Chapter I Introduction to Business-to-Business Marketing OVERVIEW In this chapter, we will introduce you to business-to-business marketing, provide you with an overview of the differences and similarities between business-to- business and consumer marketing, and, finally, provide you with an approach for studying this field that is built around the concept of value for customers. Value includes both customer benefits and customer costs incurred in realizing these benefits. We close the chapter by introducing several trends currently changing the face of business-to-business marketing. These trends, which are important for you to keep in mind as you progress throughout the book, raise the question of whether we need to change our ideas about what works in business-to-business marketing. In the opening example, two transportation companies—UPS and FedEx—take their partnerships with office services companies to a new competitive level. UPS's acquisition of Mail Boxes Ete. and FedEx's acquisition of Kinko's, Inc., created new bundles of services creating differentiated value for their small business clients. In so doing, they illustrate several of the core concepts that will be examined in later chapters, Example: FedEx Kinko's versus The UPS Stores! In 2001, United Parcel Serviee (UPS) bought the company Mail Boxes Ete. This gave UPS much greater presence in urban areas, neighborhoods, and shopping districts. While much of the business UPS acquired was retail (consumers), visibility and services were also extended to small busi- nesses. Offered services went beyond shipping: the former Mail Boxes Etc, stores also gave small businesses mail drop locations and “suite” business addresses, which lent credibility to their images. The big increase in value came from offering shipping locations closer to the locations of many more small businesses since the old UPS locations were typically in industrial or commercial areas Mail Boxes Etc. was a franchise operation with over 4,000 franchised locations. In the acquisition, UPS became the owner of the central Mail Boxes franchisor operation. Shortly after the acquisition. UPS worked with a small number of franchisees (0 test some operational changes and new alternatives for rebranding the stores. The results favored renaming the chain as The UPS Store.2 Chapter 1 * Introduction to Business-to-Business Marketing In 2003, the Mail Boxes Etc, franchisees were offered the chance to sign new franchise contracts that adopted the new name and some changed operating policies, which included new pricing 20 percent below the existing Mail Boxes price schedule, The franchisees who patticipated in the test became advocates for the changes because they had seen the financial impacts to their own operations—in some cases almost double the sales, with an increase in profitability, Over 90 percent of the franchisees switched aver. Those who hetd out will operate under the old Mail Boxes Etc, name until their franchise agreements expire. A lawsuit was filed by some of the franchisees.” These franchisees principally have locations in high cost aseas and they do not believe the new pricing will allow them to remain profitable, This suit is still pending Three years after the UPS acquisition of Mail Boxes Bic., FedEx responded to this competitive move by acquiring Kinko's, Inc., Unlike UPS, FedEx acquired all 1,200 stores outright, thus FedEx had more contra! of the stores and their operations (this also cost FedEx a great deal more—FedEx paid §2.2 billion, while UPS paid only $190 million for Mail Boxes Etc.). FedEx also tested new names for the Kinko's stores. They settled on the new name FedEx Kinko's ‘The FedEx Kinko's stores are targeted toward small businesses that need office and graphies services combined with shipping, This move was considered by analysts to be a “leapfrog” competitive move, offering more service and value than UPS's earlier move with Mail Boxes Etc. Initially, UPS Stores had a sizable advantage simply in the number of locations they offered, However, even with fewer stores, FedEx Kinko's tends to offer more in the way of copying, printing, and graphics—UPS Stores have added similar services, but FedEx Kinko's hias more capability on-site. Plus, these services were Kinko’s biead-and-butter. FedEx saw Kinko's as an attractive purchase target in part because Kinko's ‘was good al what it did! By the fall of 2004, FedEx Kinko's, through FedE’x’s partnership with Microsoft, Jaunched a new service that gave it even more of a service edge.” FedEx Kinko’s launched its File, Print FedEx Kinko's (EPEK) service, in which a customer can send FedEx Kinko's a document via the Internet. FedEx Kinko's will print it. copy it. bind it, and do whatever else to it the client requests. The client can then pick up the order at any specitied FedEx Kinko's Location or have it shipped elsewhere Both companies are offering convenience to small businesses. But they offer different kinds of ‘convenience. Both will have to innovate to stay in the race, And the competition is not just between the two of them—Staples, Inc., upgraded its in-store copying/printing services.’ Staples, Inc., of course, offers office supplies, so this represents a third value bundle now in the competitive mix, and DHL acquired the ground stations of Airborne Express to get a nationwide ueeess points. LEARNING OBJECTIVES By reading this chapter, you will ® Remember the basic marketing principles ® Gain an appreciation for the main differences between consumer marketing and business- to-business marketing. Understand the marketing concept and its implications for business-to-business marketing, Understand the meaning of value. ® Gain a sense of how the value chain is structured and how it is related to the concept of a supply chain, = Gain an understanding of the implications of the value chain for business-to-business marketing. changing nature of the business environment. ® Obtain a sense ofChapter 1 * Introduction to Business-to-Business Marketing 3 INTRODUCTION Business markets present different types of challenges and opportunities than those presented by consumer markets. The concepts of relationships, value, and buyer decision making function in very different ways than would be expected in consumer markets, The example of the acquisitions of Mail Boxes Ete. and Kinko's, Inc., by UPS and FedEx, respectively, illustrates all of these and more, First, FedEx’s combination of shipping with copying and other office and graphics servi ates a different kind of Value for small businesses than does the combination of UPS and Mail Boxes Etc. Both combinations of services have the potential to create lasting relationships with their customers. In this case, the customers will engage in extended decision making that contin- tues well after the initial usage of the service, Both FedEx Kinko's and The UPS Stores must understand this and adapt their post-sale service to focus on maintaining customer satisfaction and reselling the service, Entrepreneurial marketing is a major emphasis of this text. Enreprenewrial Entrepreneurial marketing can be practiced by established companies as well ag marketing is conducting by startups. [involves innovation, xcting proactively, and controlled risk taking? "iret ina vay har In the opening vignette, both UPS and FedEx have marketed entreprencurially. nes Mnar UPS initially saw an opportunity by offering a combination of services, taking een sk: Mail Boxes Etc,, aimed ata segment of small businesses, FedEx