Selling

Advertising

Customer Service Training

Sales Promotion Publicity & Public relation

Telemarketing

Instructional materials

Word-of-mouth (through other customer

Corporate design

Fig. 7.4 : Elements of the Communications mix


The communications strategy involves the selection of the communication mix and a wide t variety of elements make up the elements of the mix. Numerous forms of communication * are available to the industrial marketer that are collectively called the communication mix. Very broadly, the two main arms of the mix are: Personal communication and Impersonal communication. Personal communication involves personalized messages that move in both directioib between the two parlies- such as personal selling, telemarketing, customer training, customer j service and word-of-mouth. ! Impersonal communication involve messages that move in only one direction and are f generally targeted at a large group of customers and prospects rather than an individual. These comprise advertising, sales promotion, publicity and public relations, instructional materials and corporate design.

Unit 7

Integrated Marketing Communications (IMC)

7.7 MEDIA SELECTION At its basic level, media selection requires two types of selection: customer profile and media characteristics: The industrial product advertiser should build a customer profile for the product and the range of segments in the product-market matrix. Information about media is usually available from media owners. It is desirable to validate the audience information supplied with data from independent bureaus that audit various media. The Audit Bureau of Circulations (ABC) is one example. While a wide variety of choices is possible within each category of impersonal communication, the nature of industrial products restricts the choices as compared to consumer products. For example, discount coupons and free gifts are standard measures for consumer products but not in the case of industrial products. The relevant options within the five constituents of the impersonal communications are given below in Fig. 7.5: . Advertising Choice of media - TV Broadcast - Print - Internet - Outdoor - Direct mail 3. Publicity & Public relations - Pressreleases - Press conference 2. Sales Promotion Sampling Introductory offers Service packages (e.g. free installation service) 4. Instructional Materials Websites - Instructional/operation Manuals

5. Corporate Design Signage (e.g. Logos) Interior decor (in Offices) Office & Product Demonstration Infrastructure Equipment Stationery Uniforms Training facilities (e.g. Training centres)

- Sponsorship of events Trade show s/exhibitions Brochures - Audio- video cassettes/

CDs

Fig. 7.5 : Choices in Impersonal Communication


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& Activity C;
"a) Two types of personal communication are: 235. ________________________________

236. ______________________________
b) Two types of impersonal communication are: 237. 238. 7.8 ___________________________________ __________________________________ PERSONAL SELLING

Of all the elements in the communications mix the role of personal selling is predominant -particularly when applied to industrial products. Personal Selling (PS) is rated as the most effective promotional medium by virtually all industrial firms: Promotional media (in descending order of importance) 239. Personal selling 240.Catalogues, brochures, manuals 241.Directmail 242. Advertising 243. Trade shows and exhibitions 244.Samples and product demonstrations 245. Publicity and public relations 246. Customer entertainment 247.Gifts, Coupons, rebates Successful marketing operations of industrial firms have depended heavily on personal selling. This is because, unlike mass or consumer markets, the number of potential customers is relatively small and identifiable, and the unit purchases in terms of rupee value are large. ! The importance of personal selling in the marketing communications mix depends on factors t such as the nature and the composition of the market, the nature of the product line, and * the company's objectives and financial capabilities. Some manufacturers may rely on their representatives or distributors but most rely almost exclusively on a direct sales force to | bring results. For maximum efficiency, the personal selling function must be carefully managed j

Unit 7

Integrated Marketing Communications (IMC)

and integrated into the firm's marketing mix. This becomes most essential for capital equipment manufacturers, firms selling technologically complex products and forms with products that are extensively customized. The sales person is not just defining the customer's requirements and matching the firm's product to the requirements. He is also offering ideas, recommendations, technical assistance, experience (of the company), confidence and other forms of non-technical assistance (eg. Service offering from a third party). A more detailed discussion on the functional aspects of personal selling is dealt later in a separate unit.

7.9 RELATIONSHIP-BUILDING PROCESS


It is useful to visualise the relationship building process as a result of the exchange between an industrial seller and buyer.

Seller firms
Organisational selling center - Marketing Manufacturing R&D Engineering Quality control \Distribution

Buyer firms

Sales person Essential activities Inquiry generation - Lead qualification - Bid proposal/offer Negotiations & sales - Product augmentation offerings - Customer

1 Organisational buying
center - Purchasing Mamtfac'T^ing R&D Engineering Quality CoattQl ] Marketing

Fig. 7.6 : Seller-Buyer Relationship Building Process Organisational selling center consists of the members (of the seller firm) who are responsible for initiating and maintaining exchange, relationship with industrial buyers and customers. Teamwork selling has emerged as a key ingredient in the success of the seller firm in building long-term relationships. Organisational buying center includes those officials who participate in the buying decision and share the goals and risks from that decision. In a complex buying situation, there may be several officials representing different functional areas.
1B7

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Integrated Marketing Communications (IMC)

Key account selling focuses on: core product/ service plus customized applications and value added services; * long-term relationship building broadening the set of benefits to the buyer becoming the preferred supplier helping the customer to reduce total costs sharing information extensively buyer-seller interaction across many functional areas participating actively in the customer's interaction with its customers. Cost Reach Targeted Broad Broad Dialogue 2-way 1-way 1-way 2-way 2-way 1-way 2-way 2-way 2-way 1-way Easy to Measure Effectiveness High Low-Med

Types of Marketing Direct Mail

PR
Advertising Sales Promotion Personal Selling Online Marketing & Newsletters Telesales Seminars/Events Trade Show Trade Magazines

Med Low
High Med High

s
S S

Low
Med High Med High High

Low Low
Targeted Targeted Targeted Targeted Targeted

Low H igh Low


Med-High Med

s
S S

Med
Med

Fig.7.7 : Choosing Promotional Tools A summary of the activities involved in personal selling includes the following: Negotiating price, terms and conditions in both long-term and transactional situations Obtaining orders from new accounts Monitoring and managing key accounts Gathering customer, market and competitor information Acting as the supplier's representative in the market place and as the buyer's spokesperson in internal discussions within the organisation

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Promoting short-term and long-term benefits to customers

- Contributing to the operation of CRM System within the organisation Using the elements of the marketing communications mix effectively with key customers Dealing with complaints and solving problems affecting the supply chain with customers

7.11 INTERNET MARKETING COMMUNICATIONS

_____________

One of the powerful ways by which marketing communications is being enhanced is through the Internet. The role of Advertising, direct mail and telemarketing is changing as the three media are brought together in an integrated communications mix. The primary role of direct mail or direct response advertising may now be to lead a prospect to a corporate Website or to an online event (such as a technical seminar on a new product). Internet marketing is assuming an ever-increasing role in the marketing strategies of industrial firms because it provides important benefits to both the supplier and the customer. The right media mix can help the marketing reach the target audience. Print advertising might be used to generate product awareness and direct mail might be used to drive potential customers to their Web site. Prospects can be attracted to ask for further information by logging in their e-mail addresses. Further communication can be carried out through e-mail. Internet marketing costs much less than direct mail marketing. The electronic media diminishes the need for printing advertising material and for telemarketing calls for generating leads. Once constructed, the website can reach thousands of prospective customers for roughly the same cost. This becomes even more cost-effective if the company is looking beyond domestic borders for new customers. The time required to execute direct mail, print advertising and telemarketing campaigns can take several weeks, while the time associated with Internet marketing is considerably shorter. E-mail copy can be written and finalized in a matter of days and distributed very fast. Moreover, the copy text and material can be customized to suit the different needs of industry groups or customer groups. The Internet provides the cheapest medium to reach out to global customers regardless of the size of the company. Since there are no time zones and no meeting protocol, the Internet marketer can conduct electronic business on a 24X 7 basis in every part of the world.

Unit 7

Integrated Marketing Communications (IMC)

______________________

The Industrial marketer needs to constantly update and incorporate the feedback received from the customer through sales, service or other personal methods in order to build customer relationship on a one-to-one basis. This feedback helps the industrial firm to adjust and tailor its Offerings to each customer's requirements. A summary of the advantages of the Internet marketing communications include: Design and content opportunities can be customised using film, color, sound, movement and interaction. It can be used for information, transaction and promotion purchases. Interactions of all kinds backwards and forwards along the supply chain are possible. Internet allows secure information and transactions to take place within the organisation and its divisions around the world. Limitless global reach. Possibility of one-to-one relationships; Opportunities exist across the whole range of communications.

However, there are still some apprehensions about the widespread application of Internet marketing communications. Some of these are: Uncertainties about the medium, audience use and reaction; Uncertainties regarding measurement methods and value for money; Difficulties in the ways of integration with conventional communication and promotion methods; Concerns about safety and security

measures T Activity D; a) Two main advantages of IMC include:

1. ____________________; ______________________
2.

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b) The three types of media that are brought together by the Internet are: 1. _______________________________________________________ _

2._________:_____________ _ _ _________,_____ _
3. __________________________________________________________

7.12 SALES PROMOTION Sales promotion forms another element in the marketing communications mix apart from advertising which forms the core element. Sales promotion enables the firm to generate leads. It also serves the purpose of stimulating the sales force. The elements that constitute the range of activities in sales promotion are: Catalogues Sales contests Promotional gift items & entertainment Technical seminars Trade shows and exhibitions.

Printed catalogues are one of the promotional aids that provide the buyer firm information about a seller firm's product lines and scope of services. They help salespersons establish contacts with the technical department personnel in the buyer firm. Depending on the range of product items and the nature of the product divisions in the seller organisation, catalogs can be general or specific. A specific catalog may contain detailed technical attributes of one product or a small range in a product line. Generally, they will include information such as product specifications, applications, performance data, drawings and service and maintenance requirements. Catalogs constitute a form of direct marketing. Of course, the advent of the Internet has reduced the dependence on printed catalogues, since detailed products information is usually made available at the company's website. Many industrial firms hold sales contests or incentives for their sales staff and or dealers and distributors. The objective is to motivate the sales force and dealers to improve their sales performance. Those who perform and exceed their targets get cash incentives or gifts or foreign trips.

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Integrated Marketing Communications (IMC)

Gift items may include business gift items like diaries, calendars that are usually given on festive occasions or for the New Year. The purpose is to keep buyers constantly aware of the supplier's presence*and the desire to continue an association. The balance components of sales promotion elements - technical seminars and trade shows & exhibitions - are two of the most widely used promotion tools used by industrial product firms. These techniques have often yielded good results for new and old firms alike. Technical seminars: or conferences that are exclusively conducted for existing customers and prospective customers are intended to impart technical knowledge or to convey the state-of-the art technology in the relevant industry. Conducting seminars are a useful way to involve the manufacturing, R & D, Quality and Purchase departments of user firms. This helps the sales person to gain access to the decisionmaking unit members of the buyer firm. Audiovisual presentations by technical experts help to raise the level of discussions and participation and initiate the relationship - building process. Ideally, such seminars work best when conducted exclusively for a single organisation. However, from logistics and cost points of view, these seminars are usually held to include the technical staff of other prospective buyer firms. The interactive nature of this technique and the immediate participation by the representatives of buyer firms helps the sales person and the marketing managers of seller firms to understand the requirements of the buyer firm on a one-to-one basis. Once a rapport is established, the sales person is in a better position to take the relationship building process forward. Well-conceived technical presentations can bring quick results to the seller in the form of pre-qualification acceptance or trial order finalization. Customized technical seminars have a high rate of success if planned and executed strategically. They remain a vital ingredient in the battery of promotion techniques available to the industrial marketer. Trade shows and Exhibitions Apart from advertising in trade publications and using the direct mail option, one other promotional activity ranks high on the list of the industrial firm. Promotion through trade shows and exhibitions is an important avenue that has been frequently adopted by both large and small firms in industrial markets. Many firms usually use this medium to showcase their products and technology. The India Engineering Trade Fair in Delhi held normally in November every year is one such channel for the engineering industry. Similar trade fairs that receive participation 193 on a national scale are held by other industries and trade organisations. For many companies, trade-shows expenditure forms the major marketing

Industrial Marketing

communication activity apart from the efforts of salespersons and distributors. Such is the level of involvement by industry members that convention centers and exhibition locations are planned on an international scale. One such location is in Hyderabad, planned on the lines of Hannover Messe (Hannover Fair) in Germany. The location is planned on a vast area of land and visitors usually require a few days to browse through the stalls. The reasons why the trade show option is attractive to seller firms are: i) New products can be introduced or launched and demon strated to a mass audience. ii) An effective selling message can be delivered to a relatively large ad targeted audience at a single locations. iii) Customers can get hands-on experience with the product in a one-to-one selling situation. iv) Potential customers can be identified, providing sales person with qualified leads. v) General goodwill can be enhanced; simultaneously promotion of the corporate image and the firm's technical capabilities s possible. vi) Enhanced publicity of the company helps create word-of-mouth advertising. vii) Evaluation of competitor's products and introduction of new products by competitors are possible. viii) New suppliers and distributors can be identified. Trade shows offer a very good cost-effective short-term method for introducing a product in international markets. An international trade fair enables the industrial firm to meet buyers directly, observe competition and gather market research data. In one study, it was reported that the entry time for exporting could be cut from 6 years to six months by participating in foreign trade fairs. However, the costs associated with participation in trade shows and exhibition can become prohibitive with the rising costs of stall rentals, travel, exhibits and pretrade shows and promotion costs. Based on specific objectives of the promotion, for example, identifying potential customers, gathering information on competitor's products or even creating additional sales - the firm can decide the budget and select the appropriate trade show for participation.

194

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Integrated Marketing Communications (IMC)

J8$ Activity E: a) Technical seminars are one of the prominent methods employed for sales promotion of industrial products: D True False

b) A cost-effective method for introducing an industrial product in international markets k Advertising in the press D Advertising on TV D Trade-show participation c) Enumerate three reasons why industrial companies find trade shows to be attractive: 2 _ 249._ 4 _ 8 _ . _ _ _

3.

7.13 PUBLICITY AND PUBLIC RELATIONS Publicity is the key component of public relations. It has more credibility and generally costs less than advertising. The major tool used for publicity in industrial marketing is publication of articles- preferably with technical content- in various trade and industry journals by the company's technical competence and reaches out to the purchasing organisation's DMU members. Companies also use their own PR departments to ensure adequate and favorable publicity in the general press- eg., Newspapers and business dailies. The PR departments at regular intervals, to ensure a build-up to the image, issue press releases. It is important that the publicity campaigns reinforce the advertising objectives and strategies - this will contribute to the integration process of the communications mix. * 7 . 1 4 I N D U S T R I A L P R O D U C T B R A N D PROMOTION _ Branding is as important in industrial markets as it is in consumer markets, and buyers feel more confident buying from a reliable company. Indeed, some industrial buyers may be reluctant to buy new products that are not proven.
195

Industrial Marketing

Brand attributes are not always obvious. A good starting point is customer research. What do youj customers find important when they buy? Compare their requirements against the performance of your own products and your company. Alternatively, look at your competitors and consider your comparative strengths. Customers admire a company that is committed to continuous improvement, so start looking for improvements, particularly in the attributes that are most important to customers. Make sure you communicate any improvement. With more and more crowding on the Internet, companies will have to work hard to stand out. Brand values will remain important. Once you have identified the attributes that are most important to your customers and prospects, you can emphasise them in your communication. If an attribute is important to customers, but is currently weak, there is a strong need to consider ways of improving performance.

The following list covers the key attributes:


Fitness for Purpose Value for Money and Quality Fjttendability Company Reliability Proven Products Investing hi Product Development Distribution and Financing Service Backup Training Customised Products Partnership Customer Service Consulting Technical Support Environmental Issues Ordering and Product Information Delivery Customer Base
H .

Unit 7

Integrated Marketing Communications (IMC)

C om m on M istakes N eglecting the "SofJ" Issues


Many companies communicate their strengths in the "hard" attributes, such as quality, performance, and price. Customers may take these for granted, particularly in a commodity market. The "soft" attributes such as customer service or technical support, can prove to be a key factor in differentiating the product.

Ignoring Branding
Traditionally, branding has been seen as a consumer marketing discipline. Industrial marketing was seen as different; buyers were assumed to be rational and decisions were believed to depend primarily on price and performance. Research has shown that business purchase decisions are more complex, and companies base their decisions on a variety of factors. Business-to-business companies ignore branding at their peril.

Concentrating on the W rong Attributes


It is essential to communicate what customers feel is important. In technology markets, quality of support and commitment to product development may outweigh price and deli very. In commodity markets, support and information can differentiate products with no performance advantage.

Failing to Com m unicate Brand Strengths


Communications that focus only on the product may fail to communicate the important brand strengths. Customer presentations, corporate brochures, public relations activities, and corporate advertising can be used to present a more balanced picture. There are many benefits in dealing with a well-known organisation when buying and selling industrial products. As choices multiply and with the growth of globalization and free trade between countries, brand appeal is becoming an important criterion in product selection and finalisation by industrial buyers. The advantages associated with branding: i) as seen from the industrial buyer perspective: reduces the risk saves time when searching out new products
:

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Industrial Marketing

known functional performance matching with benefit needs known value, quality, consistency, service safety and peace of mind.

i) as seen from the industrial seller perspective: builds a reputation that can be used effectively when launching new products helps segment the market strong brand values can protect a product from growing price competition can serve as a barrier against substitute products prevents the product being seen as a commodity product can be used when diversifying into new areas/markets

IBM's 'Thinkpad' and the 'Think' family


IBM's 'ThinkPad' was by far the strongest brand. Announced in 1992, the IBM 'ThinkPad' stood for quality and innovation. Its classic black design was recognizec throughout the industry and had won hundreds of design awards. Research showed that customers believed that 'ThinkPad' users tended to be serious business leaders who had achieved success in their field. These factors translated into high awareness, consideration and purchase for the ThinkPad line of notebook computers. The IBM 'NetVista' desktop PC line was less well known. Announced only the prior year, it had not yet had the ability to build brand equity and become known in the marketplace. Beyond the branding issues, other factors also needed to be considered. The PC industry had grown up, placing high importance on having the latest technology, yet as hardware capabilities outpaced the demands of software applications, PCs became "good enough". Lower prices and stable offerings had become more important than new hardware technology to business buyers, IBM's major target. Two questions intertwined - "how should IBM differentiate itself given the new industry dynamics?" and "how might a new branding approach help communicate this new strategy?" The IBM PC team's innovation focus was beginning to shift beyond the benefits provided to end users to include the information technology department and the business overall. These innovations were in areas such as enabling wireless mobile computing, enhancing notebook security, and making back up and restoration of data easier and more fail-sale.

198

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Integrated Marketing Communications (IMC)

Tiis shift in strategy was profound, enabling IBM to position itself more effectively against ompetitors whose value proposition could be summed up as "lower purchase prices for anilla technology''. Yet, to create awareness of an alternative, IBM needed to communicate ts new value proposition - innovation for business advantage - to customers. This tie to "Think" was linked to IBM's heritage for innovation and was such a prominent )art of IBM's culture that it became linked to IBM in customers' minds as well. Yet a 'ThinkPad' brand extension strategy was not without risk, because it might devalue equity that had taken several years to build. In fact, the strategy had been considered >efore but was rejected because different organisations controlled the various product ines, making consistent brand management difficult if not impossible. n the fall of 2001 a number of "Think" names were tested for the different products in he IBM PC portfolio. The worldwide study revealed that using the "Think" label was jerceived to be a "natural extension" of the 'ThinkPad' brand and that customers would >e willing to accept the "Think" label as a brand if the Think products were compatible and had the same high levels of quality expected of the IBM ThinkPad. ixtending the 'ThinkPad' brand name, the NetVista desktop line was renamed ThinkCentre and the monitor line was named the Think Vision. Grouping these :ormerly disparate products under an "umbrella brand" enabled IBM to communicate in shorthand the key differentiators of its personal computers. The Think strategy was announced in 2002 in events in 12 major countries. Then in the First quarter of 2003 IBM released the "Thinkers" ad campaign, featuring real-life successful people who used company offerings to gain business advantage. As 2003 continued, the new offerings from the Think family were released. Uniting the branding and business strategies had a significant positive effect on market perceptions and business results. Organisationally, the PC Division's innovation for business advantage strategy also linked well to corporate IBM's new 'On Demand' strategy, which was announced in October 2003, just before the 'Think' announcement. The On Demand strategy is focused on making businesses more productive and 199 responsive through IBM's business consulting and technology offerings. Just as importantly, the 'Think' strategy re-energised the IBM PC team, renewing purpose and intent.

Industrial Marketing

The advertising campaign was well received, testing extremely well among readers and increasing awareness of selected Think family products significantly in 2003. More importantly, the Think message and promise of value has resonated with customers, leading them to reconsider their purchase criteria for personal computers. By October of 2003, sales of the ThinkPad had reached 20 million more than any other notebook brand. Significantly, while the first 10 million unit sales took eight years (1992 to 2000) the second 10 million took only three years (2000 to 2003).
(Source : Condensed from article in managementfirst website)

& Activity F:
a) Identify two advantages of branding industrial products: 1. _________-____________________________________

2.
b) Identify two disadvantages of branding industrial products: 250.

251. __________________________________________
7.15 SUMMARY With the changing dynamics in industrial markets, the roles of advertising, sales promotion and public relations have undergone a drastic transformation. This unit has attempted to put the traditional concepts of advertising and sales promotion in the wider context of integrated marketing communications (IMC). The relevance of direct mail and e-direct mails in present-day industrial advertising has been emphasised apart from a discussion on the components of the communications mix. The key decision stages in developing an advertising program have been described with special reference to industrial products. In addition, the strategic role of personal selling as the key vehicle in external marketing communications has been highlighted. The elements of sales promotion, that are more applicable to the industrial marketing environment, have been covered with a special emphasis on technical seminars and trade shows.

200

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Integrated Marketing Communications (IMC)

An example of branding for IBM's products has been provided to convey its importance in the marketing strategy of the MNC in the early part of this century.
*

7.16 KEY WORDS

______________________________

Advertising Media: These refer to the various media available to an industrial firm for advertising. They can be electronic media such as TV, radio, internet etc. or the print media such as newspapers, journals, trade publications etc. Communication mix: This term refers to the numerous forms of communications used by companies. The mix comprises the two broad categories of personal communications and impersonal communications. Direct marketing: This term refers to the marketing of products by sellers directly to the consumers or customers without involving intermediaries. The method uses catalogs, direct | mail advertising, etc. to sell products and services.
'*

Integrated Marketing Communication (IMC): This term refers to a comprehensive program of integrating the activities and outputs of advertising, sales promotion, and public relations including the co-ordination aspects. Personal selling: It is a form of selling commonly used in industrial marketing where the sales person carries out the various selling activities directly with the customer on a oneto-one basis, s 7.17 SELF-ASSESSMENT QUESTIONS Ql. What is the reason behind the growth of IMC? Q2. How does the Internet affect the growth of IMC in industrial firms? Q3. How does advertising play a role in supporting distribution channel members? What are the decision stages for developing an effective advertising program for electronic energy meters? Q4. How will you select the advertising media for electronic equipment used for medical diagnosis (e.g. heart monitors, sonography equipment)? Q5. Describe the role of direct mail in direct marketing of industrial products. What is the importance of direct e-mail marketing and explain with the 201 example of one company of your choice?

Industrial Marketing

8.1 INTRODUCTION
The function of distribution and logistics services has undergone tremendous changes in 'the last few years. In fact, these services are increasingly becoming a sub-function under the larger umbrella of supply chain management (SCM) function. Significant developments have taken place in this field in the context of industrial product marketing. These have become the backbone for new models in the consumer product marketing field. It is necessary for every industrial marketer to understand and grasp the basic concepts of product distribution, logistics, IT systems and SCM so as to help their organisation keep pace with these developments. This unit begins with the nature and structure of industrial distribution channels and ends with a table giving the impact of SCM systems in organisations. In between, the unit also covers the channels for service delivery (particularly post-sales), the functions and types of intermediaries, channel alternatives and channel member evaluation, elements of a logistics system and SCM principles. It must be added that this function of distribution and logistics is still undergoing fast-changing developments (especially in B2B marketing), and the attempt here is to provide only a glimpse of its various dimensions and impact on the firm.

8.2 NATURE OF INDUSTRIAL DISTRIBUTION CHANNELS____________


A marketing channel or distribution channel refers to a set of organisations that make a product or service available to customers for use. The decisions on selection and design are important from the strategic point of view of the industrial suppliers' firm since they directly affect marketing operations and costs. To change a decision channel after selection is much more difficult than decisions on pricing, advertising or sales promotion. Industrial product distribution channels are different in nature from those used for consumer goods and services. Some factors, which affect the nature are:

1.

Region wise distribution


Industrial distributors (or dealers) are generally concentrated in urban areas, particularly those where industries are large in number. They can be found where industrial markets exist i.e. in towns/cities where industrial zones or areas have a dominant presence. Some of the industrial belts are Delhi-NOIDA, MumbaiThane, Chennai - Pondichery, Bangalore- Mysore, Baroda-BharuchVapi, Hyderabad-Vijaywada-Vishakhapatnam.

206

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Distribution Channels and Logistics

2.

Short/Long Channel
Industrial channels are short and involve a type of intermediary (or middleman) for selling, storing and handling the products. In many cases, the channels are direct from the manufacturers to the customers, without intermediaries. The reasons for the short channel is that the industrial buyer expects product availability, technical expertise and servicing capabilities. These expectations have to be fulfilled by the intermediary (Distributor or dealer) and the manufacturer. In the case of consumer products, the channels are generally long, involving more than one intermediary to ensure reach to all types customers and to all types of markets spread across vast regions.

3.

Characteristics of Intermediaries (or Middlemen)


Industrial intermediaries are often qualified personnel and have a close relationship with the industrial firms. The types of intermediaries used by industrial marketers are also different from the variety of wholesalers and distributors used by consumer product manufacturers. The types of intermediaries go by various names: industrial distributors, manufacturer representatives, Sales agents, merchant middlemen, channel partners, resellers or brokers.

4. Mixed System
Some supplier firms use a mixture of direct and indirect channels in order to meet the requirements of different market segments or when the company has resource constraints. For example, a firm may adopt the direct channel method for its equipment or system (air conditioning plants) and the indirect channel method for own sales force for large volume customers and independent distributors or dealers to cover small scale organisations. Example: Voltas is one of the many leading companies that adopts this route for meeting the requirements of its large and small customers for airconditioning equipment and systems. Due to resource constraints, some firms may have agents (or manufacturer's representatives) to serve the market segments consisting of geographical regions.

5. Servicing Network
A significant difference between the consumer product marketing system and the industrial product marketing system is the need for post sales services in 207 the case of

Industrial Marketing

industrial products. The delivery of the services can also be channelized through direct and indirect channels. Manufacturer Manufacturer Manufacturer

3rd Party Service Provider

Intermediary's Service Team

Industrial Consumer

Industrial Consumer

Industrial Consumer

208

Fig. 8.1 : Service Delivery Channels


> ~ i

Depending on the complexity of the product and the extent of services required

by e the authorised service provider. Another alternate indirect channel can be custom through the intermediary for the supply portion, who may also undertake post sales ers, a service contracts from buyer firms. In some cases involving foreign manufacturing third firms which supply from other countries, the service system may involve their own party, local country/ area office as well as their authorised service intermediaries. which is an $ Activity A: indepe a) Distribution channels for mass-produced industrial products that are readily ndent available off the self are: service Necessary ' organis ation, Not necessary can Useless for industrial firms becom

Unit 8

Distribution Channels and Logistics

b) Give an example of an industrial firm that uses the channel of third party service provider for its range of services.

8.3 INDUSTRIAL CHANNEL STRUCTURE____________________________. Some channel structures for industrial products distribution are direct and some are indirect (Fig. 8.2 & 8.3). Manufacturer Manufacturer Manufacturer

Manufacturer

Wholesaler

Wholesaler

i r
Retailer Retailer

Retailer

Consumer Level

Consumer Level

^ r Consumer Level 2 Two Intermediaries


Indirect Channel

1 1
i

Consumer Level .3 Three Inetermediaries Indirect Channel

0
*

1 One Inetermediary
Indirect Channel

Direct Marketing Channel

.1

L.

Fig. 8.2 : Consumer Product Distribution Channels

20 9

Industrial Marketing

Manufacturer

Manufacturer

Manufacturer

Manufacturer

^ r

TeleMarketing ir

Online Marketi ng

Manufacturer's Manufacturer's Representative Sales Branch


^ Industrial Distributors i r Industrial Consumer Indirect Channel

^r

Industrial Consumer Direct Channel

Industrial Consumer
Indirect Channel

Industrial Consumer Indirect Channel

Fig. 8.3 : Industrial Product Marketing Channels

The number of channel intermediaries is usually lower for industrial marketing than for consumer product marketing.
1. Direct Channels
t

In direct channel structure, the manufacturer performs all the tasks and jobs necessary to create sales and deliver the products to industrial customers. Some of these functions are storing, dispatching, transporting, installing (at buyer's premises) and provided post-sales services. The example of direct channel is direct sales through the company's sales force. direct marketing through telemarketing, online marketing and e-commerce (business transactions through computers). The direct channel becomes an attractive proposition or becomes necessary when: i) the value of the transaction is large n) the selling process includes extensive technical and commercial negotiations 210

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Distribution Channels and Logistics

iii) the buying process involves multiple stages iv) the industrial buyers insist on purchasing directly from the seller firms.

2.

Indirect Channels

In indirect channel structures, the manufacturing firm and the intermediaries share the tasks between them, Examples of the types of intermediaries are: dealers or distributors, manufacturer's representatives (or agents), commission merchants, value added reseller, brokers, merchants, dealers. Distributors usually take the title (Legal ownership) of the products before selling to the industrial consumer, while agents resellers, brokers may or may not take the title. In cases where the title is taken from the manufacturer, intermediate stock points exist before final distribution. Brokers provide useful service for goods that are highly standardised. Raw materials and few types of equipments can fall in the category. Because of their knowledge of trade, they can locate buyer firms willing to purchase the excess stock lying with the seller firm. In industrial marketing, the manufacturer's branch office is used for selling spares and providing after sales services. In many cases, the sales may be routed through local selling agents or distributors for effectively reaching out to customers spread over the district, town or state. Branch offices can also be: i) Stock-carrying type ii) non-stock carrying type. The Stock carrying branches are useful for bulk sales and for lowering the transportation charges. This arrangement offers the seller the advantage of freight rate, speed and certainty of delivery to customers. Non-Stock carrying branches are primarily used for the purpose of coordinating the sales operations of respective territories. The disadvantage of branch office could be its associated costs in terms of overhead expenses incurred by the seller. It is not preferred by the seller firms that have limited sales potential only in one or two regions and in cases where the customer base is low. An indirect channel becomes appropriate when i) value of transactions is low; ii) the manufacturer has limited resources; m) the industrial buyers are widely dispersed; iv) the buyer firms purchase many product items in one transaction.

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Industrial Marketing

Some products suitable for the indirect channel are industrial chemicals and limits, wiring materials, electronic components and general industrial machinery. Selection criteria that influence the channel structure are many. Some of them are given below in brief: 252.Type of market-horizontal or vertical 253.Market potential-large or small 254.Geographical concentration of customers - concentrated or spread out. 255.Purchase policies of buyers - periodic supply or one-time supply. 256. Profit margins - whether prices are volatile and costs can be recovered over the long term. i) g) h) i) j) k) Product installation requirement - specialized contractors may be required. Requirements of post-sales services - trained service personnel may be required for installation and commissioning. Stress on quality - different customers require conformance to different quality specification. Weight and volume - if users buy in truckloads, direct channel is preferred. Requirements for repair and maintenance - frequency and extent of services required play a dominant part. Supplier's marketing objectives - whether supplier wishes to expand scope of operations or wants to remain in existing markets.

8.4 FUNCTIONS OF INTERMEDIARIES The rent functions performed by ng


The distributor (or Dealer) purchases products from the seller firm for resale to ustriaTbu^rs either on 'as is' condition or by making suitable modifications.

Jy contact potential or existing customers, promote the product, negotiate and serve orders.

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Assonment provision
some intermediaries bring together several related items from various sources to serve potential customers.

tilt

Cl

C2

C3

C4

Distributor Attached to One Supplier Firm

Distributor Attached to Many Supplier Firms

Distributor Offering Assortment of Products to Customers CCustomer Firm; Intermediary) Sf-Seller Firm; D - Distributor (or Other

F i g

. 8.4 : Linkages of Supplier-intermediary

F in a n c in g

Some distributors purchase products and invest in inventory. They also extend credit to customers while reselling the products. They therefore perform an important function of financing the marketing process.

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Industrial Marketing

Warehousing The distributors have to store the products and items and keep them in normal condition for sale to buyer firms.

T ransportation
Some intermediaries also perform the function by physical movement of the product from the warehouses to customer 'premises' Many industrial customers are willing to pay a premium for prompt or speedy delivery.

Inform ation
They are entrusted with the responsibility of providing information both to their customers and suppliers. Customers need information about product features, prices, delivery periods, etc. While suppliers need information on customer requirements, product performance, etc. Well-developed intermediary firms can be important sources of information for new product development by supplier firms as well as of competitive intelligence.

Risk taking The intermediaries take on the risk for the period between storage and actual use by the customer. They need to ensure that the product does not deteriorate, alter in characteristics and does not become obsolete.

Technical Services Some intermediaries are well equipped to render both presales services and post-sales services. This need is gaining more and more importance. For example, even a manufacturer's franchisee (for example, HP-Compaq) has to invest and keep certain equipment for rendering services to both potential user and actual users. As can be seen, industrial buyers prefer to buy from intermediaries provided they are responsive to their needs in both products and services. The main reasons for selecting intermediaries are: fast delivery; useful information; appropriate variety to ensure one-stop shopping, credit facility.

8.5 TYPES OF INTERMEDIARIES ____________________________________________________________ _____ Some of the common types of intermediaries in industrial marketing are manufacturer's representatives, industrial distributors, brokers, commission merchants and value added resellers (VARs)

W iS T

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1. Manufacturer's representative
Their main function is to promote sales, service orders and keep track of market development. However, they do not buy or store the seller firm's product or items, or finance the transactions. They are paid a commission on sales which varies from industry to industry. The marketing representatives are generally used by small and medium sized firms. These firms find it economical to have independent representatives (either firms or individuals). They are paid commission only when the orders are generated. There are no other selling costs. In territories and areas with low market potential or in cases of low value transactions, seller firms find it more economical to use independent representatives or agents. These agents are selected on the basis of their product and customer, knowledge and contacts with other industrial firms. They usually represent a number of manufacturers, whose product complement one another but do not compete with each other.

2. Industrial D istributors
Industrial Distributors (or Dealers) are the most common type of intermediary in a distribution channel. Typically, they are small and independent business firms who service narrow or limited territories. Their main responsibilities include buying, storing, promoting, selling offering credit, transporting and delivering products, and providing information and feedback to the seller firms. There are three major classes of industrial distributors: i) General line distributors ii) Specialised distributors I) Combination house distributors General line distributors carry a wide variety of general industrial products and goods required in a large cross-section of user firms. Specialized distributors focus on a narrow range of related products such as hydraulic or pneumatic equipment, components, cutting tools, etc. Combination house distributors sell some products directly to industrial companies and some to retailers or smaller distributors (sub-distributors) who in turn sell to the final customer. They may be involved in both consumer and industrial 215 market.

Industrial Marketing

3.

Brokers

' " - >^ " . " < * <

- <

They bring buyers firms and seller firms together by providing information on user needs. Their main function is to find potential buyers, negotiate and close the sale. Brokers do not buy or handle the products and are paid on commission basis. They generally deal with standard product or raw materials and their role assumes importance under conditions when information on markets and products is inadequate.

4.

Commission Merchants
They usually deal with bulk commodities such as raw materials. They have short term agreements with seller firms on products, which are sold in large quantities or volume. They do not buy or take ownership of the material, but perform the functions of arranging inspection, physical handling, negotiating process and completing sales. Since they represent the large manufacturing firms, they are paid on commission basis.

5.

Value added resellers (or Channel Partners)


The computer industry has given rise to this new breed of distributors. The VARs customize the computer hardware and software to solve specific problems and often customized solutions. These intermediaries are specialists and need technically qualified persons to carry out the sales and service operations. Generally, industrial distributors or dealers and VARs are paid through trade discounts on the price list, whereas the other types of intermediaries like manufacturer's representatives, brokers and commission merchants are compensated through commission on net sales value (exclusive of sales tax, freight charges and excise duties)

JS$ Activity B :
a) If a distributor has a warehouse facility, it is: D Disadvantageous to the industrial firm D Advantageous to the firm D of no value to the firm b) the The most common type of intermediary in the industrial environment is

216

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c)

A commission merchant D oesD D oes not D take ownership of material from the parent industrial firm.

8.6 CHANNEL DESIGN Channel design involves the development of new marketing channels and modifying the existing ones. The steps which need to be followed are: ** I 1) Developing channel objectives 2) Identifying the suitable channel alternatives 3) Evaluating the objectives 4) Selecting the marketing channel f 1. Channel Objectives These are derived from the sellers' marketing objectives. The channel objectives should focus on the customers needs in terms of service levels required by the target m arket segm ents. The channel objectives can vary depending on product characteristics. A manufacturer of steel fasteners may have the distribution objective of ensuring product availability to both major and minor industrial firms with market potential of Rs.5 Lacs and above. 2. Identifying the channel alternatives covers four m ajor issues : i) Types of intermediaries ii) Number of intermediaries iii) Number of Channels iv) Terms and responsibilities of channel members. i) Types of interm ediaries As discussed in the previous section, a seller firm can select the types of intermediaries from VAR's, Industrial distributors manufacturer's representatives, brokers, commission agents, a seller firm may appoint or select one or more types of intermediaries for the same product servicing different market segments.

21 7

Industrial Marketing

ii) Number of intermediaries


There are three strategies typically followed by seller firms: Selective distribution where a few intermediaries (two or three) are selected to cover a particular territory, The criteria for selection depends on the product characteristic and customer needs. Intensive distribution is suitable for highly standardized products, which have less unit value and more frequent purchases. Eg. Small electric hand tools. It is important to offer intensive distribution by placing the goods and services to as many distributors as possible in a given market. Exclusive Distribution pertains to distributors who handle only one seller range of products by exclusive arrangement. By granting exclusive distribution, the seller firm expects a high degree selling efforts and marketing skills from the appointed. This strategy in mostly adopted by the large and very large industrial firms which need to have a strong presence in target markets and in identified industrial segments. Hi) Number of Channels This is also referred to as Multi-channel Marketing. Industrial firms do use more than one or two channels such as direct sales force, independent agents/ representatives, and distributors. The benefits expected by the seller firm are: increased market courage, lower channel costs, and more customized selling. However, the possibility of conflict can arise between the channels if role clarity and unassigned territories are prevalent. iv) Terms and responsibilities of channel members The responsibilities and tasks of the channel members need to be clarified in detail by the seller firm to avoid future conflicts if warranty services are included in a contract; it needs to be ensured whether the manufacturer or the intermediary will carry out the services. Sales policies involving trade discount to the distributors on the list prices and commission to agents/brokers should be agreed upon along with any incentives like cash discounts and quantity discounts. After Sales Services form an important element in the chain of tasks expected from a primary distributor in case prior agreements have been made with the seller firm. 218

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3. Evaluating the Channel alternatives


The factors used for evaluating each of the channel alternatives are Economic Performance, Degree of control, and Adaptability to changing market situation. For evaluation of economic performance, the industrial marketer can estimate the levels of sales revenue and selling cost of each alternative; for a better assessment, the levels can be optimistic and pessimistic. Similarly, the total costs of selling at the two levels can be estimated.

Total Selling Cost(Rs.)

Distributor Company Sales Force

Represents Break even Level > Sales Revenue (Rs.) or Volume of Units Sold Fig. 8.5 : Break Even Level When plotted in on graph, there is a point Y (Fig-05), where the total selling costs for the two channel alternatives is the same. If the expected sales revenue is below point Y1, the distributor channel is appropriate in view of lower selling costs. Likewise, if the revenue expected is above Y (ie. Point Y2), the company sales force channel is preferred since the selling costs will be lower. However, the above evaluation is based on the assumption that there is a linear relationship between sales revenue and selling costs. This assumption may not hold true over longer time periods and in certain categories of products. The Degree of control that the seller firm exercises over the channels is also important for evaluation purposes. For example, many selling agents and manufacturer's representatives are quite reluctant to perform non-selling functions such as collecting market information, obtaining detailed customer feedback, and show disregard for payment collection. If seller firm wants a distributor to concentrate on developing the market demand for a new product, the distributor may show uninterest since it does not match with his primary motive of creating more profits. Other types of channel 219 conflicts which can arise are:

Industrial Marketing

f) Manufacturer's aim is long term profitability but the distributors' (or channel members' aim) is short term gains and profits. ii) Manufacturers prefer to deal directly with large buyer firms while the channel members feel they are required to serve only the small customers. in) The seller firm wants the intermediary to carry higher inventory due to its perception of favorable market conditions while the intermediary's perceptions are quite different. iv) The adequacy of the commission percentage is a matter of constant debate between the intermediary and the seller firm. v) When two or more intermediaries operate in the same territories(sometiraes unknowingly) and with the same customers, an awkward situation arises for the seller firm to justify their offers to customers. These conflicts are usually resolved, unless the channel member feels the necessity of resorting to legal measures, mediation or arbitration. Evaluating Channel Members is useful for the seller firm to know which intermediaries are achieving targets and results. The non-performing intermediaries may need to be retained, re-motivated or terminated. For this purpose, the weighted factor method of evaluation can be employed. Evaluation Factors (A) 1. Sales achieved (Vs. Budgeted sales) 2. Customer Delivery 3. Customer Complaints 4. Customers opinions & feedback 5. Pre Sales Services 6. Post Sales Services 7. New Customers development Weightage Rating Min:l -max:10 (B) Score (A*B) 2.45 0.60 0.60 0.60 0.20 1.00 0.20

0.35 0.10 0.15 0.10 0.05 0.20 0.05 1.00

7 6 4 6 4 5 4

5.65 Min. Score Required: 5.00

Fig. 8.6 : Example of Evaluation for Channel Member

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JS$ Activity C: a) Seller firms follow three types of distribution strategies with intermediaries. These are:
1. ___________________________________________________________

c us to m er s.

L o gi st 2 ic . s is fo c 3 us e . d o b) Post sales services for industrial products of standard nature should be the n responsibility of: st D Thecompany or in D The distributor g D A third party service provider a n d 8.7 LOGISTICS MANAGEMENT _______________________________________ m o Logistics is a term that originated in military warfare. In business, logistics refers vi to the design and management of all activities necessary to make material n available for manufacturing and marketing when and where needed. Logistics g therefore encompasses two primary product flows: ac 257. Physical supply or flows that provide raw materials, components, and supplies ti to the vi productions or manufacturing process. (This is sometimes called in-bound ti es logistics) as 258. Physical distribution or flows that deliver finished goods to channel members pr and to o customers.(This is sometimes called outbound logistics) d u Logistics is a critical component in supply chain management (SCM). How is ct logistics management different from SCM? s a SCM is focused on the integration of all business processes that add value n for d

information proceed through the supply chains to final customers.

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Industrial Marketing

The importance of supply chain activities needs to be emphasized in the context of higher customer expectations of delivery, and unrelenting competitors from various industrial companies, both in India and from abroad. For a US $ 100 mn sales turnover company, improvements in earnings of up to US $ 6 mn.have been achieved by companies by adopting supply chain management practices in a systematic and through manner. Supply chain management is a broader integrative discipline that includes the coordination of several business processes in addition to logistics. i Today Logistics management is viewed as critical weapon by many industrial firms because of its huge impact on a customer's operations. It is become a primary marketing tool for both small and large industrial firms for gaining advantage.

Just-in-time System
Under this principle, all suppliers need to carefully co-ordinate the delivery of products and supplies with the manufacturer's production schedule -often delivering products a few hours before they are used. The objectives of a JIT system are to eliminate waste of all kinds from the production process- requiring the delivery of the special product at the precise time and in the exact quantity needed. This implies that there is no room for defective items or supplies, since there is no opportunity for inspection. Because a JIT system attempts to link purchases to production requirements, the typical order size reduces and more frequent deliveries are required. A significant effect of JIT purchasing is the drastic reduction in the number of suppliers utilised by industrial product manufacturers. However, long-lasting relationships emerge, which are unique, and unite the buyer & seller.

Elements in Logistics System


Table 8.1 : Elements in Logistics System Main Elements 1. 2. Customer Service Key Features Considered to be the 'Product' of logistics activities -Level of customer service has a direct impact on total cost, market share & profitability. Directs activities necessary to deliver products to customers. - Speed and accuracy will affect costs and customer service levels. ^

Order Processing
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: i

p. Communication

Information exchanged in the distribution process guides the activities in the system. - Forms an important link between seller's logistics system and its customers. Physical movements of products from source of supply through production to customers is the most significant cost area in logistics.

5S-Wafehousing 7. Packaging

Provides storage space, serves as a buffer between production and use. - Can be used to enhance customer service and to lower transportation costs.

6. Inventory

Inventory is used to make products available to customers to ensure that the correct mix of products is available, at the proper location and right time. To provide protection to the product. To maintain product identity throughout the logistic process. Increases the speed of, and reduces cost of making orders in ware house and moving products between storage and transport carriers. Cost generating Cost generating activity that needs to be controlled.

8. Materials handling

9. Production Planning

10. Plant & Warehouse Location

Used in conjunction with logistics planning, production planning ensures products are available for inventory in the correct mix and quantity. Strategic placement of plants and warehouses increases customer service and reduces the cost of transportations

Table 8.1 represents the main elements in a logistics system and its key aspects. Each activity in the logistics system has some effect on all other activities. In case of unsatisfactory logistics operation system by the seller firm, customers may have to bear the extra cost of high inventories, install expensive order-expediting systems, develop secondary supply sources, or in the worst case, turn to other companies.

22'

Industrial Marketing

The significance of logistics management and service is similar to that of product quality as a measure of performance. Logistical Service relates to the availability and delivery of products to the customers and can be imagined as a series of sales-satisfying activities that begin when the customer places the order and end with the delivery and installation of the product by the buyer firm. Logistical services include all aspects of performance that are important to the industrial customer. They comprise: 259. Delivery time 260. Delivery reliability 261.Order accuracy From creation of order to delivery; includes order processing time and delivery /transportation time. It is most frequently used measure of logistics service, focuses on having product to meet customer demand. It is the degree to which items received conform to the order specifications. Key dimension is incidence of orders shipped complete and without errors. Firm's ability to respond to inquiries about order status and product availability. A measure of the physical condition of the product when received by the buyer. Extent to which orders, returns, credits, billing and adjustments are handled. Such features as packaging, which facilitates customer handling, other services (like free installation).

262.Information access 263. Damage 264. Ease of doing business 265.Value added Services

Many industrial products that are custom-built- such as a packaging plant, dairy equipment, or machinery for cement manufacture - have relatively low logistical service requirements. Items such as replacements parts, components, sub-assemblies require stringent logistical performance. Industrial marketing personnel need to isolate segments and adjust the level of logistical service offerings accordingly. The sales and cost effects of various service levels should be analyzed to find the level that generates high profits. Alogistics system has a direct effect on a channel member's ability to control cost and service to buyer firms. If a supplier firm provides erratic delivery service to distributors, the distributor is forced to carry higher inventory in order to provide a satisfactory level of product availability to end users.

UnitS

Distribution Channels and Logistics

Inefficient logistics service to the distributors either increases distributor costs (larger inventories) or creates shortages of the supplier's products at the distributor's level. Neither result is good. In the first case, distributor loyalty and marketing efforts will suffer; in the other case, end users will eventually change suppliers. On the other hand, more efficient expertise in logistics management by intermediaries is helping the seller firms to concentrate on their own companies of production and marketing. Third party Logistics organisation A recent development in logistics management involves the emergence of third-party firms. These external companies perform a wide variety of functions related to logistics and warehousing, traditionally performed by the seller firm. The functions performed by a third party company can include all the elements of the logistics process. Alternatively, they perform a few selected activities from that process. Third parties can perform the warehousing (eg. DTDC Couriers), transportation function (e.g. Patel Roadways) or they may perform entire logistics process (GATI Groups of companies for outbound logistics). The use of third parties enables the industrial firm to concentrate on its core business while drawing on the professional expertise of logistics service providers. This has brought significant improvement in the entire management process such as lower cost, better service, improved asset utilisation, increased flexibility. Some firms in foreign countries have gone a step further in advocating the use of 'Fourth party' Logistics service provider - a firm that does not own any assets but serves to manage several third parties that are employed to perform a variety of logistics functions. In analyzing the most efficient way to achieve improved costs and service objectives, the industrial marketing firm should consider carefully the benefits and drawbacks of outsourcing part or all logistics functions to third party service providers. Example: Caterpillar USA is the number one supplier of earth-moving machines and equipment. They formed a logistics services company to manage the spare parts distribution to other manufactures and customers. The company has a worldwide reputation in ensuring spare parts availability to any part of the world within 24 hours. The company has gained knowledge from its own experience in distributing more than 300 product types that require over 5 lakh spare parts in their entire range. A well-placed logistics system uses the three major variables of facilities, transportation and inventory, critically examined for optimum utilisation. They form the basis of decisions on logistics faced by the industrial marketing firm. Hence 225 logistics and its management plays akey role in the overall strategies of industrial firms.

T
Industrial Marketing

& Activity D;
a) i) Inbound logistics refers to:

ii) Outbound logistics refers to:

b) The set of activities that focuses on the integration of all business processes that add value to customers is called

c)

Two key elements in the logistics system are:

2.

8.8 SUPPLY CHAIN MANAGEMENT (SCM) CONCEPTS________________


A supply chain involves all activities associated with moving goods from the raw materials stage to the finished product and end user. SCM is defined as the integration of business processes from end user through original suppliers that provide products, services and information that add value for customers. The supply chain includes a variety of industrial firms ranging from raw material and

226

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component suppliers to those engaged in wholesaling and distribution. Also included are all types of organisations engaged in transportation, warehousing, information processing and materials handling. The various functions to be executed throughout the supply chain include: sourcing, purchasing, product design, production scheduling, manufacturing, order processing, inventory management, materials handling, warehousing and customer service. SCM co- ordinates and integrates all these activities so as to improve the efficiency of throughput at minimum cost.
Distribution & Logistics Delivery & customer Service Performance measurement

End User/Customer

Manufacturing Operations

Inbound Logistics

Outbound Logistics

Information Flow Cash Flow

Product FlowFig. 8.7 : Supply Chain System


The major objectives of SCM are: i) Reduce cost per unit for customer ii) Minimise order to delivery cycle time in) Reduce waste and duplication iv) Ensure superior delivery service Industrial firms following the SCM approach look for ways to integrate their logistics, procurement, operations and marketing functions with other supply chain members so that material, information, component parts and finished products flow from point of origin to the final customer at low unit cost and high levels of service. In responding to actual user
227

Industrial Marketing

demand when it is desired, the seller firms minimize the flow of raw materials, finished products and packaging materials, thereby reducing inventory costs across the entire supply chain.

Benefits
An appropriate supply chain system will create benefits to both the supplier firm and the ultimate customer. Table 8.2 : Benefits Package

Benefits to Customer Reduction in delivery cycle time Reduced wastage of time and researches Improved quality and efficiency in distribution

Benefits to Supplier Minimisation of order processing time and costs Reduced delivery time Reduced wastage of resources and duplication Improved partnerships with raw material suppliers and outsourced firms Lower costs of operations Revenue growth Enhanced cash flows Higher rate of return on assets

228

Example: One of the top semiconductor MNCs cut its standard delivery time, reduced supply chain costs and increased sales by nearly one third of its total revenue. The company achieved this by shutting down six large warehouses around the world and delivered its microchips to customers around the globe from a single, new distribution center in Singapore. Before the system was revamped customers waited

about travelled 20,000 different routes mostly in the cargo areas of 12 different airlines 45 stopping at 10 warehouses along the route. In the new system, the MNC moved days products from factory to customer in four days or less. It is not surprising that the for on- corporation achieved increase in sales $1.5 bn. over a 2 year period, and supply site chain cost dropped from 2.6 % of sales revenue to 1.9 %. deliver y. The This is just one example of a leading industrial company, but there are other MNCs microc (among them are Dell Computers, HP-Compaq and CISCO Systems), which have extracted huge benefits as a result of systematic adoption of SCM techniques hips and tools.

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8.9 IT SYSTEMS IN SCM


Supply chains cannot function at high efficiency levels without powerful IT Systems to drive them. Many of the complex, internet supply chains adopted by leading industrial companies can operate at optimum efficiency only through modernised information networks and interactive software that help manage the elaborate networks. The Internet- and internet technology - is the major tool that industrial companies have to rely on for bringing major benefits to supply chain systems. In addition, many software applications may play a key role in optimising the efficiency of the hardware system. The Internet has allowed industrial marketers to realise the following important benefits: Timely product development and new product introduction Reductions in own inventory as well as channel intermediary's inventory Reductions in communications and customer support costs Ability to improve traditional products and customer relationship through customisation.

The Internet permits supplier firms to gain real time information of their customers needs and gives them the lead time necessary to respond to those needs in a timely manner. Virtually all industrial marketing departments are now using the internet technology in some form for taking orders, order processing, communicating with the customers, and instantly initiating transmission of information to all supply chain partners.

Recycling / Remanufacturing

Material Transfer Information Transfer

Fig. 8.8 : Supply Chain for Industrial Goods

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Industrial Marketing

The effects of SCM implementation on industrial firms are huge. In large organisations, it may form part of the enterprise resource planning (ERP) networking system considered for implementation across the company and across countries. Example: Dell Computers is one of the many large MNC firms that has implemented a unique model of SCM in its operations on a world-wide basis. Some of the major benefits that companies derive are listed in Table 8.3. Dealer management systems at TATA Motors To address its competitive challenges, TATA Motors began standardizing its customer-facing business processes company-wide, laying the foundation for strong dealer relationships apart from improved operational efficiency and a better customer experience. This has posed numerous challenges as it involves more than 250 dealer organisations at more than 1600 locations and staffed by more than 10,000 sales persons across India. In conjunction with its re-engineering effort, TATA Motors has put in place a technology platform to improve the flow of information across the organisation and its intermediaries. The platform consists of an effective dealer management system which helps individual dealerships with everything from inventory management and credit reporting to calculating commissions. By integrating this dealer management system, TATA Motors has streamlined transactions and ensured that dealers capture customer data as a part of their normal operations. The solution provides a 360 degree view of customers to the extended organisation, with appropriate controls to ensure that one dealer is not privy to information from another. To further enlist dealer support, TATA Motors involved dealers throughout the solution configuration and deployment process. This process has helped them overcome the usual resistance to change and gain rapid acceptance from the dealers. The system has been integrated with a wide array of back-office ERP applications including applications inventory management, fulfillment and parts location. Pricing and tax calculations can be adjusted to each dealer's requirements. In addition, comprehensive sales and reporting functionality has been built into the system integration process that enables TATA Motors to distribute sales targets to its dealers and have real-time access to the actual sales across the country on a 24x7 basis.

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Table 8,3 : Impact of Supply Chain Management on Industrial Companies

Element/Link 266.C hannel R elationship

B e fo r e

A fter

Independent/Competitive; Independent; A few select Many Competing Suppliers and suppliers and distributors as distributors. partners. months; most recent downstream demand data and production schedules not available. optimised for efficiency. Fast, in some cases instantaneous; Access to most recent downstream demand data and production schedules. Others outsourced for flexibility; integrated and synchronized to match supply with demand.

267.Flow of Inform ation Slow; can take weeks or

3. B u sin ess P rocesses Predominantly inhouse; locally In-house for key processes;

4. Inventory

High; use is buffer against uncertainty & lack of information.

5. Production

Inflexible; long lead times; dominated by material requirements planning; 'buildto-stock' approach

Low; information connectivity reduces inventory buffer due to transparency; better positioning of inventory further up the supply chain. Rexible; Lead time reduction; products based on common components positioned at the right location in the supply chain to meet customer need times; 'build-to-order' approach. Direct delivery, more feasible; continuous replenishment. Greater emphasis on design for manufacturing and supply chain management. Global (Single business with global sourcing).

6. Distribution 7. Product Design

Traditional warehousing network. Product designed without significant inputs from manufacturing or distribution. Multinational (separate business in each country)

8. International Operations
23 1

Industrial Marketing

JS$ Activity E; a) The 4 major objectives of a supply chain management system are: I.___________________________________________________ 2. 3. 4.

b) Three major benefits from the SCM system to customers are: 1.________________________________________________ 2. 3. c) Mention the effect of SCM systems on industrial companies on the following factors before and after implementation: i) ii) Distribution___________________________________________________ International operations:_________________________________________

8.10 SUMMARY This unit has covered the nature and structure of distribution for industrial products. A significant difference between the consumer product and industrial product marketing systems is the need for post-sales services. The role of the third party service provider needs to be understood. The conditions which favour the selection of direct or indirect channels have been covered. The intermediaries selected for industrial product distribution perform more functions than those selected for consumer products. It is necessary therefore to understand the functions of the various intermediaries operating in the marketplace. Logistics management, covering both inbound and outbound logistics, has become a crucial component in an industrial firm's strategy of gaining higher market share. Supply chain management is now a broad-based discipline that includes the coordination of several business processes in addition to logistics. The elements in a logistics system have been

Unit 8

Distribution Channels and Logistics

briefly explained. An appropriate supply chain system offers benefits to both the supplier firm and the end customer. A table towards the end of this unit brings into focus the impact of supply chain management in industrial companies before and after implementation.

8.11 KEYWORDS__________________________________________________
Direct channels: In this type of structure, the manufacturer performs all the task and jobs necessary to create sales and deliver the products to industrial customers. Some of these functions are storing, dispatching, transporting, installing and providing post-sales services. Intermediary: A term used to describe the middleman in the channel of distribution for products and services. Industrial intermediaries are often small and medium companies that have close relationships with parent firms. The common types of intermediaries are distributors, dealers, manufacturers, representative, channel partner, or broker/agent. Indirect channels: In this type of structure the tasks pertaining to creation of sales and delivering of products are shared between the manufacturing firm and intermediaries. Supply Chain Management (SCM): It is defined as the integration of business processes from end user to original suppliers firms that provide product, services and information that add value for customers. Value-added reseller (VAR): This term refers to an individual or a company that assembles and customizes various products into a composite unit as per the requirements of customers. They perform the role of specialist in carrying out the sales and service operations.

8.12 SELF-ASSESSM ENT QUESTIO NS

r'

Q1. Describe the type of channel structure and the reasons why you would recommend them: i) standardised industrial valves ii) customised MP3 audio players for automobiles

Q2.

Ide nti fy Q3. What are intermediaries, the types of intermediaries and the various functions that they perform?
****:

the merits and demerits of the direct channel and the indirect channel with the help of your own examples.

Industrial Marketing

9.1 INTRODUCTION

II

With customers demanding problem-solving solutions rather than products, industrial suppliers are increasingly turning to services as the principal ingredient in these solutions. A service might be the complete solution or a critical component of the total solution (such as design outsourcing contract from an equipment supplier). The service could also play a supporting role in a physical product sale such as providing guarantees, JIT shipping, inventory management or providing free spares for operation and/or maintenance. Very often, the extent and quantum of services are of prime importance in award of orders or contracts by industrial buyers. It is therefore necessary to understand the critical role services play in helping the industrial supplier gain an advantage over competitors. This unit focuses on the growth of the importance of services - whether in the form of 'pure' service product (e.g., financial services or banking), as an 'add-on' package to physical products, or as critical components in a supplier's package (e.g., exclusive post-sales services). A subsequent section deals with the differences between goods and services from the industrial marketer's point of view. The unique aspects of service characteristics and the service quality dimensions that customers use to perceive the total package are then described. The service processes that link customer expectations and customer satisfaction and loyalty are also covered. A separate section reviews the stages in the development of the services package. An assessment of the importance of service employees in service delivery is also defined in the concluding section.

238

9.2 GROWTH OF INDUSTRIAL SERVICES One of the most important developments in the last decade has been the growth of services and the service economy. In fact, services marketing has emerged as one of the fastest growing branches embracing a host of services ranging from personal, to business, to industrial, to managerial. Advertising and Management consultancy are just two examples of business services utilized by industrial companies worldwide. Many large companies such as Bharti Televentures, and Reliance Infocom (in telecommunications) Taj and Oberoi group (hotels) Indian Airlines and Jet Airways (in transportation) ABN Amro Bank and HDFC Bank (in financial services) Accenture and Infosys (in IT Services) are some more examples. Services, in a broad sense, encompass a very wide range of industries. Services are not limited to service industries. They now play a very significant role in the marketing programs of traditional manufacturing firms of consumer products and industrial products. Entire new sets of sub-industries have sprung up in the IT fields, which have gained further momentum with the advent of the Internet age. ITES (Information technology

Unit 9

Role of Services

enabled services) is the fastest growing sector in India with an average compound growth rate of 30% to 35%. Example: In its company brochure, IBM states that it is the largest service business in the world. Through its Global Service division, IBM offers product support services, professional consultancy services and network computing services around the world. Many business houses have outsourced entire service functions to IBM, relying on the company to provide the services better than other providers of similar services. IBM now earns the maximum revenue from its services divisions rather than from computer hardware and software. This is also the case with GE, Hewlett-Packard, Sun Microsystems and Cisco Systems. Services now account for 75 percent of General Electric's (GE) total revenue. Switching from a manufacturing focus to a service focus requires a change in management mind-set, change in culture, changes in the ways people work and get rewarded, and new ways of implementing solutions. The service sector is growing through revolutionary change that is affecting the way industrial customers and retail customers live and work. E.g. Very few people could anticipated in the late nineties the need for e-mail, online banking and web hosting services. In 1999, the service sector represented 50 percent of total employment and constituted 78 percent of the GDP in the USA. In India too, the service sector has overtaken the agricultural sector in terms of output and now constitutes approximately 55 percent of the GDP. 9.3 DEFINING SERVICES Services are, in simple language, acts of work processes and performances. The services offered by companies like IBM or Reliance Infocomm are not tangible things that can be touched, seen and felt- they are intangible. IBM offers repair and maintenance services for its equipment consulting services for IT and e-commerce applications, training services, Web-design and hosting, and other services. \ Definition A service is an act or performance offered by one party to another. Although the process may be tied to a physical product, the performance is transitory, often intangible in nature, and does not normally result in ownership of any of the factors of production. Customer Services are those services that are provided in support of a company's 239 core products (the core product can be a product or a service). Customer service can include answering questions, taking orders, handling complaints, rendering post-sales service on physical products such as installation, testing, repair and maintenance. Customer service

Industrial Marketing

can occur at a customer's site location, or over the phone, or via the Internet. Call centers of most companies provide customer service that often needs to be staffed around the clock. Quality customer service is essential in building customer relationships. Manufacturing and technology industries are realising that a large percentage of their revenue is coming from services. They have recognised the need to provide quality service in order to complete worldwide. The main reasons for the growth of customer services among industrial product firms can be summarised as under: i) they help to augment the sales revenue, provided the right pricing strategy is followed.

ii) they help to bring greater customer orientation in the company. iii) they help to identify new business or new product opportunities faster. iv) they can bring revenue to a firm even in times of recession. v) they can help to improve the overall performance of the company through more profits. vi) they help to add value to the product over competitor's offerings. A service might be the entire solution, or a critical part of a product associated solution such as design engineering assistance to a component manufacturer. The service could play a supporting role in a product such as providing warranties, just-in-time shipping or inventory management. Competitors cannot easily replicate the service component within a superior offering. The industrial firms that have been traditionally involved in selling pure products or equipment, | have realized that the services accompanying physical goods transferred in a sale are often the customer's most important criteria for selection. This creates tremendous opportunities for industrial marketers in making choices of lying emphasis on the tangible product or the intangible service, or the total offering.

4
Services create the climate for trust and person-to-person inter-organisational relationship that improves profits for both suppliers and customers. There are 3 basic types of offerings and choices available to industrial firms (Fig. 9.1).

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A)

Professional Services: These are pure services that are marketed as standalone offerings, generally without being associated or linked to a physical product. The list of such services can include instance IT management, labor contracting, security and protection services, travel booking, market research, transportation, warehousing, etc. The variety of such services is expanding by the day. More businesses are purchasing services (standardised and customised) as are IT and manufacturing industries (both local and foreign). With the dramatic increase in the outsourcing of key activities, professional service firms have found it necessary to develop highly focused marketing programs. Customer support services: These are services generally associated and linked to own manufactured products . The range of services that accompany the physical product are frequently as important as the technical suitability of the product itself.

B)

i) Pre-purchase services: These activities relate to the assistance that needs to be carried out before the buyer firm issues the purchase order. It can be in terms given design or product engineering assistance, formulation of technical specifications, providing the technical expertise in discussions about product to the customer's customer, in other specific activities. ii) At-purchase services: These can include installation service, providing the necessary documentation, (drawings and manuals), pre-shipment testing and certification and training of operations staff in product application or commissioning. iii) Post-sales services: These can include mandatory services during guarantee period,rgpaif and maintenaQcejuring breakdowns or planned shutdowns, customer training, training documenta!iOn>operation and maintenance spares

OTIS Elevators earns more than 65 percent of its revenue from maintenance services rendered to customers worldwide. The industrial marketing manager needs to recognise that service activities augment the physical product and can create a vital advantage for the firm in the eyes of industrial customers. Caselet: Enhancement with services at VOLVO Trucks (Sweden)

Volvo, headquartered in Sweden, is one of the world's largest producers of trucks. By listening to its truck fleet customers, Volvo has identified ideas for new services that canenhance the value of its trucks. 243

Industrial Marketing

Dynafleet 2.0 is an extensive transportation information system that Volvo can customise for its truck customer. The system is composed of three separate modules that are installed in the company's fleet of trucks to provide exact information and direct communication, resulting in more efficient operations and reduced costs for the company. One of the modules is the 'logger tool' that gathers information on a vehicle and its driver. The driver logs in some information. The second module is the 'communication tool', which transmits and receives text messages and also sends out information about the company's location, fuel consumption and other details to the company's fleet office. Drivers can also communicate directly with the office or send messages to other drivers through this communication system. The third module is the 'information tool' providing maps and traffic information to the driver of the vehicle via a colour display. Back in the office, the fleet manager utilises "a logger manager that provides reports on vehicle fuel consumption, hour-to-hour information on work day activities of which vehicle and drivers, and start/stop times. This information is useful, in wage calculations and keeping track of work hours. The 'transport manager, which is used to track exactly where each vehicle is at all times, generates reports that can be used in traffic planning and other operational decisions. This service package shows how Volvo has expanded far beyond simply providing trucks for its business customers. Other services such as maintenance agreements, training of customers' personnel and financing further enhance the package.

Activity B t
a) Professional services is one of the two components of.

b) One example of a professional services company in India is:_

c) Three MNC companies that earn more revenue from service than products are: 1. ___________________,______________ ' _______________

2. _____________;____________________________________ 3.___________________________________________________

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Role of Services

9.5 DIFFERENCES BETWEEN GOODS AND SERVICES________________________________________________________

T h e re a re d iffe re n c e s b e tw e e n goods and s e rv ic e s p ro v id in g a u n iq u e set of c h a lle n g e s fo r serv ice b usinesses and for m an u fa c tu rers th at p ro v id e serv ice s as co re o fferin g s. The b a s ic d if fe re n c e s can be e n u m e ra te d as f o llo w s : i) C u s t o m e r s d o n o t o b tain o w n e rsh ip o f serv ices. if) S e r v i c e p r o d u c t can n o t b e sto re d o r in v e n to ried .
I) Customers may be involved in the service production process.

iv) T h e re is g r e a te r v a r ia b ility in o p e ra tio n a l in p u ts

a n d o u tp u ts . v) M a n y s e r v ic e s a re d if fic u lt fo r c u s to m e rs to e v a lu a te . v i) T h e tim e fa cto r assu m e s g re a t im p o rta n c e p a rtic u larly in th e ca se o f p la n t o r m a c h in ery b re a k d o w n s . v ii) D is trib u tio n c h a n n e ls ta k e d iffe re n t fo rm s . T h e m o s t b a s ic a n d u n iv e r s a ll y re c o g n is e d d iff e r e n c e is in ta n g ib ility . S e rv ic e s are m o re in ta n g ib le th a n m a n u fa c tu re d p ro d u c t, and m a n u fa c tu re d p ro d u c ts a re m o re ta n g ib le th a n s e rv ic e s (s e e F ig . 9 .3 ). B e c a u s e s e rv ic e s a re a c tio n s o r p e rfo rm a n c e s th e y c a n n o t b e s e e n o r to u c h e d in th e s a m e w a y th a t c o n s u m e rs s e n s e ta n g ib le s goods.
Lubricating Oils, Greases

O f M

PC

HIGHLY TANGIBL

Fig. 9.3 : The Tangi bilityIntang ibility Spectr um

Industrial Marketing

As can be seen in Fig. 9.3, at one end of the intangibility spectrum lie products like oils, grease, nuts, bolts and fasteners that are highly tangible and require minimal service component. At the other end lie IT services and management consultancy that are highly intangible and require a very high service component. A PC is an example of physical goods made up of tangible elements that facilitates the work of individuals and organisations. In addition to the design and performance characteristics of the computer, the quality of technical service support is an important dimension of the marketing program as well as the modern customer's key requirement. Today, no PC manufacturer can afford to venture out without a solid backup of service packages to industrial buyers. A convention center of a hotel is in the center of the spectrum because the buyer will receive both tangible elements (meals, beverages, notepads, etc) and intangible elements (ambience, check-in facilities, courteous staff, etc.). The concept of tangibility is especially useful to the industrial marketer because many industrial offerings are composed of product and service combinations. It also helps the marketing manager to focus clearly on the firm's total market offering. Generally, services cannot be stored. This means that if they are not provided at the time they are required, the business can be lost and is not recoverable. The service marketer must carefully evaluate capacity (capacity is a substitute for inventory). If capacity is set for peak demand, a service backup capacity must exist to supply the highest level of demand. If there is no demand during a given period, unused capacity is wasted. The marketer therefore needs to analyse the cost versus lost revenue and customer goodwill that might result from maintaining lower capacity. Many services require customers to participate in creating the service product. Customer involvement can take the form of self-service- as in using an ATM machine or following instructions from an instruction manual. Under such circumstances and particularly for more complex industrial products, customers should be considered as partial employees. Service firms can gain a lot in training their customers to make them more competent and more productive. The quality of the service output may vary each time it is rendered to the customer; services vary in the amount of equipment and labour used in the service. The less uniform the amount, the more difficult to judge the quality before the service is provided. Because of variability problems, industrial service providers need to fine-tune quality control programs. invest in 'systems' that minimise human error and consider measures to automate the service.

Unit 9

Role of Services

Customers experience considerable difficult in evaluating certain services- sometimes even after the service is rendered. For example, professional services such as accountancy or management consultancy or technical repairs to complex machinery are not easy to evaluate even after consumption. The industrial marketer can reduce the customer's perceived risk before a service purchase by helping them to match their needs to specific service features and educating them on what to expect both during and after service delivery. Whether it is repairing a machine or completing design engineering assistance, the customer has definite expectations about how long a particular task should take. Today's customers, product manufacturers rendering pre-sales and post-sales services need to understand the customer's time constraints and priorities. This may vary from customer to customer in the same market segment. The supplier firm needs to find ways to compete in speed, and minimise the waiting period of customers. There are severe time pressures in service personnel for specific emergency jobs like breakdown repair and non-availability of parts during maintenance or repair. Service businesses may choose to combine the service generation point and the service consumption point at a single location or use electronic means to distribute their services (e.g. posting of instruction manuals on websites). With the growth of the Internet, electronic delivery of services is expanding rapidly. This has made service delivery relatively easier than physical products which necessarily require distribution channels to move them from the factory to the customer. Some of the unique characteristics and their marketing implications are summarised in Table 9.1.
* - > * -

Table 9.1 : Service Characteristics Characteristics 1. Lack of ownership Possible implications to marketers Seller should focus promotion on the advantages of non ownership, reduced labour, overhead and capital expenses; emphasise flexibility. Buyer, seller interaction requires that service is done right the first time; requires high-level training of personnel; requires effective screening and recruitment.

2. Simultaneous production and consumption

24 7

Industrial Marketing

3. Variability (or heterogeneity) in output

Seller should emphasise strict quality standards; develop systems that minimize deviation and human error; prepackage the service; look for ways to automate. Seller should plan capacity around peak demand; use pricing and promotion to even out demand peaks and troughs; use overlapping shifts for personnel.

4. Perishability: inability to store or inventory

& Activity C;
Fill in the blanks: Products 268.Ownership 269.Inventory 270. Output variability 271. Tangibility Services

9.6 SERVICE QUALITY


The customer ultimately defines quality standards. Actual performance by the service provider or the provider's perception of quality is of no consequence compared with the customer's perception of service. When the service provider meets the customer's expectations, the result is customer satisfaction. If the service provider exceeds the customer's expectations, the result is customer delight. Research suggests that customers do not perceive service quality in a un-dimensional way, but rather judge quality based on multiple factors relevant to the context. For example. quality of automobiles is judged by such factors as reliability, serviceability, prestige. durability, and functionality. Pioneering research on the dimensions of service quality has identified five specific dimensions: 272. Reliability: ability to perform the promised service dependably and accurately. 273.Responsiveness: willingness to help customers and provides prompt service. 274. Assurance: service employee's knowledge and courtesy and their ability to inspire trust and confidence.

Unit 9

Role of Services

y
e ;

275. Empathy : caring, individua lised attention given to customer s. 276.Tangibl es: appearan ce of physical facilities , equipme

n 1. T Fe de x (F ed er al E xp re ss ) U S A, in co rp or at es thi s co nc ep t ve ry ef fic ie ntl y in th eir m es sa ge w he n 'it ab

solutely, positivel y has to get there'. Fedex is the leading logistics and courier service company in the USA and in 73 other countries . 2. Responsi veness: is the willingne ss to help customer s and provide prompt service. This dimensio n emphasis es attentive ness and promptne ss in dealing with customer requests, questions , complain ts and problems

277. A

as employe es' knowled ge and courtesy and the ability of the firm and its employe es to inspire trust and confiden ce. This dimensi on is likely to be more importa nt for services that the custome r perceive s as involvin g high risk or those that pertain to the industria l custome rs critical work processe s. Professi onal and knowled

y: is defined as the caring, individu alised attentio n the firm provides its customer s. The core element of empathy is conveyin g through personali sd or customis d services, that custome rs are unique and special. In industria l services, custome rs want supplier firms to understa nd their industrie s and issues. Many

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5. Tangibles: are defined as the appearance of physical facilities, equipment, personnel and communication materials. All of these provide physical representations or images of the service that customers, particularly new customers, will use to evaluate quality. Although tangibles are often used by industrial service companies to enhance their image, provide continuity and signal quality to customers, most industrial companies combine tangibles with other dimensions to create a service quality strategy for the firms. For websites used in e-commerce or e-business, the following additional dimensions are used to evaluate the sites: i) Efficiency: the ease and speed of accessing the site.

ii) Fulfillment: the extent to which the site's promises about order delivery and item availability are fulfilled. iii) Reliability: the correct technical functioning of the site. iv) Privacy: the degree to which the site is safe and protects customer information. v) Responsiveness: handling of problems and product returns through the site. vi) Compensation: the degree to which customers are compensated for problems. vii) Contact: the degree to which help can be accessed by telephone or online representatives. Table 9.2 summarises the components of quality with respect to manufactured products and service products.

Table 9.2 : Quality components in Manufacturing and Services


Manufacturing-based components 279.Performance-primary operating characteristics 280.Features - product attributes 281. Reliability - probability of malfunction or failure 282.Conformance - ability to meet specifications 283.Durability-useful product life Services-based components 284. Tangibles - appearance of physical elements 285. Reliability - dependable, accurate performance 286.Responsiveness-promptness and helpfulness 287. Assurance - competence, courtesy, credibility, security

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288. Service ability - Case of having problems fixed 289.Aesthetics-product appeal 290. Perceived quality - associations, reputation or image of company JS$ Activity D; a) Empathy is concerned with:

5. Empathy - easy access, good communication, understanding customer's problems

b) The three dimensions in e-service quality are: 291. __________________________________ 292. __________________________________ 3. _ _ _ ________ c) The willingness to help customers and provide prompt service is the. . dimension of service quality. Measuring service quality To measure customer satisfaction with different aspects of service quality, Zeithaml and others (VAZeithaml, AParasuraman, LL Berry /Delivery service quality; Balancing customer perceptions and expectations /New York: The free press /1990) have developed a research instrument called SERVQUAL. It is considered to be one of the most popular research models, although its suitability for industrial sources and customer support services is not yet fully established. It is based on the presumption that customers can evaluate a firm's service quality by comparing meh^ei^erju^ns^fTts~seFvJce with their own expectations. In its basic form, the scale contains 21 perception items andjl series of expectation items reflecting the five dimemionVeserviLC quality. Respondents are asked to complete a series of scales that measure their expectations of companies in a particular industry on a wide range of specific service characteristics. Using those same characteristics, respondents

251

Industrial Marketing

are subsequently asked to record their perceptions of a specific company whose services they have used. When perceived performance rating is lower than expectations, it is a sign of poor quality. The reverse indicates good quality. The SERVQUAL measure has been known to work well in reasonably competitive markets in which customers have sufficient knowledge to purposefully choose a service that meets their needs and wants. JS$ Activity E; The system that incorporate the procedures, policies and processes that an industrial firm uses to resolve customer service problems promptly is called:

9.7 CUSTOMER SATISFACTION AND LOYALTY________________________ The components of an industrial firm's offering and its customer-linking processes that affect customer satisfaction are: i) Basic elements of the physical product and /or service that customers expect all competitors to provide.

ii) Basic support services (e.g. technical assistance or training), that make the product or service more effective or easier to use. in) A recovery process for quickly fixing product or service problems. iv) Extraordinary services that provide unique solutions to customers' unique problems and those that seem customised to the individual customer. Loading service provides carefully measured and monitored customer satisfaction because it is linked to customer loyalty that is, in turn, linked to long -term profitability. Xerox Corp. regularly surveys more than 4 lakh customers on product and service satisfaction using a five-point scale from 5 (high) to l(low). On analysis, Xerox found that the very satisfied customers (5 rating) were for more loyal than satisfied customers. Very satisfied customers were six times more likely to repurchase Xerox products than satisfied customers.

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Service recovery
The way in which the supplier firm responds to a buyer firm's service problems has a crucial impact on customer retention and loyalty. Service recovery incorporates the procedures, polices and processes that a firm uses to resolve customer service problems promptly and effectively. On being assigned a customer complaint or problem, the IBM service engineer must contact the customer within 48 hours (except in the case of very severe problems in which case the response is made much faster). Service providers who satisfactorily resolve service failures at the customer's end often find that the level of perceived service quality rises. Industrial marketers need to

develop highly responsive processes for dealing with prior service failures. Some studies have shown that customers who experienced a service failure and had it corrected to their satisfaction have greater loyalty to the supplier than those customers who did not experience a service failure.

Zero defections
The quality of service provided by the industrial firm generally decides on the number of customers who will not come back - a process called 'defections'. Customer defections have a very significant effect on the margins and profits of seller firms. As a supplier's relationship with a buyer extends over longer and periods, profits are known to rise. Many additional benefits exist for the seller firm that retains existing customers. They can charge more, the cost of

sales /marketing expenses is reduced, and the longstanding customer provides 'word-of- mouth' advertising. Service providers should therefore track customer defections and recognise that continuous improvement in service quality is not a cost.

Return on quality
A difficult decision for the servicemarketing manager is to decide how much to spend on improving service quality. Expenditures on quality improvement can follow the law of quality. Techniques such as 'return on investment in quality' have been developed. Under this approach, service quality benefits are successively linked to customer satisfaction, customer retention, market share, and to profitability. The relationship between

expenditure level and customer satisfaction change is first measured by managerial judgement and then through market testing. When the relationship has been estimated, the return on quality can be measured statistically.

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Industrial Marketing

An important conclusion that can be drawn from the proceeding sections is that quality improvements should be treated as investments. No expenditure should be wasted on efforts that do not produce a favourable return.

& Activity F;
Leading service providers carefully measure and monitor customer satisfaction because it is closely linked to:

9.8 DEVELOPING THE SERVICE PACKAGE


The service package can be considered as the product dimension of service involving the essential concept of the service range of services provided, quality and level of service. Some factors are unique in the service package -the personnel who perform the service, the physical product that accompanies the service and the process of providing the service.

Stages in the development of the service package


Customer benefit concept - this refers to evaluation of the core benefit that the customer will derive from the service. An understanding of this concept will focus the industrial marketer's attention on those attributes that must necessarily be offered and monitored from the quality control viewpoint. A sales manager, selecting a hotel resort for an annual sales conference, is purchasing a core benefit of 'a successful location for work and relaxation. The hotel staff has to consider a wide variety of service elements that will together fulfill this objective e.g. meeting room size, layout, environment, acoustics, meals, comfortable rooms, audio visual equipment, staff responsiveness. a) Service Concept: The next step is to give shape to the service concept, which defines the general benefits the service company will provide in terms of the bundle of goods and services sold to the customer. The service concept translates the customer benefit concept into the range of benefits the service marketer will provide. For a hotel, the service concept may include aspects relating to flexibility, responsiveness, courteousness in providing meeting rooms, a full range of audiovisual equipment, flexible meal schedules and message services.

254

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293.Service offer: Closely linked with the service concept is the service offer which spells out in more detail those services to be offered when, where and to whom they will be provided and how they will be presented. The service elements that ultimately decide the tangible and intangibles must be determined. The service offer of the hotel includes a number of tangible items (sound proof meeting rooms, projection equipment, flipcharts, refreshments, heating and air conditioning) and intangible items (attribute of attendants, responses to unique requests, meeting room ambience). It is a lot easier to manage the tangible elements of service than to

control the intangible elements. 294.Service delivery system: The final constituent of the service product is the service delivery system or how the service is provided to the customer. The delivery system includes carefully conceived jobs for people personnel with the right skills and attitudes for successful performance, equipment, facilities and layouts for effective customer work flow and suitably developed procedures and processes aimed at a common set of objectives. For physical products, manufacturing and marketing are generally separate and distinct activities; for services these two activities are simultaneous, and often inseparable.

The service performance and the delivery system both create the product and deliver it to the customers. This pinpoints the role that people, particularly the frontline staff, play in the marketing process. Technicians, repair personnel and maintenance engineers are closely involved in customer contact and they most certainly influence the customer's perception of service quality. In short, the attributes, skills, knowledge and behaviour of service personnel have a critical impact on the levels of satisfaction that the customer derives from the service.
9.9 IMPORTANCE OF SERVICE EMPLOYEES______________________________________________________

Over the last few years, customer service has gained tremendous importance not only among service companies but also in

industrial companies. As explained in one of the earlier sections of this unit, customer service has become the main element in differentiating a company's offering and in creating value addition. All the service employees in industrial firms, whether frontline or back-office, are creating the brand image by performing various types of services. The service staff (often called 'contact employees') influence the buyer'sperceptions of product quality and acceptance. They play multiple roles in internal and external marketing. Customer loyalty in the industrial marketplace cannot be gained without a focus on customercentric service orientation by the seller firm. Because service employees represent the organisation and can directly

influence customer satisfaction and loyalty, they perform the role of marketers. This is not easily acknowledged
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Industrial Marketing

in manufacturing industries. The providers of customer service can be the firm's employees, subcontractors, or outsourced organisations that can deliver the services. Research has shown that satisfied service employees make for satisfied customers. Some research has also suggested that unless service employees are happy in their jobs, customer satisfaction is difficult to achieve. There are important linkages among elements like service quality, employee productivity, and value of services provided to the customer, customer retention and profits (Fig. 9.4). All the five dimensions of service quality - reliability, assurance, tangibles, empathy and responsiveness - that have been reviewed earlier in this unit can be influenced directly by service employees. Internal Service Quality

I Employee Satisfaction I
Employee Retention Employee Productivity

L
External Service Value Customer Satisfaction

Customer Loyalty

Fig, 9.4 : Deriving Profits from the Service Chain

Unit 9

Role of Services

Being highly productive and providing quality service to individual customers is an ongoing challenge for service providers - the frontline of the industrial firm. These are the persons who produce revenue and profits and build customer relationships for the company (Fig. 9.4). In many industries such as telecom and software, the service employees are constantly challenged daily to satisfy increasing numbers of customers more efficiently. Example 1: At AT&T's customer service center, the employees are equipped to build customer relationships that ultimately reflect on increased revenue. Thanks to frontline automation, these employees are now viewed as a key to the company's growth. The

technology allows service employees to take the time to customise the service and satisfy individual customers while being productive at the same time. Example 2: Another company that has implemented one of the most comprehensive CRM systems in the world for its sales and service persons on a worldwide basis is IBM. The goal is to integrate the whole organisation around its customers. Anyone in the company can respond to the customer in a consistent manner with the same basic information. This system becomes complex when the firm has to deal with 80,000 system users, 30,000 business partners and millions of customers. To build a serviceoriented culture

within its workforce, the industrial firm needs to: hire the right person develop the persons to deliver service quality provide the needed support systems retain the best persons. To provide quality service, the employees need ongoing training in the necessary skills and knowledge of the process, and interactive skills. Whether it is a single desktop PC or the modern offshore oil drilling platform, technical training needs to be imparted to the service employees. Successful companies such as Siemens, BOSCH Group, Reliance group, NTPC have built upon their success by investing heavily in

training and making sure the training fits their business goals and strategies. Support staff, supervisors and managers need service training as well. Many firms have started with service training for the top layers of management and then worked through the organisation to supervisors and contact employees, giving every staff member a unified view of the shared vision and service philosophy. Industrial manufacturing companies like the 'pure' service companies (eg AT&T, Fedex, DHL) have found that it takes years of consistent hard efforts to build a service culture and
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to shift the organisation from its old patterns to new patterns of carrying out their business. These are the firms that have realised that the spectrum of services accompanying the physical product are often the customers' preferred criteria in selecting suppliers in national and international markets. Caselet: OTIS - The credo of service excellence Otis Elevators is one of the most successful industrial companies providing transportation solutions with a package of industrial products and services. Its products and services are offered in more than 200 countries around the world with manufacturing major facilitie: in the Americas, Asia and Europe. Its engineering facilities are located in China, Czech Republic, France, Germany, Japan, Korea, Spain and the United States. In 2005, its revenue was USD 9.6 billion of which more than 80 per cent was generated outside the USA. It has an installed base of more than 1.8 million Otis elevators and 115,000 escalators in operation throughout the world and its service base has provided service to more than 1.5 million worldwide. The group employs more than 60,000 employees, with more than 87 per cent located outside the United States. The tallest elevators in the world are located in Shibayama, Japan (505 feet or 154 meters above ground; 89 feet or 27 meters below ground) and Bristol, Connecticut., United States (384 feet or 117 meters above ground). Vision at OTIS We intend to be the recognised leader in service excellence among all companiesnot just elevator companiesworldwide. We will inspire our customers' total confidence through exceptional service that earns us 100 percent of their business, 100 percent of the time. Moving people safely is what we do best. As the largest manufacturer and service provider of elevators, escalators and moving walkways, Otis is recognized the world over for helping people travel up, down and from place to placeconveniently and safely. Creating service excellence Service excellence is more than what we provide, it's how we think and act. It's not just "fixing a problem" or performing routine maintenance, it's the "smile" in the voice on the phone, the prompt response to a request and the drive to always improve. It's
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Role of Services

low we work with O one another and u how we work r with our v customers and the i s riding i >ublic. o n / We believe that o service excellence f begins with each m a employee's commitment to k improve the things i no matter how n smallthat are in g their control. By keeping an "at your O service' attitude t and striving to i exceed our s customers' and t each other's h expectations, we e are working hard l to become ae benchmark for a superior service d not just for e r elevator '.ompanies, but for i all companies n worldwide. s very Otis e employee is r expected to v practice Service i c Excellence every day e allowing this 12- e point roadmap. x

cellence must be evident in the actions of every Otis professional worldwide. Likewise, every employee is an ambassador of Otis who must help us achieve our mission of being first in service, firs n products and first in performance. Our employees are the Otis brandthe jmbodiment of the values we share. 1. We think safety first. Each employee is responsible for his or her own safety, the safety of other workers and the safety of the riding public. Every employee is empowered to take any action necessary to eliminate the potential for an accident. At the beginning of each work session, we scan the area

for haza rds or risk of acci dent . At the end of each wor k sessi on, we mak e sure the job site or wor kspa ce is clea n, tidy and safe. 2 . W e r e s p o n d

to customer requests promptly. We answer telephone calls in a standard way and before the third ring: "Otis Elevator Company. (Your name.) How may I help you?" We reply to every customer phone call or e-mail on the same day (leaving a message or e-mail if the customer i unavailable). 3. We visit customers every time we are in their building. We convey a sense of urgency in our work and keep our customers fully updated on our progress. When possible, we check in and check out with them daily, giving a brief

over view of the wor k we have com plete d. We ask if ther e is anyt hing else we can do for the m and, abov e all, than k the m for their busi ness. If the cust ome r is not ther e, we leav e a card

with a note.

2 5 9

Industrial Marketing

4.

We deliver what we promisepromptly and unequivocally.


By the same token, we do not promise something we know Otis cannot deliver. If circumstances arise that prevent us from keeping a promise, we call the customer immediately.

5.

When a customer complains, we remain calm.


We listen, empathise and respond with a can-do attitude. We take ownership of the complaint and work to resolve it promptly. We know that every complaint contains an opportunity to exceed the customer's expectations and transform a negative experience into a positive one.

6.

We are prepared when going into a customer meeting.


We conclude each meeting with a summary of action items. If a customer asks one of us for something, that person owns that request. We keep track of open action items until the request is fulfilledand the customer fully delighted.

7.

We think of ourselves as an extension of the customer's staff in every building we work in.
We are our customer's eyes and ears. Where appropriate, we offer suggestions that will help make the customer more successful.

8.

We remember that we are always on view.


We adopt a pleasant and constructive attitude. A smile goes a long way toward maintaining a positive image. We take pride in our appearance. We take pride in our work. We take pride in our company.

9.

We ask ourselves: "What does the customer want?"


Then we work to exceed those expectations. We follow up on every job and never assume that any problem has been fixed.

10. We are responsible for our own learning and self-development.


By expanding our knowledge and skills, we enhance our ability to help both Otis and our customers.

11. We are uncompromising on work quality.


We never pass along errors. We apply Achieving Competitive Excellence (ACE) tools to identify the root cause of a problem, then work to eliminate it.

Unit 9

Role of Services

12. At Otis, we succeed or fail as a team. It's up to each of us to create a work environment where the needs of customers are met promptly by leveraging Otis' global network of knowledge and experience.

( S o u r c e :

C o n d e n

s e d

f r o m

c o m p a n y

w e b s i t e )

&

A c t i v i t y

F ;
e b) Name three aspects of service excellence that has helped Otis have a superior service culture: c u s t o m e r . A r a n g e o f s e

3.
9.10 SUMMARY Selling to industrial product consumers involves working with the end-

rvices can now be provided by the supplier to the customer and to the customer's customer. The greater the product complexity, the greater the need for services. Fortunately for industrial firms, there is wide scope in offering a variety of service offerings at the pre-order stage, execution stage and poststage. More and more industrial companies are collaborating with end-customers creating customised services products that are vital to CRM implementation and to the genesis of value addition. This unit has attempted to bring into the open the critical importance of services in industrial marketing (although services marketing is a separate subfunction by itself). Apart from an understanding of the nature and growth of services

i n t h e i n d u s t r i a l w o r l d , t h e d i f f e r e n c e s b e t w e e

n the characteristics of goods and services have been dealt with. The basic dimensions of service quality have been examined including the linkages to customer satisfaction and loyalty. The stages in the service development process have been explained. The really successful companies around the world have recognized that service offerings have become inevitable but their value in creating 2 differentiating 6 elements from 1 their competition is tremendous.

Industrial Marketing

9.11 KEYWORDS Customer services: This term is generally used to describe those services that are provided in support of a company's core product (which can be a physical product or service products). Customer support services: These are services generally associated and linked to ownmanufactured products. e-services: This term refers to those services and service transactions that take place through the electronic media such as the internet. Contact employee: This term refers to the service staff who are frontline service person and who are given the responsibility of delivering the service to customer where required. Service delivery system: This refers to the system by which the range of services is delivered to the customer. 9.12 SELF-ASSESSMENT QUESTIONS_______________________________ Q1. Why is it important to understand the role of the services sector in the Indian economy? How is the service concept being used by industrial product companies to enhance value? Q2. How is the concept of a customised solution different from that of product + service offering? Give one example of a situation that requires a customised solution. Q3. What are the kinds of pre-purchase industrial services that can be offered by product suppliers? What activities can be performed in such a situation by a supplier of aircraft air conditioning systems to Airbus Industry? Q4. What new-age technologies and systems is VOLVO, Sweden using for old-economy products like trucks? Q5. What are the unique characteristics of services that separate them from products? Q6. Identify and explain the five specific dimensions of service quality. Q7. What is service recovery? How can it be use to build customer loyalty in the industrial world?

Industrial Marketing

10.1 INTRODUCTION Pricing represents the most crucial component in the marketing mix of industrial products. There are other elements that are important for industrial products such as the role they play in the buyer's value chain of activities, the bundle of attributes sought by the buyer and the degree of trust and confidence the seller enjoys with buyers in a particular industry. Buyers generally assess the total cost in use of a particular product or service rather than the basic price. This has led to the modern concept of total cost of ownership (TCO) while selecting suppliers. Three different costs that are considered by the industrial buyer are acquisition costs, possession costs and usage costs. The pricing objectives must be consistent with the overall marketing objectives of the supplier firm. The main issue in the pricing process is to decide which attributes contribute to a product's perceived value. It is necessary to understand the types of costs encountered in business and manufacturing operations for industrial products. This unit also discusses some of the concepts related to target costing. Pricing strategy dimensions are an essential part of the pricing mechanism in industrial products. The strategic pricing options during the product life cycle (PLC) stages are also reviewed. The types of pricing and pricing methods are also covered and a summary of pricing methods have been presented in the last section of this unit.
. j

10.2 IMPLICATION OF PRICE IN INDUSTRIAL MARKETS______________ One of the key components, and possibly the most crucial, of the marketing mix is price. When the members of a decision-making unit in the buying firm select a particular product, they are buying a given level of product quality, technical service, product performance and reliable delivery. There are other elements that also become important for industrial products - the reputation of the supplier, a feeling of security, friendship and personal benefits that emerge from a buyer-seller relationship. The attribute bundles sought by the buyer firm may fall into three categories: Product-related attributes, (for example, producf quality) Company-related attributes (for example, reputation for technological superiority), and salespersonrelated attributes (for example, dependability). 266

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Price and Pricing Strategies

Buyer firm Purchasing Manufacturing Quality Engineering Supplier's offering Competitor's offering

Product attributes

Company attributes

Salesperson attributes

Product attributes

Company Salesperson attributes attributes

Fig. 10.1 : Total Offering to Customer


The total product is much more than its physical attributes. Likewise, the costs of industrial product from a supplier include much more than the supplier's price. Evaluations of industrial products in each market segment having distinct needs, are based on certain aspects and factors of particular value to them. The various benefits the industrial customer looks for can be classified into: functional, operational, financial and personal. Functional benefits are derived from the product design that might be attractive to technical personnel. Operational benefits may include durability, reliability or ease of maintenance, qualities/desired by operational staff or production managers. Financial benefits are favourable terms and opportunities for cost savings, important to Purchase Department and finance personnel. Organisational status, reduced risk and personal satisfaction are some of the personal benefits that might accrue to an individual from a particular supplier choice. Costs : As compared to consumer products, a broad perspective is needed in examining the costs presented by an alternative to the buyer. Rather than making a decision on the basis of price alone, buyer firms generally assess the total cost in use of a particular product or service. The three different types of cost that are considered in the calculations of buyer's firms are: i) Acquisition Costs: include not only the selling price and transportation cost, but also administrative cost like evaluating suppliers, expediting orders analyzing offers by 267

Industrial Marketing

suppliers, correcting errors in shipments or delivery inspection (if any) at supplier's end before dispatch. if) Possession Costs : include financing, storage inspection (at buyer's premises), relevant taxes, insurance and other handling costs .

268

in) Usage Costs : involve costs associated with the utilisation of the purchased product such as installation, employee training, user labour, field repair, product replacement and disposal costs.

As an electronic ordering system; possession costs by emphasizing just-in- time service exampl and usage cost by creating an efficient buy- back agreement in the case of an e, upgradation. Industrial firms need to involve value- based strategies that shift the conside selling proposition from individual transactions to long-term relationships built around r the value to customer and total cost in use. Successful implementation of value-based case strategies requires close coordination between the product, sales and service units of for the firm. medica Hence, price may be conceived as the value (usually expressed in monetary l equipm terms) at which the seller agrees to sell a product or service to the buyer and the ent like value at which the buyer agrees to purchase. patient monito ring system. A supplie r firm can reduce the hospita l's acquisi tion costs by offerin g an Price transactions can be: Fixed : where the price is given and the buyer agrees or disagrees. Negotiable : where the buyer and seller negotiate until a mutual price is agreed. Variable : where one or more elements may be fixed and other elements may be negotiable.

Setting a price requires an understanding of factors like the value of the product to the buyer, the likely competitive response, the costs used in the setting the price and the price sensitivity of the market.

,gT Activity A;
a) Buyer firms do not base their purchase decisions on price alone but assess the following of a particular industrial product or service: D Basic price plus transportation costs

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Price and Pricing Strategies

D Operational costs D Total cost in use b) Three types of price transactions are: 295. __________________________ 296. 297. __________________________
10.3 THE INDUSTRIAL PRODUCT PRICING PROCESS__________________

There is no single defined way by which prices are fixed. For industrial markets there area number of interconnecting factors such as the point at which the product is introduced during its life cycle, strength of competition, demand levels, costs involved and types of services to be offered. The appropriate price level can only be obtained by continuously interacting with customers using both quantitative and qualitative marketing research. The pricing mechanism is the only way the organisation can obtain revenue and profits.high or too low a price can lead a Too company to failure and even bankruptcy such as the "bubble burst" in dotcom 2000-01 in which hundreds of new companies in the IT sank because of a sector lack of understanding of what customers valued. Some factors that are responsible for the downfall of many industrial companies are: inconsistent pricing across the product portfolio failure to identify specific related costs in adequate data on competitors' products and their

capabilities I Poor recognition of customers'changed needs The key considerations in the pricing process are: 298.Pricing objectives 299.Demand characteristics 300.Costs elements 301.Competition
269

Industrial Marketing

1)

Pricing objectives

The pricing objectives must be consistent with the marketing and overall corporate objectives. The three main goals that are derived from these objectives can be broadly classified as: i) achieving a target return on investment; ii) achieving market -share goals in each segment; iii) remaining competitive in the markets. Some of the more specific pricing objectives are given in table 10.1. Each firm has to deal with its own unique set of internal and external environmental factors that affect pricing in some way. One company may take the route of lowmargin prices to build market share and maintain it; another may take the route of high/premium prices that may subsequently be reduced as the market expands and competition strengthens. Table 10.1 : Some Pricing Objectives 302. Maximize short-term profits 303. Maintain price leadership status 304. Discourage new competitors from entering 305.Help increase sales of weak products in portfolio 306.Create interest and excitement about the item 307. Avoid intervention by Government or regulatory bodies 308. Enhance image of firm Each firm requires its own definition of pricing objectives that are consistent with its corporate mission. 2) Demand characteristics

Industrial markets are diverse and complex. Each market segment can have a unique application of the product and usage level. The level of importance attached to the industrial product in the buyer's end product can also vary by market segment. Hence potential demand, price factors and potential profitability can differ widely across market segments. To establish an effective pricing policy, marketers need to analyze and understand the value attached by a customer to the product or service. The value attached by a buyer of refrigerator compressors for selling refrigerators (as the end product) will certainly differ from a buyer of headlight assemblies for selling automobiles (as the end product).
270

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Price and Pricing Strategies

Assessment of value: The suitability of industrial products are evaluated on the basis of cost -benefit trade-offs of the total offering. Two competitors with similar products may quote different prices because their total offerings are perceived by buyers as differing in value from the buyer firm's view point, one firm may provide more value than the other. The main issue in the pricing process is therefore to decide which attributes contribute most to a product's perceived value. An example of differing value of attributes of competitors' product offerings is given below in Table 10.2

Table 10.2 : Attribute Levels of two offerings


Attribute High level Low level

234 56

Defective parts less than one part per million Delivery within one week Can supply total system Product easy to maintain or service Retraining of customer's personnel provided on request Post-sales service available through local franchisees

Defective parts less than ten parts per million Delivery within three weeks Can supply product only Product difficult to maintain or service Only initial training provided upon first time purchase Post-sales service available only through company personnel from headquarters.

Table 10.2 highlights the necessity to assess the relative importance of the attributes in different market segments and the strength of a firm's offering on each of the attributes visavis those of competitors. Delivery times may be the topmost consideration in one industry, quality in another, service in another and so on. The weightage factor attached by one buyer to each of the attributes can be different from that of another buyer. If the perceived values of two different offerings are assigned, then the relative perceived value can be calculated from: Weightage of one attribute Perceived value of offering A

27

Industrial Marketing

Product offering A may have a total perceived value (of all the attributes) of Rs.5600/while offering B may have a total perceived value (of all the attributes) of Rs.5000/-. The differential of Rs. 6007- can constitute the premium that might be derived from the value that buyers assign to a high level of product quality, a responsive delivery system, and the perceived advantage of offering A over others in all these attributes. If the premium of Rs. 600/-is acceptable to the buyer firm and offering A is considered to be best choice from technical and operational considerations, it may select offering A. Implications of Cost / Benefit analysis |

The assessment of the customer's perceptions of the cost/benefit analysis helps the industrial marketer to price the product with greater confidence. If the firms product truly performs better than the minimum level expected by the customer or better than the level of performance of competitors' products, but the market does not perceive the difference, then it would be appropriate for marketing communications to be developed to bring perceptions in line with the reality. If buyers attach special importance to certain attributes, the seller firms can make suitable changes in the total product offering. Knowledge of the cost/benefit perceptions of potential customers can also aid the seller in carrying out market segmentation in a meaningful manner. If particular product attributes are valued in certain market segments, then the seller firm can gain an edge over others in those segments. > Price elasticity of demand: is a measure of the degree to which customers are sensitive to price changes. If demand changes substantially with a small change in price then demand is elastic. If demand hardly changes with a change in price, the demand is said to be inelastic. The price elasticity of demand is expressed mathematically as the ratio of percentage change in quantity demanded to the percentage change in price. ,
Price elasticity of demand =

Percentage change in quantity demanded Percentage change in price

272

Price elasticity of demand is not the same at all prices. For example, total revenue (price x quantity) will increase if price is decreased, and demand is price elastic; the revenues

will fall if the price is decreased and demand is inelastic.

Unit 10

Price and Pricing Strategies

The demand is likely to less elastic (or inelastic) when the competitors are few, there is no availability of substitute products from other industries; The buyers consider higher prices to be justified by normal inflation or changes in government policies on excise duty or sales tax, etc.

End use importance


When the industrial product constitutes an important but low-cost input into the end product, the price policy or price change is less significant than attributes like reliability and quality. When the product assumes a more substantial portion of the final products cost (such as, the compressor in a window air -conditioner), changes in price can significantly after the demand for both the end product and the product itself. Reduction in the price of the compressor may cause a reduction in the price of the air conditioner. In a price elastic market, this will generate an increase in demand for the air-conditioner that will further result in a demand increase for the compressor. End-market importance: Shifting end market demand patterns need to be assessed since the demand for many industrial products is derived from the demand for end-use products. Different sectors of the market grow at different rates and a demand recession in the economy may not affect equally all sectors. It is generally easier to pass on price increase to customers that are operating in growth markets than to customers that are operating in slow or declining growth markets.

3)

Cost elements

Two ways by which an industrial firm can increase profits are: increase the price and /or reduce the costs. In highly competitive markets (that is generally the norm), it is virtually impossible to increase prices, and so the firm needs to continuously look at costs when pricing goods and services. Supplier can remain competitive only by continuously examining and benchmarking cost drivers so that wasteful practices can be eliminated and efficiencies optimized in order at the best possible value. If a company decides not to carry out this most crucial process, the competitor will, and any competitive advantage gained over years of toil can be lost. Because cost plays such an important role in deciding the final price and the final profit, it is necessary to be aware of the types of costs, 273 where they arise and how they can be minimised.

Industrial Marketing

<

The basic types of various costs encountered in business and manufacturing operations are given in Table 10.3. Table 10.3 : Types of costs

Type
1. Fixed Costs

Brief description
Costs incurred whether the company produces goods / prices or not. They do not vary with sales or production Costs incurred only when products are produced. They vary in direct proportion to production level. Costs vary with changes in output but not necessarily in direct proportion to production volume. They contain elements of fixed and variable costs. Sum of the fixed and variable for a given production volume. Fixed or variable costs that are directly attributable to a specific product or sales region. Fixed or variable costs that cannot be specially identified with a particular project or product line. Costs that support a number of activities that cannot be assigned to a specific product, product line or a market. These costs are allocated across business divisions and departments through managerial agreement and discretion.

Example
Rent, loan interest payments, administration expenses, salaries Direct labour costs, raw material costs Machinery repair and maintenance costs

309. Variable costs 310. Mixed costs

311. Total costs 312. Direct costs 313. Indirect costs 314. Allocated costs

Selling expenses, freight costs

Production overhead costs, Quality control costs.wages, electricity costs. Corporate administrative costs, corporate advertising

Some of the typical costs incurred in marketing departments relevant to industrial products are:
274

Costs of goods sold Sales and promotion expenses Sales overheads


j , ' . , : I

Unit 10

Price and Pricing Strategies

Sales and intermediaries communications Shipping costs (to distributors or direct) Possible product returns (customer rejections) Margins and profit markups.

Costs / profit centers Customer rejected material or goods represent one example of the problem in allocating costs internally. Should the responsible department be sales, distribution or production? One way of overcoming such problem areas is to clearly define the cost and/or profit centers. The business is divided into different centers where costs and profits arise. These can be in almost any form such as SBUs (Strategic Business Units), departments, sections, operations, process and part processes of a business. The marketing department is an obvious choice as a profit center since its operations decide the primary source for profits. The exact costs and profits as the case may be will be allocated to each center identified for usage. This helps to organise the business, help achieve financial control, motivate and give realistic responsibility for cost improvements to all employees involved.

XI X 2
PRICE (FIRMS A &B) COST (FIRM B) COST

CO ST
UNIT

CUMULATIVE PRODUCTION VOLUME

XI Price for Firms'A'&'B'At 2P (Production Volume) XI-X2 = Margin For Firm'B1 XI -x3 = Margin For Firm 'A' Fig. 10.2 : Effects of Unit Cost Vs. Production Volume

275

Industrial Marketing

To compete effectively, a company may use economies of scale. This refers to the widelyheld concept that unit cost declines as cumulative volume of production increases. In short, this means that a cement plant of 2MT production capacity p.a. will have a lower unit cost than a similar plant of 1MT capacity p.a. The reason for the fall in average total cost per unit is that spreading them over more units with each unit bearing a smaller fixed cost reduces the fixed costs. This is the main reason why large manufacturers of standard industrial items now go for installation of machinery and equipment that have the largest manufacturing capacity. This is the same principle that Reliance Industries has followed over the last three decades in continuously building plants of optimum capacity to become a competitive producer on an international scale of downstream petroleum products (Polyester chips, PVC, polystyrene, LDPE,etc.) The learning (or experience) curve concept refers to the fact (as borne out by experience) that variable costs decline as cumulative volume of production increases. Put differently, the average unit total cost of a product declines over a period with accumulated experience of production and sales. It has been found that the reduction in the average total cost per unit is anywhere between 10 to 30 % for industrial products that lend themselves to massmanufacturing operations. Break-even analysis

I
REVENUES COSTS Ro

276

Sales Volume (Units)

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Price and Pricing Strategies

RO - Sales Breakeven Point (Turnover Corresponding to QO Quantity) QO - Breakeven Point (Quantities at which revenues equal total costs) Q1 - Quantity bringing a global profit for a certain price level Spu -Selling price unit Fig. 10.3 : Breakeven Point Analysis The Breakeven Point determines the level of activity where a company makes neither profit nor loss. It is calculated by dividing the cost into fixed costs and variable costs. For a given price and for a unit produced and sold, there is a difference between the price and the variable costs involved: the margin above unit variable cost (MUVC). The breakeven volume is obtained by dividing the fixed costs (FC) by MUVC. Breakeven Volume = FC ,, = MUVC FC , 0 ... : ... . ,. -r(Selling price - Variable costs)

The turnover breakeven point (RO) is obtained from: Turnover Breakeven Point = ^ SPu
MUVC
FC

L X

zone much earlier than bringi ng down the variab le costs will further lower the breake ven volum e and increa se profits .

Where SPu is the unit selling price. The breakeven point depends a great deal on the selling price. For example, let us assume: FC = Rs.5, 00,000/Unit Selling price = Rs.35/Unit Variable Cost =Rs.25/5,00,000 BEV =....... units (35-25) = 50.000

Now, if we increase the unit Selling price to Rs.40/5,00,000 BEV units = (35-25) Thus a lower breakeven volume is possible and that the company can enter the profit = 50.000

In d us tri al M ar ke ti n g ,

r T

277

B a s e d o n th e re la ti o n s hi p th at is e st a bl is h e d b et w e e n th e p

I
Target Selling Target Profit Allowable Cost 1 Product Level target Cost

ae cost r reduc r tion i step vis erepres s entati ve of athe t profit shortf

278

t all hthat emay occur aif the l produ l ct odesig w ners acanno bt heed l the eallow able Fig. 10.4 : Target Costing Process ccost. Target Costing: emerges from a design-to-cost philosophy that begins by oThe examining market conditions. The firm identifies the most attractive s impor market segments. It determines what level of quality and types of product t tance attributes will be required to succeed in each segment, given or predetermined . of separa target selling price and volume level. For this, a clear understanding of the Tting customer's perception of value is essential. h Once the target selling price and the target profit margin are established, one

Unit 10

Price and Pricing Strategies

the allowable cost and the product level target cost brings to the forefront the pressure thst it exerts on the product development team and the company's suppliers. True transmit the competitive cost pressure it faces to its suppliers, the firm breaks down the target cost of a new product into components of target costs at the function level or component level and finally to the suppliers- both raw material and component. For example, the major functions of an automobile include the engine, the fuel supply and injection system, the transmission system and the cooling system. Japanese manufacturers who have pioneered the approach have considered target costing as a profit management tool rather than just another system of costing.

Activity-based Costing (ABC)


Traditional accounting systems are often arbitrary and inaccurate in the way they allocate costs. So any particular activity can falsely show costs that are higher or lower than the actuals. Activity-based costing is an accounting technique that assigns costs to activities rather than products or services. This enables managers to assign resource and overhead costs to the products and services that consume these costs more accurately. Its intention is to show clearly Low costs flow into activities and what activities are involved for each marketing area e.g. product and customer. ABC allows the manager to model more realistically the way that costs behave and so manage processes for better results. Used with the marketing information system, ABC can provide managers with the information they need regarding the contribution each customer makes. To determine how much a customer costs, every activity related to each customer must first the identified separated into individual costs drivers and then a total cost given. Cost drivers might include order processing, credit, delivery, telephone expenses, training and product returns. In this way all customer interactions can be measured and valued. Strategies can be adopted to optimise the relationships with the more profitable customers and reduce emphasis on relationships with the less profitable customers.

4 ) C o m p etitio n
The industrial marketer's degree of freedom in setting a price depends largely on the degree of differentiation in the perceived value by industrial buyer firms. But the biggest limiting factor is the competitor's price and price movements. In most industrial markets, price plays the primary role but not the only role in the cost/benefit equation of buyers. The marketer can gain a differential advantage over competitors on many dimensions other than product advantages and features e.g. reputation, technical expertise, reliability of delivery, reliable post-sales services, etc. The industrial seller firm needs to constantly review the ways in which competitors will 279 respond to pricing decisions.

Industrial Marketing

In externally competitive markets, successful companies create temporary advantage and destroy the advantage of rival firms by constantly disturbing the equilibrium in the market. This has been observed in the highly volatile price sensitive market for mobile communications to retail customers in India. Airtel, Reliance, Hutch, MTNL, BSNL and other mobile service providers have been frequently lowering prices as the number of subscribers keeps increasing. Intel is known to disturb the equilibrium of the microprocessor market; HP-Compaq does so in the computer printer industry by its consistent drive to lower prices. The fundamental strategies adopted by industrial companies for pricing on the value-cost matrix are similar to those adopted by consumer product firms.

Opportunity for Value Enhancement

HIGH

HIGH > Opportunities for Cost Reduction LOW Skimming Price Fig. 10.5 : Value Enhancement-cost Reduction Matrix Follow the Leader Strategy Leadership

>

O
Cost/Price Pric

O
Follow The Leader

Penetration Strategy

I
LOW
In this situation, the industry price will follow costs and in particular, the costs of the price leader.

280

Cumulative Voume

Industrial Marketing

through the firm's salespersons, dealers and service personnel, competitors' quotations, competitors' published literature, market surveys of target groups and cost estimates of the components of competitors' products. An estimate of the cost structure is valuable when predicting how well competitors can respond to price reduction and when projecting price pattern in the future. For custom-built products, the level of competition, and price levels can vary from one tender quotation to another. If a competitor has built up a sizable order backlog close to its manufacturing capacity, it is unukely to quote low prices in future tenders. This fact can be utilised to the seller's advantage by not quoting at 'distress' prices (or with prices at very low profit margin). If competitors enjoy a differentiated position and higher perceived value from customers, they may not decrease their prices as often as other industry players.

Competitive information required for pricing strategy


Some of the relevant competitive information required by an industrial firm is: Published price information and technical brochures Information on competitors' special promotion campaigns Competitive reactions to price moves in the past Competitive product line comparisons Timing of competitors' price changes and initiating factors Competitors' financial statements and balance sheet details Estimates of fixed and variable costs Financial capability in initiating or engaging in price war Overall competitive aggression Expected reaction to price movement (upward or downward)

282

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Price and Pricing Strategies

Pricing LOW is a good strategy if: a new capital-intensive product is to be introduced a large or mass-market share is an aim a simple distribution system involving one distributor is desired promotional expenses need to be cut down to a bare minimum quick penetration into many well-developed markets is a priority entry is desired into a mature, highly competitive market.

Pricing HIGH is a good strategy if: A new labor-intensive product is to be introduced whose unit cost will increase rapidly with volume production A small select market share of 'premium' buyers is desired A complex distribution system involving multiple levels of distribution is unavoidable There is no restriction on promotional expenses Penetration is required into poorly developed markets Entry is desired into new or emerging markets High profits for the short term are the immediate objective.

Activity B ; a) Demand characteristics are one of the main considerations in the

c) B r e a

b) Identify the following attributes that are perceived by the buyer firm as high or low: 315.Can supply total system low 316.Only initial training provided upon first-time purchase low 317.Post-sales service available only through company personnel from HQ. low 4. Product easy to maintain or service low D high D D high D D high D D high D

k e v e n

p o i n

t refers to the point at which: D Revenues are more than total costs

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Industrial Marketing
I

D Revenues are less than total costs D Revenues are equal to total costs d) Four strategies for pricing that emerge from the value enhancement-cost reduction matrix are: 1.________________________________________________________ _
3.. 4.

e)

If a competitor sets the price low at the entry stage, the strategy being followed is called: D Skimming strategy D Penetration strategy

f)

The timing of a competitor's price changes is an important indicator of its likely future direction. False

D True

10.4 PRICING ACROSS PRODUCT LIFE CYCLE (PLC) STAGES__________ After having analysed the factors given in the previous section, the appropriate pricing strategy needs to be decided. 1) Pricing new Products The two basic strategies are skimming (high initial price) and penetration (low initial price). One of the primary considerations in selling prices is the period decided by the company in the recovery of its investments (such as in R &D, purchase of new machinery for new product or product line etc.). a) Skimming strategy: In this strategy, the firm decides to set high initial prices to reach specific profitable segments that are not very price-sensitive. Thereafter, the price may be reduced to reach other segments that are sensitive to high prices. This process is also termed 'time segmentation'. The skimming strategy enables the

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marketer to capture early profits and helps the company to recover its development costs quickly. TV manufacturing companies started in India with high initial prices (although the reason being given was that the manufacturers had to import the TV picture tubes) but over a period of time as competition increased and the market matured, the prices dropped. Skimming strategy works under certain market environments and situations such as: target market is not too price-sensitive; the product can be differentiated on features that are valued by the customer; the product requires high technology or is highly capital-intensive thereby making it difficult for new competitors to enter and catch up; the'experience curve'has scope for reducing costs in future. The company has already established a good reputation in the market. b) Penetration strategy: This strategy is effective when the buyers are highly price-sensitive, strong possibility of threats from competitors exists and an opportunity exists to reduce production costs as volume expands. Through economies of scale, the firm can quickly gain market share and the experience helps to create a distinct advantage over competitors. The factors that need to be examined and assessed in determining the value of additional market share include the investment requirements: Potential benefits expected from the'experience curve', t likely competitive reaction and profit objectives.

For companies that have yet to establish a strong image, reputation or brand in the target market segments, the penetration strategy is a better choice since it helps to build long-term profits through increase in market share. In any case, the fundamental parameters for consideration in selecting either pricing strategy remain the same, i.e. demand patterns, costs, competition, and marketing objectives.

2) P ricing in grow th sta ge


In this stage, new competitors enter the market and more customers use differentiation, product line extension and fulfilling the needs of newer market 285 segments.

Industrial Marketing

3)

Pricing in the Maturity stage

In this stage the competitors are embedded and become hungry for more market share. The company finds it difficult to sustain the differential advantages gained from customers in the first two stages. The prices have to be lowered to match the competitors' price levels or new ways have to be found to justify the price difference with low-priced competitors. Customers' buying behavior will also undergo changes in realizing the full cost/benefit analysis of suppliers.
i

4)

Pricing strategy in the decline stage

If the company has earned a good reputation in the market for quality products and/or service, it need not lower prices further. Instead value analysis techniques could be used to further reduce costs. If some of the competitors have withdrawn from the market, the industrial marketer can consider selective price increases for some market segments. Value analysis It is an intensive appraisal system of all elements of the design, manufacture or construction, procurement, installation, maintenance of an item and its components include the applicable specification and operational requirements in order to achieve the necessary performance, maintainability and reliability of the item at minimum cost. It reviews the design, engineering procurement and all manufacturing and control processes with the specific intention of identifying and eliminating unnecessary costs.
Factory gate - Inspection Central Stores

9 Department
stores

- Assembly
line

- Inspection

hours The Problem


Factory gate Inspection Assembly line Inspection

'

BOMinutesThe Solution

286

The example given above refers to the time taken for raw material to be transported in a large engineering company from factory gate to the assembly line. Through the value analysis

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technique, the time was reduced from 9 hours to 30 minutes by eliminating the transit stages. However, the best alternative would be to keep enhancing the value of the offering by eliminating attributes or features that are not considered essential and using a range of presales and post-sales services. High costs of switching by customers can be built by developing unique solutions for the most valued customers. The alternative of shifting the focus away from price can also work well in specific industries and specific markets. For example, a firm that has better quality products can respond by offering a longer warranty period to customers. The common pricing approaches in the PLC are summarized in Fig. 10.6

I
INTRODUCTION GROWTH MATURITY DECLINE

Fig. 10.6 : Strategic Pricing options during the PLC


0 Introduction: High price for skimming, low price for penetration. 8 Growth: Maintain price as market grows; increase profit through economies of scale. 6 Maturity: Lower price constantly to defined market share; offer special price contracts to existing or new distribution. 0 Decline: Lower price to phase out product. Reposition product in new segment. & Activity C; a) As compared to pricing in the growth stage, pricing in the maturity stage is: D Relatively easy 287

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d Neither easy nor difficult D Relatively difficult

10.5 PRICING POLICIES


Industrial firms deal with various types of buyer firms- small and big companies/corporations, original equipment manufacturers, dealers and distributors. These buyer firms are located geographically across the country. Some big companies have multi-locational plants and offices from where purchases are made directly. In addition, the quantities differ widely between customers and also within a specific company. Pricing policies are formulated by adjusting the prices and setting the price, rating, sizes base of a product. For multiple types of products, and product ranges (the list can run into hundreds of items), a price structure has to be established that covers the entire spectrum of products and product lines. For example, a transformer used for last-mile connectivity to domestic buildings will have different ratings (KVArating related to its capacity and KV related to the voltage), different enclosures, different adjustments for voltage ratings, etc. The number of possibilities and combinations comprising the full range can be very large and base prices have to be established for each type. The basic types of pricing and adjustments made for standard, off-the-shelf industrial items are as follows:

1.

ListPrice
It is the published price of the seller firm to customers. The effective date of applicability (usually the first day of the financial year) is mentioned along with applicable taxes, duties, octroi, freight and insurance. The net price corresponds to the list price less discount (see section below) or any concessions (e.g. freight charges). This is the price that is the most important to the purchase departments of buyer firms because that becomes the contractual price.

a)

Types of Discounts

Three types of discounts are common in industrial marketplaces. They are: i) Trade discount - that are offered to the trade i.e. intermediaries like dealers and distributors. The amount of trade discounts varies from product to product, industry norms and functions that the intermediaries perform.
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in)

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ii) Quantity discounts - that are given to customers depending on the volumes purchased. It is a price reduction from the list price and justified as they reduce the cost of selling inventory carrying and transportation. The quantity discounts can be a non-cumulative basis (based on a series of orders over a period during theFY). Hi) Cash discount - that is offered to customers on an ad-hoc basis. The purposes can be many-such as for obtaining prompt payments from specific customers, to push slow-moving products, to reduce inventory or simply because the supplier would like to favour specific buyers.

2. G eograph ical pricin g


The ultimate price to the buyer is affected by the volume and weight of the product as well as the transportation costs from the seller's works or distribution outlet to the buyer's plant, warehouse or site. The two forms of geographical pricing are: Factory or ex-works pricing and GIF (cost including freight) pricing. Table 10.4 : Types of Geographical Pricing Factory (net) Price Freight Borne By Supplier Customer Insurance Borne By Supplier Customer Leads to

'
7

' ' '

FOB Price (Freight on board) FOB destination price CIF (cost including freight & insurance) price

V
/

Factory pricing (FOB price) has the following advantages to the supplier: i) This method assures a uniform net price irrespective of the destination. i) This method eliminates the necessity of negotiating adjustment of freight charges in cases of multiple consignments and fixations of freight rates. in) In the absence of an agreement to the contrary, the title of the products passes to the buyer the moment the goods are delivered to the transporter or carrier.
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iv) The seller avoids all risks of damage to the consignment due to transportation or acts of God. v) The seller avoids any responsibility for the del ay in transportation.
i

FOB destination price: means that the seller pays for freight charges and assumes the risks of transport not taken by the carrier up to the buyer's destination. The title of the products does not pass to the buyer until the carrier delivers the products. GIF price includes the freight and insurance components under the scope of the seller. The seller undertakes responsibility for transporting the goods and assumes all risks of damage by insuring the consignment before delivery. In effect, this becomes the landed cost to the customer and the contractual price for the seller. Taxes and duties It is necessary for the industrial marketer to be aware of the Central sales tax, State Sales Tax, excise duty, provisions, other levies such as octroi and entry permits in all the states of India. Due to the differential between Central sales tax and State Sales tax, the implications on large value contracts are huge and business can be lost merely on the basis of applicable sales tax. Competitive Bidding Large value industrial purchase contracts are decided through competitive bidding. Rather than a list price, the seller has to develop a price or a bid a to meet particular product and/ or service requirements of a customer. Competitive bidding is generally applied to the purchase of nonstandard item and materials, complex engineered or fabricated items for which manufacturing and design methods can vary and custom-built products to customers' specifications. Buying by Government organisations and Defence undertakings is generally carried out almost entirely through the competitive bidding process. The types of items procured are those for which there are no generally established price levels in the industrial market. Competitive bids enable the purchaser to evaluate the relative correctness of the prices. Competitive bidding can be closed or open. The process followed can be single part bidding (in which both the technical offer and the commercial/price offer are included) or two part bidding (in which the technical offer and the commercial/price offer are separately submitted). The bids can also be domestic competitive bidding (only domestic suppliers 290

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e n c are allowed to participate) or international competitive bidding (in which o international companies are allowed to participate in addition to domestic u suppliers). r a Very large public corporations and the government buyers most often use closed g bidding. It involves a formal invitation to potential suppliers to submit written, e sealed bids for a particular selling opportunity. All bids are opened and renewed at s the same time, and the contract is generally awarded to the lowest bidder who meets a the technical specifications. n Online sealed bid format is used for online auctions. The term 'sealed' means that u only one supplier and the buyer have access to the details of the bid. n d Open bidding is informal and allows suppliers to make offers and bids up to a e certain date. The buyer may negotiate with several suppliers throughout the bidding r and evaluation process. Open bidding is considered an appropriate option when st specific requirements are hard to define or when products or services of competing a suppliers vary substantially. Complex technical requirements may result in the n evaluation of the technical offers before evaluating the prices and the commercial d terms. i n 10.6 MARKET STRUCTURE AND PRICE_______________________________ g o Each type of market structure will have an important bearing on the price and f pricing mechanism. Some of these structures are discussed below: p ri i) Monopoly: This refers to the situation where a single supplier controls the c market with a dominant share and there are no competitors of comparable size e operating in the same market. Where monopolies exist, through a patent or access to new ' technology, the organisation can either control the price or the level of demand. Setting a high price will cause a drop in demand and setting a low price will cause a rise in demand. There can be markets where there might be only one buyer (e.g. very large Government entity) - this is known as a monopoly market. This market will operate under the .-? same circumstances as monopoly markets but the roles of the buyer and seller will be '$ reversed. c ii) Oligopoly: This structure is characterized by a few sellers all offering very similar products and services. This situation is quite common among industrial markets and companies that have similar manufacturing capacities and capabilities. Dropping of the price by one seller will encourage the others to follow this action - not a very welcome situation. This structure is healthy if it

Price and Pricing Strategies

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levels while attempting to gain differential advantage through non-price related value additions such as innovations and customer services. iii) Monopolistic competition: This is similar to oligopoly markets. It is a market dominated by a few large organisations; but there are many substitute products. So the demand is elastic, making it easier for buyers to switch from one seller to another. This type of market structure is more prevalent in B2C rather than B2B markets. iv) Free competition: Industrial markets are rarely representative of free competition. Very few industries have many competitors all selling the same or very similar products with hardly any differentiating elements. This may be more applicable to commodity industrial materials and consumable items. Where this structure does exist, the demand is elastic and buyer can easily switch from one seller to another. Thus all sellers become price takers rather than price sellers. Profits will always be low in this type of markets. v) Adulterated competition: Most industrial markets have a combination of the above types, in which case it is called adulterated competition. It is characterized by local elements of oligopoly, monopoly and free competition.

Summary of pricing methods


1. Cost-plus pricing: A Profit percentage is added to the total cost to arrive at the selling price. 2. Going-rate pricing: 3. Target profit pricing:
4.

A situation where the structure of the market decideds the level of prices. The company sets the price according to the price levels prevailing in the market arrive at the selling price. Some companies will price products to breakeven or reach profit targets within a given period. Pricing by what the market will bear, to take advantage of market conditions such as shortages, scarcity, and emergencies. The company sets the highest price the customer is willing to pay.

Market bearing capacity pricing:

5.

Customer-driven pricing: If a marketing approach is taken, the price should be fixed at the level the customer is willing and satisfied. This level can be found through market research

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Pricing policies for likely failure Policy followed: Risks

318.High price/Standard value: Risk of losing market share in competitive markets 319. High price/Low value: 3. Standard price/Low value: Only possible in monopoly situation-hence, very rarely used. Risk of losing market share.

The policy options given above are probably destined for failure since they do not provide or do not intend to provide high-perceived value for customers. Policy 1 Policy 2 PolicyB Suggests increasing price without increasing product features/benefits. Is more risky than Policy 1 since it involves reduction in features & benefits while increasing the price. Calls for reduction in benefits/features while maintaining price. This is also highly risky though many firms have tried to follow it.

g$ Activity D:
320.When companies price products to break-even or reach profit targets within a specified period, it is called____________________________________pricing. 321. International competitive bidding refers to a process where offers from only domestic suppliers and contractors are invited by the buyer firm. True False

10.7 VALUE-BASED PRICING


Value-based pricing is the concept that a supplier delivers different levels of economic value to different customers. The supplier therefore has the potential to extract different prices from different customers. In this concept, the prices are set based on the customer's perceived value of the offering (see Fig. 10.8).

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Industrial Marketing

Table 10.5 : Cost-based Pricing vs Value-based Pricing Cost-based Pricing Price is set by calculating the cost of an offering, then adding a standard percentage profit. Cost-based Price Issues Costs depend on volume. Costs assigned by standard rates may have no relationship to actual costs. Price has no relationship to customers' perceptions of the offering's worth. Value-based Pricing Price is set based on perceived customer value.

Value-based Price Issues More difficult to implement than costbased pricing. Need to establish the evaluated price (the price of the offering from the customer's perspective after all costs associated with the offering are evaluated).

There are three areas that impact the industrial organisation's ability to take advantage of value-based pricing strategies: 322.Differences in the cost-to-serve customers 323.Economic value delivered to the customer through all parts of the offering 324.Competitive environment and overall market structure

Effective Pricing Strategy

294

Cost to Serve Fig. 10.7 : Value-based

Pricing

Triangle

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Price and Pricing Strategies

These differences must be defined and quantified so that the industrial organisation understands the value it is delivering and can leverage the understanding in the way that it communicates about the offering it is delivering.

i)

Cost-to-serve

Understanding the cost-to-serve customers is the first side of the value-based pricing triangle and is the start of any sound pricing strategy. The relationship between costs and individual customer contribution can be constructed through a customer profitability analysis (that might include activity-based cost models). This analysis can highlight the differences in costs that are attributable to different customers. Different elements of the supplier's entire offering (product, services, distribution, etc) are consumed differently by different customers. The customer profitability analysis proves that the industrial firm is delivering greater economic value to some customers than to others. The analysis helps to define the drivers of cost to serve the customers and how these affect the prices that the supplier must achieve from various customers.

ii) Value delivered


Cost is not the only element in effective value pricing. Pricing based solely on cost is not an acceptable approach when a firm has the goal of maximising profit. Cost is determined by the value the customer derives through the transaction. Focusing only on cost, the firm fails to recognise what the customer is willing to pay and thereby leaves potential profits in the hands of the customer. The value that the customer derives from the transaction with the supplier is the true determinant of his willingness to pay. Documenting and understanding the value that is delivered to customers is the key to defining an effective value-based pricing strategy that maximises profitability. For realising the maximum profit gains, the firm therefore needs to take stock and understand: 325. the elements of the total offering that customers value, and 326. the definition of the elements that can be uniquely delivered by the organisation and charging the customer the prices that reflect these values.

iii) Competitive environment


The nature and extent to which the competitors react to price changes, whether price undercutting is prevalent, the strength of competition from substitute products, the demand elasticity, have all to be analysed to understand the relationship between prices, demand and competition. An effective strategy followed by suppliers is to 295 document and analyze the price points available to the customer of each of the alternative solutions that competitors

Industrial Marketing

make available. The expected reactions of leading competitors to price changes initiated by a supplier become all-important in the analysis of the competitive environment. For example, one needs to assess the percentage of production capacity that the competition controls, their strategic intent (being a niche player, trying to gain more market share, being a low-priced supplier) along with their likely reactions to price moves at any given point in time are beneficial inputs in the analysis. Customers can be segmented based on the value they derive from the various elements of the supplier's offering, and different pricing strategies can be constructed for each of these segments. Once customer value systems have been identified, customer segments have been defined and the size and the attractiveness of the segments to the supplier firm have been evaluated, one needs to search for ways to vary the prices for the various levels of value delivered. Opportunity to customise price based on elements of value delivered can be exploited in the following ways: i) Product differentiation - Some segments are willing to pay more for certain elements of the product. Some attributes of the product can be enhanced to cater to a group with different needs. With variations in product, the supplier may be able to allow the customers to select the various options with 'add-on' prices that suit their needs in a better way. ii) Service differentiation - There are some elements of service for which a segment is willing to pay more. A highly valuable, capability could be inventory management, JIT delivery, or posting of service personnel for specified periods. Hi) Geography/availability - There are some geography/availability constraints that the supplier can overcome that can greatly enhance the value from a transaction. iv) Transaction type - Some transactions deliver greater value to the customer - like EDI, vendor-managed inventory, expedited delivery, making available crucial spare parts for emergency operations. 10.8 PRICING DIFFERENCES BETWEEN INDUSTRIAL PRODUCTS AND CONSUMER PRODUCTS Industrial Products (B2B transactions) 327. Price bidding generally followed 328. Industrial Customer pricing Consumer Products (B2C transactions) Little or no price bidding Common pricing

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329. Price basis as well as price level discussed. 330.Large and complex DMUs involved 331. Pricing based on building customer relationships/ loyalty 332. High pricing possible on premium products based on functionality 333. Payment terms usually involve extended credit 334. Discrimination in pricing is easy to detect (due to fewer and identifiable customers)

No discussions on price basis Small and simple DMU Pricing based on building mass loyalty High pricing on premium products based on brand and emotional appeal Payment terms are generally cash or credit card Discrimination in pricing is harder to detect

335. ong-term contracts are possible L


336. Relationships are more important than price 11) Costs as well as price are discussed during negotiations 12) Price negotiation is the norm

N oJong contracts term


Price is more important than relationships No discussion on costs Very little or no price negotiation

10.9 SUMMARY This unit has been designed for the reader to understand the implications of pricing in the field of industrial marketing. It has covered the basic pricing process including the costing methods and types that are relevant to industrial products and services. The different types of pricing policies and their significance in the PLC have been stressed. The relevance of market structure in pricing and pricing policies generally adopted by industrial firms have been discussed in some detail. The principles of breakeven point analysis are as important to industrial products (particularly massproduced) as for consumer products. Competitive information is one of the most essential ingredients in pricing strategy and the extent of information required for deciding strategies for industrial products is more comprehensive than what is required for consumer products. This unit stresses on the differences between the practices of pricing, pricing policies and pricing strategy for industrial products versus those for consumer products. 297

Industrial Marketing

11.1 INTRODUCTION
One of the most important elements in the communications mix in industrial product marketing is personal selling. Whether it is establishing contact with a prospect or whether it is delivering a solution at the post-sales stage, personal selling is the hub of all customer-related activities. In industrial markets, the average revenue per transaction is usually much higher than in consumer markets. This puts the onus of marketing on the personal selling skills of the industrial sales person as compared to mass produced consumer product selling. There are several tasks involved in personal selling since the buyers in industrial markets are becoming more professional with the passage of time. It is important for the sales person to identify the changing buyer's needs, their buying preferences and the reasons for their selection of goods. In addition, it is necessary to understand the steps in the personal selling process that bring the seller firms closer to the buyer firms. ! An important situation the industrial sales person often faces is the handling of objections from the customer. For this, it also becomes essential for the sales person to anticipate the appropriate time when the deal should be closed. In the entire selling process, negotiation skills are the key ingredient that a successful sales person must process. Without this ingredient, it is unlikely that the industrial sales person can achieve a degree of success.

11.2 IMPORTANCE OF PERSONAL SELLING__________________________


The role of personal selling in industrial marketing is significant from all points of view -whether it is establishing contacts with a prospect or whether it is rendering a bundle of post-sales services. It is certainly more significant than the role played in consumer product marketing. Although there may be some products that sell themselves (e.g. branded products or component spare parts) most industrial products need some type of personal selling. Any form of communication that involves direct interaction between a seller's sales person and a buyer's representative can be referred to as personal selling. The activities involved are crucial to the various stages in CRM management and require operational planning, skills, knowledge, commitment and diligence. The customer might be an intermediary, an industrial retailer, a customer's customer or any other type of business firm. Even in consumer product marketing, the customer may be a wholesaler or retailer, buying products and services for end use, or selling to the end customer by direct contact. In many cases involving industrial products and services, personal selling is the easy only viable strategy to communicate with the DMUs of buyer firms because of the complexity of products

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Personal Selling and Negotiations

involved, the quantum of information required to analyze product characteristics, and the usually large size of an average order. This will apply to both initial and long-term purchases and for purchases made at various stages (as explained in Unit 3). 11.3 DIFFERENCES IN PERSONAL SELLING IN INDUSTRIAL AND CONSUMER MARKETS The main purpose of Personal Selling in consumer product marketing is to communicate and persuade buying actions. Because of the existence of very large numbers of potential customers, mass advertising is a dominant medium of communication (except possibly in the case of firms involved in direct selling). The revenue obtained per transaction in the case of consumer product sales is usually low. In business to consumer (B2C) markets, the products and services will be packaged by the supplier firm into consumer usable benefits and sold either through retail outlets or direct to the end consumer. In industrial markets, the average revenue per transaction is usually higher than that is consumer markets. In such cases, the goods and services may be component parts, capital equipment or services used in the production of these goods and services. N Table 11.1 summarises the differences between personal selling in industrial and consumer markets. Table 11.1 : Personal Selling Differences In Industrial Markets 337.Sales persons are employed to market goods to other firms (Public & Private) for use in the business 338.Sales persons are employed by an industrial wholesaler to sell further to other firms for their own use. 339.Sales persons of the company are normally not employed with intermediaries. In Consumer Markets 340. S ales persons are employed to sell branded & unbranded goods to wholesaler or retailers to sell to the end consumer. 341.Sales persons are employed to sell goods directly from the manufacturer to the end consumer. 342. Sales persons are employed in retail outlets to sell directly to the end consumer.

30 3

Industrial Marketing

xgf Activity A:
According to you, the two main reasons for differences in personal selling between sales activities of refrigerators for Whirlpool and electric motors from Siemens India are:

11.4 TASKS IN PERSONAL SELLING


The Sales person in industrial firms performs numerous tasks. As buyer becomes more professional in the way they perform business and introduce innovative purchase practices, so too must the sales person, if the reputation of the firm has to grow. The image of the company and company policy are conveyed by how the salesperson and the sales staff behave and present themselves. Besides the fundamental duty of providing product and service information to buyer firms, the industrial sales persons work as a source of market intelligence to their companies, since they are the ones who are closest to their customers. They possess information on a customer's buying preferences, their changing needs, their switching behavior and are primarily responsible for assessing market demand. In addition, they help the supplier firm in identifying prospects, forecasting and collecting information on competitors. It may not be possible for the sales person to know everything for all types of sales situations in advance. However, the person is required to be knowledgeable in many different areas and determine how to access the balance information from the staff and resources of the supplier firm. On many occasions, the sales person may require the assistance of technical personnel from the company to directly interact with the customers. The sales person must take the appropriate decision regarding the timing of assistance required from colleagues and superiors during the selling process and also know how the make the best use of their expertise. The sales person should be available to offer help, information and advice to customers on a 24 x 7 basis to existing customers. In particular, they should have the expertise to deal with customer's dissatisfaction and complaints on the firm's products and services, both with the customer (C) and the customer's customer (CC). The higher the salesperson is within the organisation, the greater will be the level of responsibility.
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While the extent of knowledge required by the sales person in industrial companies is vast, he/she is required to have knowledge at least in the following areas:

Product Knowledge
product features, attributes and characteristics sales units and product range for deciding minimum order quantity uses, applications, benefits and limitations of the firm's product range current customers/users of the firm's products and services detailed price information or cost information to work out selling price range of services

Company Knowledge
History and growth of the company Management structure and organisation Size of company in terms of activities and multi-divisional set up (in the case of company involved in multiple products and fields)

Special capabi lities and achievements Company policies and practices that have an impact on company image Location of company and sales and service organisation across the country and international operations

Facilities such as intermediaries in various regions and stock points

Sales Policies
Prices, discounts and commercial terms of contract normally accepted Credit terms and delivery periods Transportation and insurance terms Post-sales services rendered, warranties and guarantees provided Policies for export sales

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Customer Knowledge
Demographic profile of customer base Industries served or covered Customer's preferences, attitude, habits and biases Customer's customer preferences Reference list of all customers in database Services rendered to key customers New customers added in the last two years

'

Knowledge of Competition
Names and organisation of leading competitors for identical or similar products Services rendered by competitors Competitor's product range and characteristics . Market performance of competitors such as market share, growth rate, reputation, etc. ,
i

Future plans and programs that may affect the competition

Knowledge of Technology
Specific aspects of new technology incorporated (e.g. Multipoint fuel injection technology in passenger vehicles)

Advantages and customer benefits of technology employed Background/history of R&D setup (if existing) Technology adopted by competition Technology parameters responsible for satisfactory performance and life of product

306

Improvements in technology carried out in the last five years

been called person Knowledge management systems al While it may not be possible for the sales person to assimilate all the knowledge selling necessary to tackle all the situations encountered in personal selling, it is useful for the . For divisional office to have a centrally managed and administered knowledge management industr system. This system helps in collecting at a central place all the knowledge gained ial produ by the entire sales and service force. cts and This can include among other aspects: servic Creation of a database of regional markets, customers and localized competitors es, it that repres can be accessed by sales persons as and when required. ents the Systematic environment analysis by sales persons for feeding it to the transfo database. rmatio Monitoring of significant developments and trends taking place in the n from environment on the a regional basis. stage of Making available frequently required information such as updated product identif catalogs, price information, pre-recorded presentations, application data, service manuals, ication of etc. prospe Implementing CRM Programs (Refer Unit cts to a 3). longterm Activity B; relatio Go to the website www.sandvik.com and mention the three main tasks that a sales nship with person of this company will have to perform for a successful career. an establi 1. __________________________________________________________________ shed 2 custo mer . that becom 3 es a key . accou nt for 11.5 THE PERSONAL SELLING PROCESS the The process of a personal approach and two-way communication to suppli understand a prospective buyer's needs with the seller's product and services has er

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Personal Selling and Negotiations

firm. All the activities involved in this process may be performed by the same sales person or by different persons. In the case of industrial

307

In du strial M arketing

products and services, the transformation may take a few weeks, months or even years depending on various marketing situations and the life cycle. Table 11.2: summarises the activities involved in the personal selling process.

Table 11.2 Stage Main activities/Outcomes


Identification of prospects 2. Qualification of prospects 3. Development of prospects 4. Proposal and Negotiation 5. Sales closure 6. . Post-Sales relationship Contact is identified Contact develops interest in dealing with the supplier firm or its intermediaries Contact has some solid reason to act Product/service requirements are identified;\ Decision makers and influencers in the DMU are identified;\ Conditions of satisfaction are noted;\ Business initiative and parameters of carrying out business are found suitable;\ Key reasons to buy are assessed Knowledge of competitors is gained Terms (technical and commercial) are mutually settled Risks to the supplier firm are identified Overall solution is technically acceptable to DMU members Delivery, pricing and financing are discussed Contract terms are mutually agreed upon Final purchase decision is made Order awarded to supplier firm, or Competitor awarded order, or Decision to award contract deferred Propose and negotiate terms for post-sales services, MRO (Maintenance, Repair, Overhaul) spares

1.

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Execute warranty services through service personnel Maintain continuous contact to expand range of supplies and services

From Table 11.2, one can observe the multitude of tasks that any industrial sales person has to perform to ensure adequate targeted sales and to raise the performance level as a trusted supplier. Some of the essential tasks that the personal selling process entails are given in the following sections:

1.

Pre-Sales preparation

The preparation refers to the activities that need to be undertaken by the sales person to prepare himself/herself with knowledge about the company, products, markets and competition. This is the basic ingredient the sales person needs frequently during discussions and presentations with prospective clients. The market situation is a dynamic one and timeliness of information is a key factor in the personal selling process. The sales person needs to update the knowledge at both the micro- and macro- levels regularly.

2.

Identifying prospects

This process is likely to take time in the case of specialised or complex industrial products and services. Identifying the right prospects is an ongoing activity and the skill is gained only through years of experience in the field. Timing is also an important factor for certain items. For example, it is more appropriate to make a sales approach for large value capital goods in the first quarter of a financial year instead of the last quarter when budgeted expenditure is cut down. An important source of information for suitable prospects is the base of satisfied customers who may suggest, either voluntarily or on request, the names of other prospects. Secondary sources of information like trade directories, business journals, membership lists of Chambers of Commerce and Industry & manufacturers' trade organisations.

3.

Qualifying prospects

Estimating the business potential from each prospect is another essential task of the sales person. Qualifying the prospect involves the assessment of costs and feasibility of selling to the prospect. In addition, an assessment of the expected profitability is also required in order to prioritize the list of prospects. Those prospects where the 309 sales potential is too low, or the profitability is not attractive enough, need to be put low on the priority list.

Industrial Marketing

The following steps are recommended in order to arrive at a list of suitable prospects: Establish criteria for the right prospects Create opening statements to focus the attention of prospective buyers Prepare and make the sales presentation Listen to the prospect's points of view Anticipate and prepare responses to likely objections

4. Planning and approach of sales calls


Approaching the prospect represents the stage in which the core of selling activities takes place. The key to reaching this stage is to capture the prospect's interest with a presentation. This remains a difficult aspect since prospects and the buyer's DMU members rarely have sufficient time to meet all the sales persons even after appointments are made. The prospects are mainly interested in the benefits they can derive from a product rather than the product itself. The important point is to get across all the highlights of the presentation in a concise and crisp manner along with the relevant quantitative data that should be available prior to the presentation. The sales person must be able to link the features and attributes of the products to customer needs. It is also important for the sales person to wait for the prospect's reactions before proceeding to the next benefit. Sales presentations become relatively easy once the pre-approach preparations have been done and thought out carefully. The presentations can use a variety of media and sales aids. The plain oral presentation can be made effective by the use of visual and audiovisual aids like OHP slides, LCD projectors, videos, or plain laptop computers. Although prerecorded presentations may be sufficient for intermediaries and SMEs, the customized presentation remains the most effective for large firms in industrial markets. The sales person should take care to understand clearly the kind of information required by the prospect and make sure this is included in the written proposal when it is submitted. Assuming there is sufficient buying interest from the prospect, the price and commercial aspects of the sales proposal should be kept towards the end of discussions. On many occasions, the commercial terms will need approval from the head of the sales department. This might lead to prolonged discussions and negotiations. The real skill of the salesperson is exhibited during the negotiation stage particularly for industrial products that are complex and customised. The key issues involved in negotiation are discussed later in this unit.

310

appro ach with both FY: 2007-08 the Sales Profitability Sr Account Opportunity Market Lead Sales Decision Order Comments seller Estimate . (%) Segment Quality Stage Expected Won/ (Rs. Lac) lost and Large Cap. 1 BHEL 1500 60 1 4 Q4 Decision the (diesel Goods (Excellent) certain engines) buyer wanti Medium Cap. 2 (Very Decision 2 Hyundai 800 75 3 Q2 Motors (I) (diesel Goods Good) postpone ng a engines) ment likely long3 term relatio 4 nship where price Fig. 11.1 : Example of Sales Call Card and costs 11.6 HANDLING OBJECTIONS are There are several areas where objections from the prospect can occur. Some of discus sed these are covered below: simult a) Need Prospect has a need that cannot be satisfied with the seller's aneou products sly and services or the technical specifications cannot be adhered to.
Unit 11 Personal Selling and Negotiations

- '* * " -

b) Features are

The seller's products do not incorporate some features that considered essential by the prospect.

343.Delivery acceptable. 344.Experience reputation of

The delivery period committed by the sales person is not

The experience of the sales firm in the industry (or products) is inadequate.

e) Price and The prices and terms and committed are considered too high or Commercial unacceptable. Terms. The most common objection occurs in the area of pricing commercial aspects. The prospect - whether rightly or wrongly - does not always perceive the real value of the product in the same way as the sales person does. If the value of the product is not properly explained or communicated to the customer, price objection is very often the result. The trend in pricing in industrial markets is now towards a co-operative

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with the other value-add factors focused on competitive advantage and ultimate customer satisfaction. Finished, branded products sold to the end-users offer very little scope for price negotiation while more complex, unbranded and customised products usually involve a process of negotiation. Factors such as length and duration of contract, expected offtake (as a percentage of the seller's production capacity), delivery conditions, payment terms, relationship and partnership status between the two firms come into play in the negotiation process for industrial products. Senior level personnel (including the CEO) will get involved with DMU members for high value and long duration contracts. i Some of the steps followed by industrial marketers and sales persons to handle price objections in the personal selling process are given below: Stress on the benefits to customer. Attempt to show value in terms of productivity or efficiency at the customer's end. Make known to the customer the entire scope of the offer (including services, warranties, training, etc). Convey the strengths of your products and services with a high degree of confidence and a lot of back-up data. Help the customer understand why the price is high. Attempt to find the real reasons behind the objection (the objections may not be actually related to price). Cover the financial benefits to the customer in great depth.

There can be no standard prescription for handling price objections, and every sales person needs to assess the gravity of the situation in working out the responses. This is where the sales person's job becomes challenging and rewarding when sales closure is achieved.

5.

Sales closure

The act of finalising a sales deal with the prospect is called closing the sale. Even though the presentation is extremely good and the handling of objections raised by the prospect/ customer is effective, the sales closure may still not take place. If sale is not closed when the customer is in the right frame of mind, the opportunity may be lost forever. It is important to know not only how to close the sale but also when to close.

312

A refusal by the prospect does not necessary imply an unwillingness to buy, but ma\ indicate the prospect's need for additional information or for clarification of some doubts,

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Personal Selling and Negotiations

Many times, the salesperson has a fear of hearing 'No' from a prospect that often causes a salesperson to keep on continuing the presentation or dialogue unnecessarily. The sale person must have faith and also accept 'No' for an answer. This must not be taken at the personal level or as an insult. In the case of industrial products, the sales person will have to make many personal visits to close a deal. For major items and large project sale, the process may take months. It is therefore advisable for the sales person to use relationship selling techniques and seek to understand the buyer's professional and human needs.

The appropriate time


Closing the sale is generally considered appropriate when: the prospect asks for detail s regarding delivery and supply of the product the prospect enquires about customers of this product the prospect asks about price discounts and special promotion schemes the prospects makes positive statements about the product the doubts/questions by the prospect are fully and successfully answered

In relationship selling, the sales person's job does not end when sales closure is achieved. It begins when the formal order is received. In industrial products, it is necessary for the sales person to make the relationship grow on a continuous basis through offering various services (see the previous unit on The role of Services').

Activity C ;
According to you, the most common objection in selling INTEL make microprocessor to unknown PC assemblers would be: the product D the price

the functional aspects

11.7 INTEGRATING PERSONAL SELLING WITH OTHER ELEMENTS OF THE COMMUNICATIONS MIX ___________________________________________________________
Personal selling, as described earlier, is a key component of the communications mix and cannot be viewed in isolation from the other elements. Other communication methods are generally required to create organisational and product awareness to 313 support the selling

Industrial Marketing !
j

process. Direct response in trade fairs and advertising in the trade journals and press might be considered to create the initial awareness. It does make the sales person's job a lot easier if the prospect has already formed a positive opinion about the company he/she represents. An industrial firm uses additional elements of marketing communications to continuously communicate with its customers. Promotional campaigns are often used by a seller firm to increase awareness of its corporate name, launch a new service, increase the penetration of its existing range of products, announce to existing and potential customers the availability of new or upgraded products/services and so on. Tata Steel uses the electronic and publishing media extensively to promote a particular corporate image - even though it has built its presence in India for more than 150 years. Characteristics of modern professional selling in industrial (or B2B) markets: Selling involves two-way communication. Selling involves win-win for both sides. Selling has more to do with providing solutions. Sales persons are part of a customer value creation team. Sales person become professionals in the long run. Customer satisfaction and not getting the sale, is the most important objective. Selling is based on giving the prospect a patient, hearing, being sensitive and ensuring adequate follow-through.

Some tips covering various aspects of the marketing process that can help sales persons improve their personal selling skills in industrial marketing are: Make sure the benefits being emphasized remain clear, current and important to the customer. Show how well the product and service offer fits into the customer's business with quantitative data. Segment the identified market to tailor the marketing mix to each sub-segment. Understand the policies and procedures involved in customer buying and fit the promotional strategy.

314

T al k w it h e v er y p er so n in th e D M U .

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t

Personal Selling and Negotiations

Communicate to each DMU member the message that will address that person's concerns. Understand how the customers'businesses are run. Be sure all actions and communications are consistent with the predetermined level of quality services, price and performance required. Understand and update the competitor's strength and weaknesses.

Measurement, control and monitoring of objectives should take place continuously while executing a communications program or a promotional campaign. This is all the more necessary since personal selling is the most expensive element in terms of costs to the seller's firm, among various elements of the communications mix. Budget allocation towards the cost of personal selling remains one of the most significant activities of the marketing manager. However, it has been found that many industrial organisations do not pay sufficient attention to the integration process of the communication mix thereby leading to adhoc decisions for the control of budgets. In brief, the relative priority of the three most important elements of the communications mix for industrial products and consumer products may be summarised as below: Industrial products Priority #1- Personal Selling #2-Advertising # 3 - Sales Promotion Consumer products Priority #1-Advertising 2 - Sales Promotion 3 - Personal Selling

JS$A ctivity D ;
The three main characteristics of professional selling in industrial markets for PC servers used in large offices are:1. 2.

3.

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11.8 NEGOTIATION SKILLS


Negotiation is a discussion between two or more parties to hammer to out solutions to their problems. It is a problem solving process in which two or more parties voluntarily discuss their differences and attempt to reach a joint decision on their common concerns. Because the industrial market place requires the exchange of high-value goods and services, negotiation skills are an essential part of the personal selling process. When parties negotiate, they usually expect give and take. How much to give and how much to take is one of the fundamental dilemmas for an industrial sales person. The process of give and take is necessary if a settlement is to be reached. As negotiations evolve, each side proposes changes to the party's position and makes changes to its own. The nature of their interdependence will have a major impact on the nature of their relationship, the way the negotiations progress and the outcomes of the negotiations. In negotiations when both sides are adversaries when one cooperates, the other is an adversary when both co-operate The outcome will be worse for both co-operator will be worse off and competitor will be a winner both will have good outcomes Situation Lose-lose Lose-win

Win-win

Effective planning is crucial to meeting negotiation objectives. If the parties need to arrive at a meaningful settlement, specific events must take place before the parties come to the negotiating table. Sometimes, sales persons fail to negotiate because they do not recognise that they are in a bargaining position for negotiations, or may use other options that do not allow them to manage their problems as effectively, hi some situations, they may recognize the need for bargaining, but may bargain poorly because they do not fully understand the process, and lack good negotiating skills. The possibility of successfully negotiating an agreement can be greatly increased when the parties understand how to determine when the time is 'ripe' for a negotiated settlement. The following conditions make success in negotiations more likely in situations that involve two industrial firms:

i)

Identifiable DMU members who are willing to participate


The persons or groups who have a stake in the outcome must be identifiable and

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willing to negotiate if productive outcomes have to occur. If a critical member is absent or missing for some reason, the potential for agreement will drop. ii) Interdependence The participants must be dependent on each other to have their needs met or interests satisfied. The participants need either each other's assistance to restrain from taking negative actions for their interests to be sati sfied. Hi) Readiness to negotiate For a dialogue to take place, both parties must be ready to negotiate. Either one of the parties may be reluctant to negotiate if: the participants are not mentally prepared to take a step a forward, adequate information is not available a negotiation strategy has not been prepared.

iv) Means of Influence For the persons to reach an agreement over issues about which they disagree, they must have some means to influence the attitudes and/or behavior of other negotiators. Asking questions that provoke new thought, providing needed information, seeking the advice of experts, appealing to the influencers, exercising legitimate authority are all means of exerting influence in negotiations. v) Agreement on some issues Generally, two firms will have some issues and interests in common and others that are of concern to only one party. The number and importance of the common issues and interest influence whether negotiations occur and whether they terminate in agreement. The sales person needs to reiterate the common issues that have been already settled in order to create the right climate for the balance issues. The buyer and the seller must have enough common issues and interest to commit themselves to a joint decision-making process. Some of the most common reasons for choosing to negotiate are: i) Obtain information about issues, interest and positions of other parties. fi) Gain recognition of either issues or parties.

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in) Educate both sides about a particular view of an issue or concern. iv) Test the strengths of the other party. v) Change perceptions, divert attention away from 'flash points'. vi) Ventilate the grievances that the DMU members may not have expressed before. Three of the critical stages in a sales negotiation process are the preparation, the opening moves by either the seller or buyer, and the ability to abandon the process. Not every negotiation reaches a situation where the sales deal can be closed, but negotiation skills are one of the key factors crucial to the sales and business processes initiated by industrial marketers.

J& Activity E;
In a situation involving hard bargaining and negotiations, the kind of end result that would be considered ideal is: D Lose-lose Win-lose

Win-Win

318

11.9 SUMMARY
The importance of personal selling in industrial product marketing and in the communications mix should not be underestimated. Without this element, no

attemp between personal selling in industrial and consumer markets have been highlighted. It t at a was emphasised that the sales person in industrial firms performs numerous tasks in long- addition to obtaining orders and repeat orders. The significant areas where term knowledge is required on the part of the sales person have been described. relation It has also been emphasised that the buyer firm should possess a centrally managed ship and administered knowledge management system. This system proves very useful in with buyers providing the necessary backup support system required for maintaining customer relationships and CRM System. is possibl The stages in the personal selling process have been described along with the main e. The activities and outcomes at each step. A separate section has also reviewed the areas differe where objections from the customer usually occur during the selling process. nces Some steps to overcome objections have been highlighted.

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Personal Selling and Negotiations

It was also noted that the seller firm needs to integrate personal selling with other elements of the communication mix in order to maintain and sustain the buyer-seller relationship. Some tips for the sales person to improve personal selling skills have also been included. Establishing relationships between two firms calls for negotiation - and negotiation requires negotiation skills on the part of the industrial sales person. The three major types of ultimate results after negotiations are: win-win, lose-win, and lose-lose. For the negotiation process to be successful, effective planning is essential. It needs to be recognised by the sales person and the marketing manager that not every negotiation meeting is a successful one, but negotiation skills are the key to concluding any business transaction. 11.10 KEYWORDS Business to consumer market (B2C): this is a term now used to describe a type of market that involves marketing and sales interactions and transactions between the company and the individual, similar to the way consumer products are marketed. The B2B market is one where the marketing and sales interactions taken place between two companies. In this sense, B2B marketing is synonymous with industrial marketing. Prospect: Any person or company that has the potential to become a new customer to a firm is a prospect. In industrial marketing, the identification of prospects is an ongoing activity and the skills gained only through years of experience in the field. Sales closure: The act of finalising a sales deal with the prospects is called 'closing the sales'. Negotiation skills : Negotiation refers to a problem-solving process in which two or more parties voluntarily discuss their differences and attempt to reach a joint decision on their common concerns. The industrial marketer needs to possess this skill since the industrial market place requires the exchange of high value goods and services. 11.11 SELF-ASSESSMENT QUESTIONS_______________________________ Q1. Why is personal selling considered to be very important for industrial products? Q2. Make a draft for a sales call card that you would give to a new salesman who has just joined your company involved in batteries for light commercial vehicles (LCVs).

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12.1 INTRODUCTION
Most industrial firms realise the importance of strategic planning, looking ahead and attempting to understand how market conditions might change, in addition to the ways the demand levels might change and the likely reactions of competitors. Just as consumer product companies are subject to intense competitive pressures on a daily basis, so are the industrial firms. The strategic planning process seeks to address the issues that describe how the firm can align its resources in response to its internal and external environments to accomplish its goal and objectives. The size of the company, its structures, systems and scope of marketing activities have a heavy influence on the active and reactive responses of the company to the constantly evolving market forces. Acompany of the size of GE will take somewhat longer than a company consisting of about 50 employees and operating in only one market. Some of the important elements in an organisational level of strategy include goals and objectives, statement of corporate culture, the organisation structure of the firms and the set of strategies. The three forms of strategy that exist in all industrial firms are business level strategies, corporate level strategies and functional strategies. The most significant initial step in the planning process is to establish and communicate within the firm the vision, mission and the overall goals. This unit goes on to describe the basic steps in the strategic planning process and how it becomes relevant to marketing planning. At the same time, this unit also reviews the important tools used in the strategic planning process. It is recommended to the reader to study this unit in conjunction with unit 2, where the aspects of internal and external environment analysis, Porter's model and SWOT analysis have been explained in more detail.

12.2 NEED FOR STRATEGIC PLANNING

__________________________

324

Success in the today's industrial markets depends to a very large extent on how well the firm's management designs and implements a viable strategic planning process. Every organisation has to align its resources to its internal and external environments to accomplish its goals and objectives. Resources include financial capital (monetary resources), human capital (human resources), facilities (land, buildings and machinery), and technology. Resources are limited and need to be prioritised to support the organisation's goal. This allocation of limited resources involves all limbs and arms of the organisation and culminates in strategic decisions that will guide the firm through its planning horizon. Often, this could be five to ten years into the future.

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Strategic Marketing Planning

All organisational planning is useless and meaningless if it is not linked to the concept of the future customer's needs and wants. The most famous example of this shortsightedness is IBM. It reported a loss of nearly USD 1 4 billion in the early nineties, until they analyzed and understood the shifting requirements of the new customer. Very few industrial companies are able to escape the relentless competition in local and international markets coming from every comer of the globe. The mass problems that strategic planning seeks to solve are: 345.future needs of buyers 346. overcoming the expected competition in the future 347. gaining competitive advantage in national and international markets Sudden changes in the external environment can alter the dynamics of industrial markets in both positive and negative ways. A sudden hike in the oil prices by OPEC can alter the demand for the premium and luxury passenger cars very swiftly. Such changes can also occur due to economic factors. A contingency plan needs to be put in place by every firm to overcome fluctuating economic factors such as high rates of inflation, frequent revisions in interest rates and currency rates. Changes in political regimes can alter very drastically the economic and business scenario in international markets. The ability of the industrial firm to plan strategically for the long-term will depend upon factors such as:i) Predictability of changes in political, economic, socio-cultural and technological

factors. ii) Whether the change will be gradual or sudden. m) Strategic alliances that may have been formed. iv) Ease of entry by competitors. v) Structure, culture and preparedness of the firm.

g$ Activity A ;
1. The purpose of strategic planning is to give a D Shortterm D Longterm 325

direction to all those involved.

Industrial Marketing

2.

Strategic planning should be linked to (select the most appropriate choice): D Present day market conditions D Current external environment wants D Future internal environment D Future customer's needs and

12.3 APPROACH TO STRATEGY The important elements in an organisation's level of strategy include goals and objectives, statement of corporate culture, the organisation of the firm and the set of strategies. Goals are generally open-ended, long-term statements that are of major significance to the entire organisation. I Objectives are short range statements that the organisation wishes to accomplish. Thus objectives tend to be more quantified, are and serve to focus the efforts of the organisation. Corporate culture is the set of beliefs and norms that characterise an organisation. Overall strategies for the organisation represent the direct interaction between goals, objectives and the philosophy and culture of the organisation. Examples of corporate strategies include diversification, forward/backward integration, planned de-merger, merger and acquisition (M &A) and cost and differentiation strategies. The organisation can be considered as the vehicle for implementation of strategic plans. It permits teamwork and cooperation so that common effort is focused to produce quality products and services. Lines of authority and responsibility are established. The delegation of authority must accompany responsibility for the results of that decision.

326

Three forms of strategy exist in any industrial organisation.

348.B anisation or unit. Strategies may differ from business to business and different u organisations within the same industry may adopt different sets of business si strategies. n es 349. Corporate level strategies refer to strategies that are adopted by large corporation s having multiple business units, or participate in multiple markets and le business. v Corporate strategy, at its most basic level, attempts to answer the question: el 'What st r at e gi es ar e st ra te gi es th at ar e es ta bl is h e d fo r a si n gl e b us in es s or g

Unit 12

Strategic Marketing Planning

businesses should we be in?' It determines how many different types of business units it manages, how many industries and nations it operates in. Corporate strategy addresses the business as a whole. Subros Ltd, (a car air-conditioner manufacturer) will need to have business strategies, while a conglomerate like BHEL (Bharat Heavy Electricals Ltd.) will need to have corporate level strategies. When a firm has several different businesses, it is normal practice to organise them into single groupings of related businesses called strategic business units or (SBUs). They are defined in terms of customer groups, customer needs and technology. SBUs consist of separate units of the company that can be planned independently from other company businesses. 3. Functional level strategies ask the question 'How do we support the business strategies?' In effect, functional strategies are derived from business strategies. Functional strategies guide the operating and staff elements. They assist in converting the corporate strategic plan into a cohesive and comprehensive operating plan. The business functions include production, purchase, finance, R & D, marketing, etc. J& Activity B ; 1. Business strategies are established for companies having D Product in single industry D Multiple product lines for multiple industries 12.4 STRATEGIC PLANNING______________________________________ Prior to the development of strategic plans, it is necessary for the organisation to establish the vision, mission and overall goals. A strategic vision spells out a company's aspirations, provides a panoramic view of 'where we are going,' and a convincing rationale for why this makes good business sense for the company. The vision therefore points an organisation in a particular direction, charts a strategic path for it to follow in preparing for the future, and moulds organisational identity. Henry Ford's vision was to have a car in every garage and Intel's vision is to get a billion connected computers worldwide, millions of servers and trillions of dollars of e-commerce. 327

Industrial Marketing

The mission statement of any company attempts to address the question: 'who we are, what we are and why we are here'. A company's mission is defined by the buyers needs it seeks to satisfy, the customer groups and market segments it hopes to serve and the resources and technologies it is deploying in trying to satisfy its customers. The mission provides the organisation with a purpose or reason for its existence. Every company's mission is shaped by five elements: history, current preferences of the owners, the market environment, resources and distinctive competencies. Agood and healthy strategic planning process shares the 'Vision' of the organisation with the employees and creates a strong organisational culture. The philosophy and culture of the organisation evolves as the strategic plan takes shape. The organisation and information systems are designed to optimise the contributions of personnel and other resources within the organisation. Formal goals and strategies translate the vision into operational tasks and activities that can be programmed and assigned to responsible individuals for implementation. Strategic planning is the process of developing and analysing the organisation's mission, formulating overall goals, general strategies, and allocating resources. Effective strategic planning includes constant environmental analysis and the flexibility to adjust to changes in the environment. It enables and organisation to avoid surprises, manage crises and take proactive steps in countering the changes in the environment and competition.

$ Activity C;
a) Imagine that you are a marketing executive working in Tata Steel. Write down a suitable statement for the vision and the mission. Subsequently, go to the website of Tata Steel and compare the statements you have written with those available on the site. b) Constant environmental analysis needs to be carried out when you are involved in D Operational planning D Production planning D Strategic planning i

12.5 STRATEGIC PLANNING PROCESS

_________________

In its simplest form, the process of developing and executing a company's strategy follows the following steps:
328

I
1

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Strategic Marketing Planning

2
Set
L

Develop

;s

3
Create

L 1 Imple :ment Strat egies

5
Monitor &
j

i k

6
Revise as needed
Fig. 72.1 : Steps in the process of strategic planning 1. Develop strategic vision
The strategic vision conveys a company's future business scope. It must provide long-term direction, energise the organisation with a sense of purpose and communicate to shareholders what the management's aspirations for the company are. com petit ive stren gth and busi ness pros pect s.

3 . C r e a t e s t r a t e g i e s
Crea

2.

Set objectives
Objectives need to spell out how much of what kind of performances by when. Judging how well a company is doing by its financial performance is not enough. The 'lead indicators' of a company's future financial performance are its current achievements of strategic targets that indicate

ting strategy is principally concerned with forming responses to changes in the external environment, deriving moves to counter competition and market approaches aimed at producing competitive strengths. A single business enterprise has three levels of strategy- business strategy for the company as a whole, functional strategy for each main area within the business and operating strategy for middle and junior level managers to ensure smooth day-to-day operations.

4.

Implement strategies
Managing the implementation and execution of strategy is an operations-oriented activity aimed at shaping the performance of core business activities in a strategy-supportive manner. The quality of company's operational ability to execute the chosen strategies is a major driver of how well the company ultimately performs.

' ]

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5.

Monitor & evaluate performance


This phase is necessary for the company to decide whether to continue or change the company's vision, objectives, strategy or implementation methods. Sometimes it becomes sufficient to fine-tune the strategic plan and continue with efforts to improve strategy execution. At other times, major changes are required.

6.

Revise as needed
When major shifts or changes in directions or strategy are warranted, the strategic plans may have to be revised at each of the five stages mentioned above. The evaluation phase is therefore most essential in deciding the quality and the quantum of changes that need to be made.

12.6 STRATEGIC MARKETING PLANNING PROCESS _______________________________________________________________ _ _


The strategic marketing planning process, which involves the development of strategies for the marketing function, will essentially follow the steps outlined above for the business planning strategy. It has to take into account the state of current organisational resources and the present and future market directions. Ultimately the marketing strategies have to address themselves to the following subelements of the marketing, namely: I Targeting - To whom should the package of industrial products and services be targeted? Positioning - How will the package be differentiated from offerings by competitors? Product/Service attributes - What attributes or features will the product have? Marketing Communication - How will the target market be reached and with what message ? Pricing - What pricing policies will be followed for the various target markets? Distribution - What distribution channels, if any, will be used to sell the product or service? Customer service - How will the specific and differing customer needs be

330

sa tis fie d?

Unit 12

Strategic Marketing Planning

The strategic marketing planning process can be broadly summarised while covering the following essential steps: 1 Strategic Situation 1. a) External environment information b) Internal environment information c) information analysis 2 2. Strategic Choice a) /Stratejgic / Situation (^jXp&yjis b )/Bevise Vjltrajegies c) Identify Strategic Choices \ / Marketing / 3 3. Strategic Implementation a) Strategic Situation Analysis b) Monitor & Control Implementation c) Take Corrective Action

Fig. 12.2 : Elements of Strategic Marketing Planning Process 1. Strategic situation analysis
Two areas for consideration in this analysis are 350. External environment analysis 351. Internal environment analysis

a)

External environment analysis


This is sometimes called the PEST analysis, which stands for

Political/legal Economic/demographic Socio-cultural Technological Some of the factors in this type of environment analysis have been covered in unit 2. Information that might be needed at both national and international levels would include:

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Industrial Marketing

f) What is the political climate? Is it welcoming for foreign business (as in India and China) or are foreign companies unwelcome and discouraged (as in some parts of Africa)? fil The economic level and trend of activity - GDP, per capita income, disposable income in) Importance of social and cultural factors iv) Importance of innovation and technology v) Types of infrastructure in place b) \ The factors here refer to the immediate and microenvironment, sometimes referred to as SPICC: Suppliers j Publics Intermediaries Competition Customers and markets j Some of the factors concerned with microenvironment analysis have been covered in unit 2. A few examples of factors to be considered are given below: 0 Elements in the supply chain and their relative importance . . Internal environment analysis

ii) Adequacy of the number of buyers/suppliers, efficiency and price/delivery policies m) Importance of the role of the intermediaries; their control over distribution channels

332

iv) Nature and extent of competition; position of major players in the industry; competitors product portfolios and product strengths v) Analysis of the major customers- size, spending power, their distribution across the country or global market

vi) Ty pe of mo st/l eas t pro fita ble cus to me rs; lon gter m pro spe cts wit h exi sti ng cus to me r bas e

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Strategic Marketing Planning

Of course, there are several other issues in the internal environment analysis that may be specific to the product line being considered. An Indian manufacturer of water pumps or transformers may have to look closely at the commercial terms and delivery aspects in the requirements of potential customers in a country like Philippines. It is also necessary to implant the necessary structures and systems that form the backbone for success in operation in new markets. The factors which make up this backbone are commonly referred to as the eight S's comprising: Structures, strategies, systems, staffing, skills, shared values, style, and sustainable competitive advantage.

Examples of the types of information required in the 8S analysis can include: i) Type of organisation structure required (e.g. centralised or

decentralised) ii) Level of systems and process required to be put in place (MIS, finance, IT systems, CRM, etc.) in) Suitability of the market to adoption of long-term strategies iv) Staffing levels necessary to meet satisfactory service levels to customers v) Availability of skills on the part of customers and general availability of skilled manpower vi) Importance of customer oriented culture to service the variety of customers vii) Effect of management policies and style of the corporate image from the customers viewpoint viii) Assets the company needs to build and maintain sustainable competitive advantage.

The 8 P's model


In addition, an analysis of the issues related to the marketing mix remains the core of all types of analyses. This may cover the company's product portfolio, supply and distribution channel relationships, pricing policies and the quantum of communication and promotion to be carried 333 out. All this will have to be carried out with the help of marketing research.

Industrial Marketing

The 8 P's model has been developed as an extension of the 4 P's that have been traditionally associated with any discussion on the marketing mix. Some of the issues involved in each category are given below:

i)

Product/services
Organisation's product/brand portfolio Cost and profit structures Product line comparisons with existing competition ii) Place or distribution Development of distribution channel partners for product delivery and /or post sales services

Centralised or decentralised warehousing Efficiency of logistics operation iii) Pricing

Pricing methods that are aligned with customer's requirements Relationship between fixed and variable costs Whether targeted profit margins are achievable iv) Promotion Level of advertising and promotion expenditure in relation to the level of sales Promotional mix methods to be used v) People

334

Marketing skills of the management and sales force Whether shared values are positive and motivating

t portfolio Comparison of financial ratios with those of competitors

Co ntr ol of fix ed an d va ria bl e co sts ac ro ss th e pr od uc

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Strategic Marketing Planning

vii) Physical Evidence Knowledge level of sales professionals and updating processes Consistency of corporate image viii) Processes Availability of adequate backup systems and processes implemented c) Information analysis To arrive at some kind of judgment, a certain amount of information analysis collected from the macro-environment and micro-environment is necessary. In practice, the whole auditing process will be a continuous one with a few decisions being taken along the way. Two of the most widely recognised models for analysis has been described in unit 2. These are: Porter's five forces model (for the external environment) and SWOT analysis (for the external and internal environments). The opportunities and threats are used to analyse the external environment factors (as mentioned in PEST and SPICC analyses). The strengths and weaknesses are used to analyse the internal environment factors (as mentioned in the 8 S 's and the 8 P's). It is important that confusion is avoided between the internal and external factors so as not to confuse the management approach and the decisions taken. Ideally, the organisation would like to match its strengths to the opportunities in the national and international markets. However, this is not always possible because of the circumstances pertaining to the organisations and the states of both the environments. It can happen that the weaknesses of the company are such that it cannot take advantage of the external opportunities. For example, many Indian companies are not entering foreign markets simply because the growth in the domestic market is tremendous. Seeking foreign partners for investment or a merger could be considered as an option for such companies. Some Indian companies like Bharat Forge and Mahindra & Mahindra have adopted this route. 335 In essence situation analysis may be looked upon as the core of the matching process as summarised in Fig. 12.1 Scalability of the various processes already

Industrial Marketing

Internal Resources 8 S 's Strategy Structure Systems Skills Shared Values Staffing Style Sustainable Competitive advantage 8P's Product Price Place Promotion People Profit Physical Evidence Processes

External Environment SPICC Suppliers M acro factors Political

Public - Economic Intermediaries - Social Customers - Technological Competition

Fig. 12.3 : The Matching Process in Strategic Situation Analysis 2. Strategic Choice

Having carried out the strategic situation analysis, the next big step forward is to exercise the strategic choice. The marketing planning process has to be built within aframework governed by the vision, mission and corporate goals. The corporate goals and objectives represent the business goals and objectives for the entire organisation. These need to be broken down and translated into the departmental or divisional goals and objectives. The marketing objectives will decide the overall performance targets for the whole marketing department/division and will usually cover parameters like sales volume,targeted sales growth, present and expected market share, profit margins for bothexisting and new products and services. The time periods vary from industry to industry. companies operating may be 8 or 12 quarters (2 or For 3 years), for those operating the farm equipment sector, it could be to the in order of 5 to 10 years. 336

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Strategic Marketing Planning

Once the sales forecast has been made and marketing objectives are clear, strategies can be developed to decide how these objectives will be achieved. The Ansoff matrix model (explained in unit 6) is one of tools used in arriving at strategic marketing choices. In simple terms, there are four major strategic options in the Ansoff matrix that can be used further to develop various approaches. These are: 352. Existing products 353.New products 354. Existing products 355.New products existing markets existing markets new markets new markets : Market penetration : Product development : Market development : diversification

Although there are many criteria for selection or rejection of strategy objectives, some of the influences on these criteria are given here: Target markets- Some may be fast growing and some may be declining. Some may match the skills and strengths developed within the industrial firm. Strategic alliances- may exist between buyers and sellers that may make it difficult to enter a particular market;. Company mission/Corporate image- The chosen strategies need to have a fit with the company's mission and image. Financial implications- The strategies chosen will most definitely have financial implication and one strategy alternative will have to be assessed in comparison with another to gauge the investment and return levels. Time and speed- are of the essence in most industries. First mover advantages rarely persist for a long period. Existing marketing mix - these factors, related to the mix, should be considered in order to maintain and develop profit margins, cost advantages, value chain relationships. For example, the strategy to develop market share for a new product may adversely affect an existing products growth rate. Competitive structure of the industry - high competitive rivalry and low profit margins may prevent the consideration of some strategic options. Overall company resources - This factor may override all other influencing factors. Ultimately, the balancing act between company resource and strategy options will have to be carried out without causing serious directional changes.
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The Balanced Scorecard System

Kaplan and Norton developed the 'balanced scorecard' strategic approach to planning. This system suggests that the organisation is viewed from four perspectives, and to develop the appropriate measures and metrics, collect data and analyse it relative to each of these perspectives:

Learning and growth perspective


This places due importance and value on employees. In the present conditions where technological changes occurr rapidly, it is becoming necessary to provide continuous learning to knowledge workers.

Business growth perspective


This refers to internal business processes. Metrics that are based on this perspective allow managers to know how efficient their business is and whether their products and services are customer-oriented.

Customer perspective
Unsatisfied customers will eventually move away to other suppliers in the industrial market place. Poor performance from thi s perspective is one sure indicator of a company on the decline, even though the company may be producing good financial results.

Financial perspective
The accuracy of financial data is no doubt paramount, but it cannot be the driver of business and its usage needs to be balanced with the need to consider the other three perspectives given in the preceding paragraphs.

3. Strategic implementation
The implementation process begins with the proposed long term strategic marketing plan and then developing every strategy adopted in detail over a shorter period - say six months or every quarter. This must be worked out in detail since it becomes a working document that every employee in the organisation is going to work on a daily basis. This document may be called the action plan.

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Differences between Strategy Strategy is long-term Strategy is broad based in content conveying what needs to be done to achieve marketing objectives. Strategy provides the main framework for coordination, providing the same direction for all company departments over the long-term. Tactics Tactics are short-term. Tactics indicate how resources will be deployed along with a set of etailed execution plan. Tactics spell dout detailed action over the short-term.

Some of the difficulties associated with strategic plan implementation are given below: All plans will become unworkable if there is poor co-ordination amongst the team members or unsolved conflicts between departments. The assumptions upon which the plan is based turn out to be incorrect. Poor information dissemination and communication systems. Inadequate skills and confused allocation of representatives. Lack of leadership and constant disagreements on methodologies. Failure to make available the right resources. Inadequate feedback mechanisms.

The lack of monitoring, feedback and control mechanisms can subvert the entire planning process and prevent the implementation stages from being completed. At a simple level, monitoring and control may consist of predetermined review meetings where open arguments, discussion and debates take place. The strategic plan can and should be adapted and changed whenever felt necessary. The marketing situation analysis should therefore be conducted on a regular basis. So that opportunities and threats can be anticipated at an early stage. Strategic marketing control involves feedback from all other departments as well as information from the different sections of the marketing department. Sales analysis, for example, would be used to determine why actual sales vary from planned sales, then allow corrective 339 action to be taken.

Industrial Marketing

Financial controls will look at costs and profits across a whole range of indicators comparing the planned budgets with the actual outcome. Financial ratios are useful in not only comparing past and present efficiency and effectiveness but also in benchmarking with the best in the industry (or in another industry). Non-financial controls could cover areas such as production and delivery times, product availability and returns, customer satisfaction and complaints, records of post-sales services rendered, competitors activities, etc. Recovery at Cummins Diesel Corp (CDC), USA In the 1980s, CDC was faced with declining sales, new foreign competition and rising domestic environmental requirements for its product range of diesel engines. Sino becoming a MNC in the 1950s, CDC's engine operations have expanded to includ plants, joint ventures or license agreements in the UK, India, Mexico, Brazil, South Korea China, Japan as well as the USA, the home country. At that time, CDC sold to 3( distributors in North America, various OEMs, and to 110 distributors around the world CDC had 42 per cent share of the heavy-duty diesel engine market in 1979 followed b) Detroit Diesel (23%) and Caterpillar (16%). The company benefited from its expansion in the heavy-duty truck market in the late 1970s. However, in the late 1980s, things were changing in the diesel industry. Many markets were in the maturity stage - particularly for the energy-intensive products above 250 hp The sales volume dipped to 40,000 units in 1982 against a peak sale of 85,000 units in 1979. The market potential had dropped by more than half in less than 2 years. At the same time, new regulations were being imposed by the Environmental Protection Agency (EPA) requiring reductions in exhaust emissions from diesel engines (nitrou oxide and particulates). These regulations forced CDC to develop engines that conformed to the new limits. CDC was forced to re-evaluate its strategies in the light of sudden drop in demand, foreign competition and regulatory changes. The senior management evaluated the various alternatives and formulated three strategic options: i) sell the company. ii) adopt a 'harvest' strategy to maximize cash flow. 1) restructure the company from top to bottom with the goal of improving its product mix and manufacturing processes. 340

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The third option was recommended to the board of directors since it focused on ways to develop new markets, new products and new organisational processes even though this involved a total investment of USD 1 billion. The key components of the new strategy were: i) expand existing product lines and enter new products,

ri) expand existing product lines into world markets, lii) carry out cost restructuring and organisational restructuring. By 1990, CDC's strategies were showing results. 356.It was successfully able to launch new product lines and ensure the costcompetitiveness of its existing product lines. 357. It entered the medium-duty diesel engine market in 1990, a market that did not exist for CDC before. 358. Power generating sets, a product line that was introduced in the mid-1980s, reached USD 1 billion in sales by 1994; CDC succeeded by making a correct assessment of new international market requirements. CDC's investments in technology allowed it to get a substantial edge over its main competitor Komatsu, Japan by developing engines that met the new environmental control regulations. Had CDC not made early investments in research and engineering, it would have lost a substantial portion of the mediumduty engine market and power generating sets that customers wanted. In addition, it could not have provided the technology for cleaner heavy-duty engines as required by new environmental regulations. By 1994, CDC had re-established itself as the leading commercial diesel engine producer in the world. The strategic marketing plan involves aligning marketing goals with the organisation's mission and overall goals and serves as the basis for all marketing strategies. While its content can vary widely from organisation to organisation, it will generally cover the following main sectors: 341 Executive Summary Current Marketing situations

Industrial Marketing

13.1 INTRODUCTION
With increasing globalisation and the spread of large MNCs in world markets, it is necessary for the industrial markets to extend the horizon from domestic markets to international and global markets. The world economy had changed drastically since World War-II and even more drastically after the developments in the IT industry worldwide since the year 2001. An analysis of the factors that have changed the patterns of economic and business growth in the last decade will help the industrial marketer to prepare the firm to meet the challenges and demands of the international markets in future. While international marketing is a separate subject by itself, this unit reviews some of the important developments of international marketing strategy and attempt to bring out the dimensions and scope of the international marketing function for the reader who may not be exposed to developments in other countries. Some of the important driving forces that are accelerating the growth of global integration have been discussed. This is followed by a review of the tasks of the international marketing department. The different dimensions in the role international marketing plays in global business management have been presented. The need for an international MIS system has been analysed before a detailed discussion on the factors necessary for consideration in international market entry and expansion.

13.2 WORLD ECONOMY ____________________________________________________________ _____


The world economy has changed tremendously since World War EL The most fundamental change has been the emergence of global markets. New opportunities beyond the national boundaries are emerging for industrial companies. While the US, UK, Japan and Europe were considered the leaders of the world economy in the 80s and 90s, the BRIC countries (Brazil, Russia, India and China) represent the growth economies in the new millennium. Simultaneously, the integration of the world economy has increased significantly. Integration has been particularly striking in the EU (European Union) and the NAFTA (North American Free Trade Area). In the 1960s and 1970s, the cars made by leaders such Renault, Volvo. Fiat Nissan, and Ford, were built by local companies and marketed in local or regional markets. Today, the world car is a reality for all these manufacturers including Toyota and Honda. Almost all these companies are global in their operations with manufacturing setups or alliances with local companies in the high growth economies such as India and China. The world's largest automakers have evolved into global companies.

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International and Global Marketing Issues

The new economy dominates the plans and strategies of virtually all MNCs and large local business houses with a presence in industrial markets. Some of the characteristics of the new realities of the global economy are: i) Production is increasing steadily from the LCCs (low-cost countries) such as India and China.

ii) Capital movements rather than trade have become an important driver of the new economy. in) The growth of e-commerce has diminished the importance of national barriers. iv) Countries that have turned their focus on the world economy are now on the fast track of growth. 13.3 DRIVING FORCES AFFECTING INTERNATIONAL STRATEGIES AND MARKETING _____________________________________________________________ Some of the important driving forces that are accelerating the growth of global integration are: 1. Technology Technology is a universal factor that crosses national and cultural boundaries. Once a technology is developed it soon becomes available everywhere in the world. Satellite communication, TV networks such as CNN and MTV spanning the globe and the Internet are only a few of the technological factors that have turned the world into a global village. 2. Regional A number of multilateral trade agreements have accelerated the pace of global integration. In Europe, the expanding membership of the EU is lowering barriers to trade within the region. 3. Market needs and wants There are cultural similarities and cultural differences in markets around the world. The common elements governing needs and wants provide an opportunity to industrial organisations to create and serve international markets, even consumer needs and wants are converging today like never before. The Indian consumer wants the latest NOKIA mobile handset as much as his European 349 counterpart in France or Belgium. The similarities are creating an opportunity for global marketing.

Industrial Marketing

4.

Transportation and communication improvements


The time and cost barriers associated with distance have fallen exponentially in the past 50 years. New communication technologies such as email, fax, teleconferencing and video conferencing have allowed managers, executives and customers to link up electronically from virtually any part of the world for a fraction of the cost of air travel. A similar revolution has occurred in transportation technology. Physical distribution has declined in terms of cost per unit and the time for shipment has been greatly reduced as well.

5.

Product developm ent cost


The pressure for globalisation is strong when new product development costs have to be recovered in shorter time spans. The costs of development are extremely high in the well-developed countries and no single national market is likely to be large enough to support investments of this size. The rising costs are forcing MNCs such as Ford, Intel, GE and ABB to start offshore product development centers in India and China. !

6. W orld economic trends


Growth has created market opportunities in national and international markets. This provides the incentive to companies to expand on an international level. At the same time, slow growth in a company's domestic markets (such as USA and Japan) can signal the need to look ahead for opportunities in other nations and regions with high rates of growth. The worldwide movement toward deregulation and privatisation is another driving force. Privatisation of telephone systems around the world is creating opportunities in new markets around the world for the telecom industry. 7. Leverage The advantages a company enjoys by virtue of the fact that it conducts business in more than one country can be turned through leveraging of factors like: a) Transfer of experience: ABB, a company with 1300 subsidiaries operating in 140 countries, has widespread experience with a well-tested management model that it transfers across national boundaries.

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Unit 13

The interna tional 359.Economies of scaleThe global company can take advantage of its : market greater ing manufacturing capacity to obtain scale advantages. Finished products manag can be er has produced by combining components manufactured in scale-efficient to deal plants in with different countries. two 360.Utilisation of resourcesA major strength of the global company is its levels : of ability to look deeply into the entire world to identify people, money and raw uncont rollabl materials that will enable it to compete most effectively in world markets. Dealing in e domai multiple currencies in multiple markets can reduce the risks of exchange value ns. fluctuation In for a company with international operations. Fig. 361.Global strategy companies with a global outlook and structure can13.1, : the adopt inner global strategies based on an information system that scans the entire most world business environment. The truly global company has the capacity to circle shows leverage its skills and focus its resources to create superior value for customer and the dome achieve stic competitive advantage. The global strategy involves optimum contr utilisation of ollabl resources to create winning offerings on an international scale. e eleme ^Activity A; nts Two advantages a company enjoys by conducting business in various foreign that countries consti are: tute a mark a eter's decisi . on area. The b secon . d circle consi 13.4 INTERNATIONAL MARKETING TASKS

International and Global Marketing Issues

sts of the major marketing elements have some effect on foreign operational that decisions. The outer circle represents those elements of the foreign environment for each foreign market within which the marketer operates. Each foreign market (country 1, country2, etc) in which the company carries business can present out separate problems involving some or all of the elements. The more the number of countries in which it operates, the greater will be the variety of foreign environment factors with which it has to contend.

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Industrial Marketing

Foreign Environment (uncontrollable) Political/Legal Forces Economic Forces Domestic Environment (uncontrollable) Political/Legal Forces Cultural Forces Marketing Elements (controllable) Price Product Distribution Research Structure of Distribution

Cultural Forces

Competitive Forces Level of Technology

Competitive Forces

Level of Technology

Geography/ Infrastructure

Structure of Distribution

Fig. 13.1 : Controllable &uncontrollable elements The outer two circles surrounding the marketing mix decision factors thus represent the levels of uncertainty that is created by the domestic and foreign environments. The adaptation of the marketing mix to these environmental factors will determine the outcome of the industrial firm's marketing efforts in foreign territories. Competitions within the home country can have great repercussions on the international

market er's task. Eastma


352

n Kodak dominated the film and film processing market in the USA till the early 1990s. It achieved sufficient profits that provided capital to invest in foreign markets. It could devise aggressive marketing plans in international markets. However, Fuji Photo Film grew and grew in the USA to become a strong competitor - by

Unit 13

International and Global Marketing Issues

lowering prices, setting up a USD 300mn. plant and gaining around 12 per cent of the US market share. As a result, Kodak had to redirect its capital and resources back to the USA. In addition to the effect of the domestic market, there are constraints posed by the environment in each foreign country - such as geography and infrastructure (China and India). The more significant elements in foreign environments (depicted in the second outer circle in Fig. 13.1) include political/legal forces, economic forces, competitive forces, Level of technology, Structure of distribution, geography and infrastructure and cultural forces. The level of technology can often go unappreciated by industrial firms looking for suitable export markets. For example, the concept of preventive maintenance for machinery (such as power plant generators) is understood differently in India and the USA. An adequate level of technical knowledge and a suitable technical support system may have to be put in place while considering the prospect. The marketing manager of the diesel engine manufactured in India and sold to a firm in Uzbekistan (Central Asia) will have to ensure a proper understanding of routine and preventive maintenance by the firm in the foreign country. Hence, the marketers must be able to effectively interpret the influence and the impact of each of the uncontrollable environmental elements on the marketing plan for each foreign market.

Stages in Marketing involvement


The degree of marketing involvement and involvement in a foreign country will correspond to one or more stages in international presence.

Stage 1- No direct international marketing


The industrial firm does not actively pursue customers outside national boundaries; however, this company's products may reach foreign markets. Sales may be registered with trading companies as well as foreign customers who come directly to the firm. More often, an unsolicited order from a foreign buyer is what generates interest in foreign markets for the firm.

Stage 2 - Infrequent international marketing


Some variations in production levels may give rise to temporary surpluses that may result

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Industrial Marketing

in infrequent marketing in foreign countries. Sales to foreign markets are made as and when goods are available. There is little or no change in company organisation or product lines.

Stage 3 - Regular foreign marketing


In this stage, the firm has earmarked production capacity to be sold in foreign markets. The firm may employ foreign or domestic overseas intermediaries or may have its own sales force or sales subsidiaries in foreign markets. Industrial products may be adapted to meet the needs of individual foreign markets. The firm begins to depend on foreign sales and profits to meet its goals.

Stage 4 - Marketing on international scale

i
I

Companies in this stage are fully committed and involved in international marketing activities. Such firms seek out customers all over the world and sell products that are a result of planned production in various countries. This generally calls for production of goods outside the home market in addition to the marketing function.

It

Suzlon's thrust abroad


governments across the world have demonstrated their support for renewable energy through favourable policies. In particular, wind energy has received a lot of attention from countries around the world. In fact, the demand for wind energy continues to be significantly more than demand - a welcome situation that Suzlon Energy Ltd (SEL), India finds itself. SEL has built its competencies, capabilities and capacities in wind power generation to increase its presence in all international markets. It is the world's fifth largest wind turbine ;enerator manufacturer. The thrust in international markets is reflected in its order book

position - it compris es export orders that are more than three and a

half times the size of domestic orders. Though Europe is the leader in wind energy installations, other countries like USA, India and China are now on the high growth path while markets such as UK, Portugal, Italy, Greece and France are in the process of finalising substantial additions. It is evident that the market for wind energy is growing tremendously and will continue to grow till 2020. Changing from the earlier focus on the Indian market, SEL has gone international - emerging as an international player in key markets like Australia, China, South Korea and the USA. SEL now has a presence in all the leading markets of the world.

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International and Global Marketing Issues

SEL has set up its international business headquarters in Denmark to drive its global growth plans. It has its global headquarters in Pune, India and has established region-specific international offices in Melbourne, Beijing and Chicago. It has also established technology development centers in Germany, India and the Netherlands. SEL has set up manufacturing facilities in China and the USA to strengthen its presence in the future global marketplace.

In addition, SEL has


developed control over critical technology and built up manufacturing capability for all the key components of wind turbine generators such as rotor blades, generators, gear-boxes, control systems and towers. improved its control over the value chain by setting up a separate company, Suzlon Generators Private Ltd, in a joint venture with Elin Motoren Gmbh, Austria to manufacture generators for wind turbines. acquired Hansen Transmissions International that is one of the world leaders in gearbox technology. obtained quality system certification system from DNV (Det Norske Veritas), one of the global registrars of quality systems for compliance with ISO 9000 standards. begun to offer total wind power solutions including consultancy, manufacturing, operations and maintenance services. reached the top 10 private sector companies in terms of market capitalization.

The comprehensive product range with generators ranging from 0.35MW to 2.1MW also enables the company to execute projects around the world with extreme variations in wind velocity and adverse climatic conditions. Estimates indicate that the worldwide wind industry is presently around USD 11 bn and is likely to grow at a compound annual growth rate (CAGR) of around 12 per cent p.a.

Stage 5 - Global Marketing


In this stage, companies treat the world including their home market as one market.

Market segme nts may be define d by custom er turnov er, usage pattern s, etc., that cover many countri es and regions. Usually , the transiti on from internat ional marketi ng to global marketi ng occurs when more than 50 percent of its sale comes from foreign market s. The entire operati on of the

company - structure, sources of finance, production marketing, R & D, -

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Industrial Marketing

begins to take on a global perspective. International operations of businesses in global marketing reflect the increased level of competitiveness brought about by the globalisation of markets, interdependence of the world's economies and the growing number of industrial firms from low-cost countries.

Activity B ;
An industrial company looks towards a foreign market when the economic conditions in the domestic market are:

D Stable& Activity C:

Unstabl

Not

Regular foreign marketing occurs when the firm: D has surplus production capacity D has allocated certain production capacity D has surplus inventory

13.5 INTERNATIONAL MARKETING IN GLOBAL STRATEGY


There are three different dimensions in the role international marketing plays in global business management. These are related to: 362. Configuration of marketing activities 363. Co-ordination of international marketing activities 3) Linkage to non-marketing activities 1) Configuration Marketing activities need to be spread in each host country to develop responses to the local environments. However, not all marketing activities need to be performed although the configuration is valuable in being customer-oriented. In many instances, competitive advantage is gained in the form of lower cost or enhanced differentiation. These activities may include production of promotional materials, sales force, service support function, training and advertising.

356

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International and Global Marketing Issues

The centralised production of advertisements, sales promotion materials and customer user manuals can lead to many benefits. Economies of scale are possible in both development and production. The sales force for some businesses can be centralised in one location. Alternatively, for industrial products, skilled sales staff can be stationed at the headquarters or in a required area or office to provide sales support in different countries. Centralisation of the sales force proves effective in the case of industrial products where the average value of each customer order is high. The highly skilled service force can also be located at world HQ or regional HQ. They can be deployed to visit the different subsidiaries to provide non-routine service. For complex jobs, service facilities (service center, repair shops, etc) can be regionspecific, especially for complex service jobs. Training of marketing personnel can be effectively centralised and lead to economies of scale in production and delivery of training programs. Training centralisation needs to be weighed against travel time and cost. Global advertising is gaining more acceptance even though the cultural differences among nations may warrant the use of local advertising organisations. British Airways uses one advertising agency on a worldwide basis. Many promotional media like TV broadcast, airline/hotel magazines have an international reach.

2) Co-ordination
International marketing activities need to be coordinated to gain competitive advantage. Such coordination can be achieved by the following methods Standardizing activities across nations: Some strategies like product positioning, service standards, warranties are easier to coordinate than other strategies. Personal selling, sales training, pricing and media selection are more difficult to coordinate across nations. Transferring marketing skills between countries: Market entry strategy that is successful in one country can be transferred and applied in a neighbouring country or in a different region. Customer and market information can be transferred for use by other subsidiaries. Such information can relate to new product application, new feature

in tr o d uc ti o ns , ne w pr o m ot io n pr o p os al s i m pl e m en te d an d re ac ti o ns of co m pe tit or s w h

o may themselves be MNCs.

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Industrial Marketing

Sequencing of marketing programs: For example, new products or new marketing practices may be introduced in various countries in a planned sequence. Programs developed in one country can be shared among other marketing teams for mutual advantage. This action can result in substantial cost savings. The industrial firm needs to create organisational mechanisms to manage the product line from a worldwide perspective and to overcome resistance by sales managers to change in all participating countries. Integrating the efforts of various teams in different countries: The most common form of such integration is managing relationships with important MNCs - often called international key account management (KAM). International KAM is often used by international service firms. International banks like Citibank and HSBC handle accounts on a worldwide basis. It has account managers who are responsible for coordinating services to its large corporate customers anywhere in the world. International KAM can result in competitive advantage in a number of ways. It can lead to significant cost reduction in marketing expenditure when duplication of selling efforts is avoided. It can allow a company to differentiate itself from its competitors by offering a single contact for international buyer firms. In the case of industrial products, the post-sales service package is often as important as the product itself. This is especially so when an MNC customer has operations in remote areas of the world or when the customer shifts its base from one country to another.

ISO 9000 Certification System


With the number of competitors in the industrial product arena increasing by the day, more buyers around the world need minimum quality standards conformance from suppliers -just as their customers require from them. ISO 9000 standards- a series of five international industrial standards (ISO 9000 to 9004) - were originally designed by international organisation for standardisation in Geneva to meet the need for product quality assurances in purchasing agreements. Now they have become the benchmark for minimum quality standards in most countries of the world. They have come to be widely regarded as a symbol of quality assurance from industrial manufacturers. ISO 9000 concerns the registration and certification of a manufacturer's quality system. It is the certification of the existence of quality control system a company has in place to ensure it can meet published quality standards. However, the company is free to choose

358

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International and Global Marketing Issues

the specific quality features in their products. ISO 9000 does not apply to specific products. It relates to a generic system of standards that unable a company, through a mix of internal and external audits to provide assurance that it has a quality control system. It is a certification of the in- house functional processes and does not guarantee that a manufacturer produces a 'quality' product or service (as is commonly perceived among those not connected directly with quality systems). To receive ISO 9000 certification, the industrial firm requests a certifying body (such as B VQI), that is a third party authorised to provide ISO 9000 audit, to conduct a registration assessment. This is an audit of the business processes of a company. The certifying body helps the company management to create a quality manual that will be made available to customers wishing to verify the firm's reliability. When accreditation is granted, the company receives the certification. A complete assessment for re-certification is done every four years, with intermediate evaluations during a four-year period. A strong level of interest in ISO 9000 is driven more by market place requirements than by government regulations and ISO 9000 has now become a virtual starting point for all companies that wish to carry out business in foreign markets. It has also become the standard for IT products, software and systems on a worldwide basis. Manufacturers from India and China, who have initiated business dealings in foreign markets, find that ISO 9000 certification is a necessity.

3)

Linkage

Linking marketing functions to upstream and support activities of the firm forms an important aspect of global operations. Marketing teams can contribute to economies of scale and the 'learning curve' by: supporting the development of universal products helping a particular design sell worldwide. creating demand for more universal products even if historically the demand has been for customised products in different countries. identifying and penetrating segments quickly in different countries to allow the sale of standardised designs. providing additional services to support the sale of universal products.

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Industrial Marketing

13.6 INTERNATIONAL BUYERS Each industrial buyer anywhere in the world is unique. However, all buyers go through a similar process in making a purchase decision. They will make different purchase decisions depending upon the responses to the unique economic, socio-cultural, political, governmental environmental, competitive circumstances. The decision making unit (DMU) of the industrial buyer is clearly influenced by these circumstances. Delivering customer value is generally governed by the value equation: V=B/P V= Value; B= Benefits and P= Price As a general rule, value as perceived by the customers, can be increased in two ways: i) ' S) Decrease price while offering the same benefits (Decrease dominator'P') The numerator can be increased by improving benefits associated with the product itself: distribution or communication. i The denominator can be reduced if costs are low due to efficiencies in manufacturing. If a company is able to offer a product with better features, low- cost distribution, low-cost service package (particularly post-sales services) and offer lower prices relative to the competition, it enjoys an externally advantageous position. The recent trend of outsourcing to India in manufacturing by industrial firms in the developed countries is a clear sign of the growing competitiveness of Indian industrial companies in international markets. This trend was preceded in the 1980s by Japanese firms like Toyota, Nissan, and Honda that offered automobiles that were higher in quality, lower in price in the US market than those made by Chrysler, Ford and GM. Therefore, the industrial product must come up to a threshold of acceptable quality first before it can taste success in foreign markets. The underlying principle of the value equation it that the new entrant can succeed in international markets only if the perceived value of its offering is equal to or greater than that of the competitors. Increase benefits while offering competitive prices (increase numerator 'B")

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Industrial Marketing

Table 13.1: Subject area framework Category 364.Markets Coverage required Demand estimates, buying patterns, products, channels, communication media availability and cost, market responsiveness. Corporate, business and functional strategies and plans. Balance of payments, interest rates, attractiveness of country currency, expectations of analysts. Laws, regulations, tax provisions, earnings, dividends in both host and home countries Availability of human, financial, information and physical resources. Overall review of Socio-cultural, political, technological & economic environments.

365.Competitors 366. Foreign exchange 367. Regulatory information 368. Resource information 369.General conditions

VAJbrmal research report is oftenrequired before decisions carj-hf made regardin&siBeifjc 2r developing a research plan, data is collected using primary or secondary resources a number of techniques such as demand pattern analysis, income elasticity measurements, estimation by analogy, comparative analysis and cluster analysis. The research findings need to be presented clearly to facilitate decision-making. Product-market profile To take the first step in choosing export markets, it is necessary to establish the key factors influencing the sales and profitability of the product in question. If the industrial firm is getting into an export market for the first time, its product market profile will most likely be based on its experience in the home market-which may or may not be relevant, the individual expert markets being considered. Answers to the following basic questions need to be obtained for the firm to be successful in export markets. 370.Who buys the product? 371.Who does not buy this product?

362

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International and Global Marketing Issues

372.What need or function does the product serve? 373.What are the customers presently buying to satisfy the need or to solve the problem for which the product is targeted? 374.What problems does the product solve? 375.What price levels are generally acceptable for this product? 376.When is the product purchased? 377.Where is the product purchased? 9. What are the specific application areas for this product?

Each answer provides an input into decisions concerning the 4 Fs. Choosing an expert market requires an appraisal of six important criteria. These are: i) Market potential ii) iv) vi) Market access Potential competition Product fit.

iii) Shipping costs v) Service requirements

13.8 INTERNATIONAL M ARKET ENTRY AND EXPANSION The international market entry decision is taken within the firm and is determined to a large extent by the firm's objectives, attitudes and capabilities. In order to select an appropriate and potentially successful market entry method, it is necessary to consider a number of criteria such as: i) ii) the company objectives and expectations relating to the size and value of anticipatedbusiness. the skills and abilities of the company management and their attitude towards the company's market expansion.

iii) the nature and power of the competition within the market. iv) the nature of existing and future barriers to entry for new entrants. v) the timing of the move in relation to new markets and new competitive situations. vi) the size and financial resources of the company. 363

Industrial Marketing

Exporting
Exporting is just one strategy for a firm that has decided to go international. Export marketing is the integrated marketing of goods and services that are destined for customers in international markets. Export marketing requires: i) an understanding of the target market environment.

if) the use of marketing research and the identification of market potential. iii) decisions concerning product design, pricing, distribution channels, advertising and communications - in short, the marketing mix.

Forms of export organisation


Industrial firms interested in export marketing have two broad considerations: Organising in the home country and organising in the target market country.

Organising in the home country /. In house export organisation


Most industrial firms handle export activities within their own organisation. The firm that assigns a high priority to its export business will invariably establish an in house department, division or SBU. 2. External export organisation This form of organisation is suitable for component suppliers or service providers. When the firm chooses not to perform its own marketing and promotions in-house, there are numerous export service providers, such as trading companies, export management companies, export merchants and brokers, manufacturers export representatives or commission agents and export distributors.

Organising in the target market country


1. Direct representation: There are two maj or advantages to direct representations by a firms own employees in a market; control and communications. Direct representation allows decisions concerning program development, resource allocation. and price changes to be implemented unilaterally. In most cases, direct representation involves selling to wholesalers or retailers. 364

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International and Global Marketing Issues

378. Independent representation: In smaller markets, it is usually not feasible to establish direct representation because the low-sales volume does not justify the cost. Even in larger markets, a small manufacturer usually lacks adequate sales volume to justify the cost of direct representation; therefore, an independent distributor is an effective method of sales distribution. Finding good distributors can be the key to export success. 379.Piggyback marketing: This is an arrangement whereby one manufacturer obtains distribution of products through another's distribution channels. Both parties can benefit. The active distribution partner makes fuller use of its distribution system capacity and thereby increases the revenues generated by the system. The manufacturer using the piggyback arrangement does so at a cost that is much lower than that required for any direct arrangement. Successful piggyback marketing requires that the combined product lines be complementary. They must appeal to the same customer and must not compete against each other. Direct Marketing The widespread use of the Internet has opened up new opportunities for direct marketing to the target country without involving intermediaries. The interactivity allows e-business marketing to be more in tune with the market than they used to be assuming that the exchange of information is correctly understood and interpreted. Franchising While it may appear to be a low-risk method of setting up a business for the franchisee and a route to growth for the franchisor, it does carry risks for each party. Franchising is a form of licensing. Licensing Licensing can be defined as a contractual arrangement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalty payments, license fees or some other form of compensation. Licensing is a form of global market entry and an expansion strategy used by many MNCs. A company with advanced technology, know-how or strong brand image can use licensing agreements to supplement its profitability with little initial investment. Licensing can offer an attractive avenue for returns for the life of the agreement,

provid ed the necess ary perfor mance clause s are in the contra ct.

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Industrial Marketing

The main disadvantage of licensing is that it can be a very participation.


"

limned form of
~ -^ A .

Potential returns fcoramarketing and manufacturing may be lostr have a short life if the license develops its own know-how and capability to stay abreast of technology irrtrieTicensed product area. When companies do sign a license agreement, they should do so anticipating more extensive market participation in the future. If possible, the licensor company should keep options and paths open for other forms of market participation. One path is a joint venture with the licensee.

366

13.9 INVESTMENT IN NEW VENTURES

Many firms reach a stage when the pressure increases to make a substantial commitment to exploit the opportunities in a new business sector, country or region in the form of new investment in its approach to the market. Some of the reasons why an industrial firm chooses to produce in international markets are:

to ga in ne w bu si ne ss (p art ic ul arl y in in du str ial m ar ke ts) .

to defend existing businesses ( Imports to a number of countries are subject to tariff and non-tariff barriers). to move with an established customer (Component suppliers often set up their local subsidiaries in order to retain their existing business, complete with local component makers and benefit from increased sales). to save costs. to avoid government restrictions (on import).

Some of the most significant developments that have taken place in recent years pertain to increased collaboration between industrial firms in gaining or increasing market presence in various international markets. This move towards increased strategic collaboration is being accelerated by a combination of factors: globalisation of world markets requiring availability of products and services on a global scale. changes in the boundaries between markets .

Unit 13

International and Global Marketing Issues

the desire among customers across nations to have solutions rather than individual product and services-thus necessitating offers to be made from new combinations of products and services. The various terms used to describe the forms of strategic collaboration are: partnerships, alliances, joint ventures. The Collaborations fall under two main categories Limited life collaborations: Equity-based collaborations: including marketing networks & strategic alliances; including joint ventures, mergers & acquisitions (M & A) and reciprocal share holdings. Limited life collaborations Marketing networks They have existed for ages but advances in technology are creating newer types. For example, the virtual network is now creating a stable network of organisations. H-P and Motorola use their long-term relationships to meet the needs of different markets using changing technology. Strategic alliances This form, developed since the late 1980s, continues to be sought after, particularly by industrial firms in developing countries like India. Alliances are used to cover a wide range of contractual agreements and involve collaboration between certain parts of two or more organisations for a specific and usually limited purpose. They are usually less-risk-prone than full-fledged collaborations. Alliances may cover one or more of the following purposes: Technology_gxchanges L& D exchangesMarketing relationship Manufacturer -supplier relationships / " " " " Gross-licensing V -

In d u s tria l M a rk e tin g

> ;: ,

Equity-based collaboration These involve the firm's financial resources in terms of an equity stake in another firm. They can be either: Joint ventures Mergers Acquisitions or Shareholdings on reciprocal basis. A brief comparison of acquisition vs. alliances is given below: Table 13.2 : Acquisition vs. Alliance comparison Acquisition Create shareholder value that is marginally more More suited to core businesses and existing geographic territories Usually works even if partners are strong and weak. More suited to related businesses and net international markets. May not work if one of the partners is weak since the strong partner will attempt to dominate and put its own interests on top of the agenda. They usually have a limited life. Alliance Creates shareholder value

Commitment is deep since there is a financial stake.

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Joint Ventures

This extremely common in the industrial markets. It occurs when a company decides that form of shared ownership of a specific new company for marketing and/ or manufacturing is collabo the most appropriate method of targeting a new customer segment e.g. international ration market entry. The joint venture (JV) route implies that each company takes an equity is stake in the newly formed company.

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International and Global Marketing Issues

The reasons for setting up a JY can include


Restrictions on foreign ownership in a number of countries. Partners in the host country can increase the speed of market entry when good business and government contacts are essential for success. Complementary technology or management skills provided by the partners can lead to new opportunities in existing sectors. Global operations in R&D and production are very expensive, but necessary to achieve competitive advantage.

Merger and Acquisitions (M&A)


They play a key role for many MNC firms wanting to go global because They are perceived to be a faster way to penetrate a market - particularly since developing new products, brands and intellectual property can take years. There is considerable pressure (e.g. from shareholders) to produce short-term profits making speed of market entry almost essential. Acquisition gives immediate access to a trained labour force, existing customer base, supplier contacts, recognized brands and established distribution network. Often acquisition is used as a tool to eliminate a major competitor from the market thus making room for price increases.

forg ing busi ness of Dan a Spic er Euro pe valu ed at US D 2.7 mn. The divis ion nam ed Cra mlin gton

SFL goes to Europe


Sundaram Fasteners Ltd, (SFL) is a leading manufacturer of auto components in India, SFL is part of the TVS group, India. SFL commenced its operations in 1966. The company manufactures high tensile fasteners, automotive components, miscellaneous cold/extruded parts, powder metal parts, precision formed gears, iron powders, radiator caps, gear shifters and tire carriers. SFL has won the 'Supplier of the Year' award in each consecutive year between 1996 and 2000 from General Motors, USA. The company has a turnover of USD 227 mn in 2004-05. SFL commenced its operations in the UK in 2004. It acquired the precision

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Industrial Marketing

Precision Forge Ltd (CFPL) is a fully owned subsidiary of SFL. This acquisition facilitatec the company to increase its customer base in Europe. With 50 employees in 2005, the revenue earned by CPFL was USD 7 mn. CPFL' manufacturing workshop is located in Northumberland, UK. It is engaged in the production of precision forged components for application in heavy commercial vehicles for onhighway and off-highway usage. It is one of the three companies in Europe that produce; heavy-duty precision-forged differential gears. Its client list includes world renownec companies such as MAN Gmbh (Germany), DAF Trucks, Albion Automotive in Europe Synergies between the Indian and the UK operations have been the reason for success of CPFL. SFL carries out back-end operations in India, thereby reducing the product cost and making CPFL cost-competitive. SFL is planning to expand its operations in UK by making new investments and diversifying the product range of CPFL. Further, SFL is exploring the possibility of using the distribution network of CPFL to market its products that are manufactured in India. The UK subsidiary will act as a center to access other countries in Europe. The acquisition by SFL has given access to new technology and it is a part of SFL's international strategy to become a global player. Reciprocal shareholdings
(

Many firms have taken an equity stake in another firm for variety of reasons. Reciprocal shareholding provides an opportunity to: influence the strategy of the firm in which a stake has been taken. create a basis for sharing the expertise available in both firms. create a platform that can lead to a more formal relationship such as a merger, as well as generating good returns.

The joint shareholding pattern of Renault and Nissan has benefited both companies. Nissan was saved from bankruptcy and the company was turned around by Renault helping to launch a competitive range of passenger cars. Renault became the recipients of Nissan's expertise in quality and production efficiency. International firms wanting to become global in their operations are adopting a range of partnerships arrangement to maximise their presence and performance.

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International and Global Marketing Issues

The market- entry strategies followed by companies in international markets are summarized in Table 13.3.

Table 13.3: Types of Market entry strategies


Type 1) Exporting Form Internet marketing Direct exporter Indirect exporter Direct Marketing Outsourcing Licensing Franchising Marketing networks Strategic alliances Joint ventures M & A Reciprocal Shareholding

2) Contractual agreements

3) Non-ownership collaboration 4) Equity based collaboration Activity E; a) A form of organisation that is suitable for component suppliers is :

b) The arrangement whereby one manufacturer obtains distribution of product through another manufacturer's distribution channels is called:

Industrial Marketing

14.1 INTRODUCTION
With the economies of the developing countries like India and China growing much faster that those in the developed countries, it is essential to analyse some of the reasons for growth to obtain some idea of the new opportunities thrown up, some of the reasons for the growth of the industrial sectors in general and of the Indian industry segment in particular. The new areas of exports that have contributed substantially to export earnings have been identified. The expansion plans of some of the biggest names in industry are indicated as a pointer to the scale of the tasks for the industrial marketer in future. The ways by which Indian companies are responding to the challenges in the industrial market place are discussed briefly while the last section summarizes the most important steps new Indian companies will need to take in their search for a strong presence in industrial markets on a global basis.

14.2 GROWTH FACTORS


So far, the appeal of everyday products such as personal products, chocolates, and fashion clothes has played heavily on the minds of management students and fresh management graduates. However, there has been a sea change now, particularly since year 2003 when the economies of developing countries like India and China have grown much faster than those in the developed world. Academicians, management gurus and experts, practising managers have now realised that there are enormous opportunities in industrial and commercial transactions along the supply chain than what was previously imagined. What makes a company like Bharat Heavy Electricals Ltd (BHEL) or National Thermal Power Corp. Ltd. (NTPC) interesting is as important as Hindustan Lever Ltd (HLL) or Dabur. If all interactions are considered - from raw material suppliers, agents, (distributors, manufacturers and business buyers) then one would notice that industrial markets are substantially larger with high value creation possibilities. The percentage of management students opting for industrial product and service companies is already more than 50 percent and likely to grow much faster in the years to come as more and more companies exploit the vast opportunities presented by the forces of the Internet, globalization and economic liberalization. There are many reasons why a career option in the business world that includes industrial products and services will become more attractive in the next decade. Some of them are given below: 1. The highest GDP growth rates are being witnessed in India and China- in excess of - j ^_ ! ^on ^ Tv>rrent in the USA, UK and Japan.

Unit 14

386. T he gr 380. To take advantage of global opportunities and to enter foreign markets quickly, o more wt companies are looking at strategic alliances and mergers. Indian companies are h tying of up with foreign companies to get closer to the geographic markets. Likewise, Eforeign co companies are setting up their offices, establishments and factories in India, m either by m themselves or through joint venture companies. er ce 381. Indian companies are also venturing out into foreign markets by acquiring in companies bu in countries such as USA, Europe, Central Asia and Korea. si ne 382.More foreign MNCs and other industrial groups are setting up ss establishments in India to have low-cost manufacturing and service facilities and use them as a to base for exporting to other countries. bu 383.The demand for industrial products and services is increasing in the si developing ne countries, i.e. India, China, Brazil, Indonesia, Vietnam, much faster than in ss the tra developed countries, i.e., UK, Germany, and Japan. ns ac 384. The outsourcing phenomenon from the developed countries to the developing tio nations ns is creating a world of new business opportunities even for small companies. ha No s longer is the outsourcing option restricted to the IT and ITES firms. There is be outsourcing en in R & D, manufacturing, design and development and other functional ph areas. en Knowledge firms are actively involving themselves in knowledge process o outsourcing m (KPO) including legal, taxation, finance and other service industries. en al 385. Trade barriers between the developed countries and developing countries are si falling nc and it is becoming increasingly easier for companies to derive a good e proportion of 20 business from foreign markets than from domestic markets. Previously, most 01 Indian companies derived their business from the domestic market. 02

Future Trends

. In fact, E-commerce has seen and will see the highest rate of growth in industrial markets for a few more years.

The Era of SEZ in India


The industrial scenario in India is undergoing a sea change with billions of dollars expected in a sizable number of Special Economic Zones (SEZ). The success of SEZs in China and the Gulf region has triggered a wave of activities in India. The Ministry of Commerce & Industry is quite confident that SEZs will attract investments of USD 200 bn including Foreign Direct Investment (FDI) of USD 50 bn. Anew

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Industrial Marketing

SEZ act was enacted in Parliament in 2005 and it became operative in 2006. The Act provides for setting up SEZs in public, private and joint sectors by thje State governments. Some of the existing export promotion zones (EPZs) located in Gujarat West Bengal, Mumbai, Tamilnadu, A.P, and U.P. have been converted into SEZs. The Act has a number of features to attract new investments such as: taxbenefits; attractive fiscal incentives; exemption from custom duties, central excise duties, central sales tax anc securities transaction tax to both the developer as well as the units operating within the SEZs;

a tax holiday for 15 years; 100% income tax exemption for 10 years out of the 15 years out of the 15 for SEZ developer.

SEZs are the new vehicle for economic development with the removal of deficiencies that characterized the earlier EPZs. The aim is to make India a global trading hub based on the models developed Hong Kong and Singapore. It provides a comprehensive policy framework, something that will satisfy the requirements of the developer and operator as well as the out-ofzone supplier and the occupant. So far, around 34 approvals have been given for the development of new SEZs. The Indian Government is taking steps to ensure the speedy development if infrastructure, transparency in administration and simplification of laws. POSCO, the Korean steel giant, have announced their plans to invest USD 12 bn in an integrated steel plant in Orissa. It is one of the many MNCs that have shown keen interest in new investments in Indian SEZs. 9. India's exports have registered a dramatic increase in the last five years from US$43 billion in 2001 -02 to US$ 92 billion (expected) in 2005-06, or more than double.

378

The five fastest growing sectors are: software, engineering goods, gems and jewellery, chemicals and related products, textiles. Some of the new areas of exports that have contributed substantially to export

ea rn in gs in F Y 20 04 05 ar e: ca rs, S U V s, m ot or cy cl es , co m m er ci al ve hi cl es , au to an cil lar ie s, pe tr ol

eum products, IT and software, Pharmaceuticals.

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Future Trends

The top five companies comprising the maximum foreign exchange earners in 2004-05 were: Reliance Industries, Adani Exports, Tata Consulting Services, Infosys Technologies, Mangalore Refineries and Petrochemicals. The exports of services at US$ 17.7 bn. have exceeded that of physical merchandise export at US$ 16.8 bn. in FY 2004-05.

387. India is expected to become the world's second largest telecom market by 2009-10. The wireless segment subscriber base is growing at rates exceeding 60% p.a. 388. The big industrial and service-related houses in India such as Reliance, ONGC, NTPC, Tata Steel, Tata Motors, TCS, Wipro, Infosys, Mahindra & Mahindra are all having huge expansion plans over the next decade in India. 389. More Indian companies and large business houses are entering the league of MNCs. At present, 30 Indian Companies are in the Forbes 500 list of top companies around the world. The List of Companies is given below: Oil & Natural Gas State Bank of India Group Indian Oil Reliance Industries National Thermal Power Group ICICIBank Steel Authority of India Bharat Petroleum Hindustan Petroleum Tata Consultancy Services Punjab National Bank GAIL India Infosys Technologies CanaraBank Tata Iron & Steel ITC Wipro HDFC BankofBaroda Bank of India Tata Motors Union bank of India Bharti Tele-Ventures Oriental Bank of Commerce Mahanagar Telephone Nigam Ltd Bharat Heavy Electricals Ltd Ranbaxy Laboratories Indian Overseas Bank Hindalco Industries Larsen & Toubro

Industrial Marketing

14.3 EXPANSION PLANS OF MAJOR COMPANIES Some examples of companies that have big expansion plans are given below. These will no doubt create new opportunities for the large industrial suppliers and SMEs. Mahindra & Mahindra Ltd. M&M (Mahindra & Mahindra) acquired an 80 percent stake in China's Jiangling Tractor Company making it the fourth largest tractor company in the world. The company already sells its utility vehicles in South Africa, Italy and Latin America. It has tied up with Renault, one of the most admired auto companies, to launch their models of passenger cars in the Indian Markets. It has launched a business process outsourcing initiative in auto components with Mahindra Systems & Automotive Technologies. (MSAT). M &M now has interests in everything from holiday resorts to software although tractors and utility vehicles remain its core business. It has 12 subsidiary companies. In the last four years, the M&M group turnover has grown from Rs.4352 Cr. to Rs.7804 Cr.

Ford Motor Co. (USA) America's leading car maker, Ford now considers India on top of its list of markets where heavy investments will be made to boost market share and volumes. Ford is stepping up its efforts to increase component sourcing from India as the company is going in for cost and manpower reduction in developed markets. Ford is also increasing its research and development activities from India. It was among the first few MNCs to setup a R&D center in Chennai from where future design of cars would be taken up for manufacture at its plants located all over the

380

w or ld. Bhara t Forge Ltd. B ha rat F or ge ba se d in P un e, In di a is th e se co nd bi gg es t m an uf ac tu re r of au to m

otive components like forgings (gear axles and other items).

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Future Trends

It has recently signed a joint ventures agreement with FAW Corp., China with a 52 percent holding. This is after making acquisitions in Europe and the USA. With this venture, Bharat Forge will become the largest forging company in china with a strong customer base across segments and covering numerous customers. Bharat Forge now has manufacturing facilities across nine locations, two in India, three in Germany and one each in Sweden, Scotland, North America and China. The Company is following a strategy of achieving global leadership partly through expansions and partly through acquisitions.

IT Services Tata Consultancy Services (TCS) is already ranked No. 1 3 among worldwide software companies in terms of revenue while WIPRO is at No. 1 6 and Infosys is at No. 1 7 It plans to raise its revenues from the present US$2bn. to US$ 10 bn. by 2010. In March 2003, the revenue during the financial year touched US$ 1 bn. The main areas where TCS expects to gain substantial growth are: engineering services, infrastructure services, consulting, BPO and products.

Suzlon Energy Ltd. Suzlon Energy is India's largest wind energy company. It has obtained export Orders from the USA. China mid South Korea to the tune of Rs. 1 100 cr. It expected the USA will be the second largest market for its products in the near future. Exports, which presently account for 1 5 percent of total turnover, are expected to touch 35 to 40 percent of total turnover within two years. It is also planning to set up manufacturing capacity in countries outside India for components where the transport costs are high. It has planned to set up a manufacturing facility for turbine blades in the USA and another one is planned in China, Other markets that the company plans to tap are: Italy, Greece, Portugal, Australia and New Zealand.

Industrial Marketing

LGElectronics

LG Electronics has grown from Rs. 125 cr. in 1997 to Rs.6500 cr. in 2004 in 8 years, its revenues have risen more than six times. LG currently has a market share of around 26 percent of the Rs. 25000 cr. Indian consumer electronics industry. It proposes to invest Rs.900 cr. in another plant at Pune for expansion and for manufacturing mobile phones. LG Electronics has one of the biggest rural distribution networks in the country. It has 72 remote area offices reporting to 86 central area offices. These finally report to 47 branch offices. Its commitment is reflected in heavy investments made in the state-ofthe-art manufacturing facilities, distribution network and internal communications. LG's target is to be a US$ 1 Obn. company by year 2010.

&$ Activity A; Give the names of the three Indian business houses showing the maximum growth in foreign markets and the industry sectors they are involved in:

14.4 MACRO-LEVEL INDICATORS

Indian is second only to China in attracting foreign direct investment (FDI). India has overtaken the USA for the first time to become the second most attractive FDI destination in the world. Among the major reasons cited for the increase in FDI inflow of US$ 5.3 bn. in year 2004 are: continuation of economic reforms; raising of FDI limits in telecom, aviation, banking and media;

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Future Trends

Increased economic cooperation agreement with Singapore. The Billion Dollar investments in India Intel, the world's largest maker of Computer chips, will be investing US$ 1 bn. in India. Of this, around $ SOOmn. will go into business expansion mostly research and another $250 mn. Intel has already invested $700mn. in India and employs about 3000 people. AMD, Intel's rival, has decided to extend chip fabrication technology to India for a US$ 3 bn. plant which is to be set up by Semlndia near Hyderabad in AP. Among other major corporations that have announced plans of investing more than $1 bn. in India are Microsoft and Cisco Systems. Cisco Systems will be investing in R&D, marketing infrastructure, in Cisco Capital (its leasing arm), a new campus in Bangalore, and e-governance initiatives. POSCO, Mittal Steel and Tata Steel have proposed investments of around US$ 10 bn. each in Jharkhand for setting up integrated steel plants.

profes sional service s to lower fixed costs has also becom e a strateg ic option .

Characteristics of high-performance businesses High-performance businesses capitalise on regional cost differences and swiftly take advantage of growth opportunities in emerging markets. They do so with integrated, flexible and extended supply chains that run all the way from the customer contact in sales and marketing right through to dealers and distributors; this superior supply chain capability is supported by common global processes and information systems. Understanding customer needs is a critical requirement for success in any industry, but the industrial products makers have been relatively slow to recognise it. High performers are plainly exceptions. They have employed rigorous marketing analytics to boost their product portfolio management, and thanks to their success in exploiting customer insight to boost innovation, they can provide the sophisticated service offerings and smart products that their customers demand. As one would expect, operational excellence is a hallmark of high performance in this industry. Six Sigma-type initiatives are symptomatic of well-defined costcutting programs designed to improve operational efficiency; outsourcing non-core

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Industrial Marketing

High-performance businesses actively cultivate a continuous learning environment and are committed to the constant retraining of their workforces. High performers align their leadership and talent development with company values and business strategies that are reinforced by a rigorously managed measurement and rewards system. 14.5 ROUTES AHEAD FOR INDIAN COMPANIES __________________

How are Indian companies taking advantage of the new economic and business scenario? Here are some examples of real-life companies that having big plans for the future. These will no doubt create new opportunities for big and small companies. They will also create new paradigm shifts in the industrial marketing environment. Essentially the routes being followed by Indian companies in pursuing their missions and goals are by: i) i) Expanding their existing plant capacities in India. Creating new capacity in foreign countries.

in) Having strategic alliances and marketing arrangements with foreign companies. iv) Having joint ventures in foreign countries for tapping the foreign markets. v) Having joint ventures in foreign countries for tapping the domestic markets. vi) acquiring new firms abroad. vii) acquiring new firms in India. viii) becoming an outsourcing partner to a foreign MNC. ix) Moving from mere manufacture to design and developing components and component sub-systems by focusing on R&D. x) Picking a suitable market segment and building global scale capacities to cater to it (as Reliance Industries has shown). xi) Focusing on cost-competitiveness and operational efficiencies.
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Future Trends

Activity B;
Two common paths followed by Indian companies in expanding into foreign territories are:

1.

2.
14.6 PATHS TO PROGRESS

New industrial companies will need to adopt one or more of the following processes in search of strategic advantage and in determining their paths to Both Asian progress: Paints Relationship marketing - Developing a relationship with key personnel of and customer Sundar organisations is the foundation for success. Companies are achieving this by am forming fastene cross-functional teams with customers' personnel. rs are examp Solution-oriented selling - This has already been emphasised in Unit 09. les of Industrial Indian buyers are looking not just for products but customised solutions. The compa complete nies package can include consultancy services, finance, customised product that design, have customer training, inventory management, installation support and achiev comprehensive ed post-sales services. status and Process integration - The successful companies are re-engineering their market processes, leader organisation structure and resources around customer's needs. For example, ship in product the development process must necessarily involve the marketing personnel. The face of ultimate level of process integration is reached when the buyer and the supplier redesign stiff compe their tition operating models and businesses as if both their personnel belonged to a from single MNCs company rather than two separate entities. by applyi Leveraging information technology (IT) - By applying the tools of IT, ng the companies above can integrate and customize business processes while creating additional

va lu e fo r th eir cu st o m er s.

practices. In addition, a research report by Accenture, the well known consultancy firm, has identified four emerging capabilities that will support the creation of market value:

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Industrial Marketing

Service Management Solutions- that allow organisations to harvest customer information to deliver products and services that increase customer productivity. E-commerce applications - that allow industrial companies to create innovative market places and exchanges where their business units, customers and supplier can interact. Plug and play integration - that enables industrial companies to integrate the processes involved in acquisition, geographies, markets and products. Business process outsourcing (BPO) - that assesses those functions and capabilities that can be more efficiently managed by a third party including functional processes such as HR and Finance.

KONE Corporation: Aiming high Finland-based KONE Corporation specialises in transporting people and goods. It is the world's fourth-largest elevator and escalator maker and one of the biggest players in the expanding global market for automatic-door services. The company has been in the forefront of the movement to outsource non-core business competencies among industrial equipment providers, but it is as a provider of innovative service offerings that KONE really stands out. KONE offers its elevator customers a maintenance contract with a performance guarantee (known as KONE Optimum) as well as elevator self-checks and remote automatic communication with its service centers (KoneXion). These initiatives allow the company to continuously monitor the condition of its customers' elevators, reducing elevator downtime and cutting out unnecessary maintenance visits while still ensuring that maintenance takes place before a problem occurs. The programs have enabled KONE to boost the efficiency of its service staff by better prioritizing the work in hand. This improves the routing of service calls, which can be bundled together, and makes those calls more efficient, since the company's technicians know just which tools and spare parts to bring to each j ob.

386

The data gathered through KONE's monitoring systems also provide important insights into the evolving needs of its customers, so the company can continuously update and improve its service concept and offer new, value-added services. KONE Optimum customers, for example, now also enjoy the benefits of technology upgrades scheduled over time, thanks to a modular modernization

soluti on that rene ws worki ng comp onent s of existi ng eleva tors witho ut havin g to repla ce the entire mach ine.

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Future Trends

By focusing on its core business, really getting to know its customers and investing in the technologies that ensure those customers get what they want, KONE has secured its place among the high-performance businesses.

JS$ Activity C;
Two important processes that are helping industrial firms to grow big are: 1. ___________________________________'._____________________________ 2.___________________________:________________________________________

14.7 SUMMARY

______________

. ...._________________________

This unit attempts to focus on the new realities of the industrial scenario in India. The first section analyses a few of the reasons for growth of the industrial sector and the acceleration in the growth of new opportunities in industrial markets. It is projected that more Indian companies will enter a number of foreign markets to garner a bigger share of the business available there. It is necessary to understand how such companies will get closer to new foreign markets. This unit has also given a snapshot view of expansion plans of some of the biggest companies operating in India and abroad. What will new Indian companies need to do to sustain and maintain their competitive edge in the industrial world? The section on 'the paths to progress' attempts to answer this question in brief. This unit is inserted to give a real-world perspective to the ongoing realities of the industrial marketplace in the new business environment in India and abroad. Although much of this information is available in business dailies, the reader needs to be made aware of the scale of changes that have swept across the world. 14.8 KEYWORDS____________________________________________________ Special Economic Zone (SEZ): This is a term used to describe especially developed zone or area for the purpose of establishing units for providing goods and services primarily for export. The SEZ is considered to be the new vehicle for economic development in developing countries like India and Brazil. Technology Life Cycle (TLC): It refers to the stages in the development and growth of a particular technology from the time it is developed to the time it gets replaced by a different or new technology.

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Industrial Marketing

14.9 SELF-ASSESSMENT QUESTIONS


Q1. Examine some of the advantages that the industrial marketing department has in moving into foreign markets in the current business climate. Q2. Bring out the similarities and differences for a marketer of refrigerator compressors in India and China. Q3. It has been stated that the career option in the business-to-business world will become more attractive and challenging in the next decade. Discuss the reasons. Q4. What are the important features of Indian SEZs as compared to conventional industrial Zones? Q5. Discuss the possible opportunities available to a small industrial firm in growing into a large multi-product/multi market firm? I Q6. What are the various expansion strategies followed by Indian auto component manufacturers? Q7. Explain some of the differences between a strategic alliance and an acquisition.