saw a somewhat ‘erent opportunity, a different segment, and addressed it with a different offering. In both eases, the company had to interpret an existing market condition and see needs that were not tully addressed. They proactively addressed the market opportunities they thought were there, but they took risks because they did not know for certain whether their interpretations of the market were correct, What should the competitors do to deal with this new situation and create a high chance of turning it into a profitable business activity? As an organization, how should each modify its behavior to suit these new and different market opportunities? This chapter sets the stage for answering these questions. To fully appreciate the differences and similarities between business-to-business and consumer marketing we need an understanding of marketing basies and how these basics apply in business-to-business marketing. For those of you who have already taken a marketing principles course, this will be a review of what you have already learned. These basic marketing concepts presented in a business-to-business context will ensure that everyone reading this book starts with approximately the same background—a level playing field. MARKETING FUNDAMENTALS IN BUSINESS-TO-BUSINESS MARKETS To see how marketing principles apply in business-to-business markets, an understanding of what business-to-business markets are and how marketing principles apply in business markets is required. These definitions and the context in which they are presented are part of the founda tions that should be kept in mind throughout the following chapters. Business markets consist of all organizations that purchase goods and services to use in the creation of their own goods and services. Their own goods and services are then offered to their customers. Notice that this does ‘tot include transactions for resale. These are considered to be within the purview of managing transactions within channels, Generally, business markets consist of fewer but larger customers than consumer markets and are involved in purchases of significantly large value having complex economic, technical, and financial considerations.Chapter | * Introduction to Business-to-Business Marketing Business marketing, then, is the process of matching and combining the capabilities of the supplier with the desired outcomes of the business customer. Business marketing is the creation of value for business customers. The business marketer must understand that business customers create value for their own customers, Thus the business marketer must define the “value” he provides in terms of helping the customer provide value for the “customer's customer.” The companies in the entire chain, from those that accumulate and process basic raw materials through those that modify, refine, manufacture, and assemble final consumer products, do not rely only on the next customer in the chain for their business. Each participant in the chain must recognize that the value added by its operations has a major impact on its customers’ ability to satisfy the needs of all downstream participants throughout the chain to the final consumer, The many facets of the business buying decision process and the needs of many stakeholders in the buying organization create behavioral situation usually far more complex than in the consumer market. Many students of marketing face difficulties in the study of business-to-business market- ing because they come into it from their existing viewpoint as consumers. Students, as do most consumers, often feel inundated by promotional messages from what seems to be an unlimited number of sources. The volume of these messages can lead consumers to believe that these messages are all there is to the entire marketing effort. In a business marketing course, students can begin the process of separating their marketing analysis from their per consumers. This is not a suggestion, however, that students abandon their understanding of consumer behavior. Quite the contrary—decision mal to-business marketing situations often behave similarly to consumers in buying situations, albeit with different and often more complex motivations yectives as rs in business The Marketing Mix Recall the four Ps four Ps of marketing whether operating in a consumer or a business market, There are. however, some differences that require explanation. he marketing mix: product, price, place, and promotion. These are still the PRODUCT In general marketing theory, the term product refers to a core product (or service) that can be augmented by additional features and options that will appeal to different buyers, In a consumer product such as a new car, buyers can add many options to the core vehicle, such as premium sound system or a sports suspension package, Beyond those options made available by the vehicle manufacturer, the dealer may provide options to assist in the ownership process, such as financing, aeceptance of a trade-in, or insurance. Taken together, these options, those that modify the performance of the vehicle and those that facilitate purchase and ownership, create the augmented product, Buyers have the choice to customize—to design—their vehicle to their own tastes and needs. In contrast, consider the product when an automobile company, such as General Motors (GM), markets a fleet of new cars to a car rental company, such as Avis Rent-a-car. The core product is still the cars, but now the quantity and assortment of many different models in the product line become important as well. The magnitude of the assortment and quantity available are major concerns for Avis. An arrangement by which GM cre also desirable, In addition, Avis prefers a schedule of deliveries over a manageable period of time, with an assortment that will provide its customers with several choices. Avis will also have a need for regular and routine spare parts delivery and training for its service personnel, Avis '§ a no-hassle payment plan is‘Chapter 1+ Introduction to Business-to-Business Marketing may also have previously rented cars it wishes to dispose of —a trade-in deal with GM would be an attractive part of the offer. Avis isn’t buying just cars; itis interested in a total value package from GM that includes * Assorted cars, in large quantities + Financing terms + Convenient schedule of deliveries * Routine and reliable source for part * Training for Avis service personnel * Disposal of old models From the viewpoint of GM, each of the above attributes is a necessary part of “the product” to be competitive in the car rental market. Reluctance on the part of GM to provide all elements of value sought by Avis would leave an opening for another car manufacturer to - capture the business. In this text, we define the augmented business-to-business wie we “ produet as the total offering that will provide a complete solution to the buyer's Am Mal rimrle needs. This may encompass features such as financing terms and delivery ‘he burers need. Ths options or, based on the buyer's preference, be simply the core product. The may include fieancing desirability of the augmented portions of the offering will vary among diffe business-to-business buying organizations, requiring flexibility of the marketer and the marketing organization.® There are often fundamental differences between core product characteristics in business- to-business and consumer markets, Because business-to-business products are often incorporated into the buying organization’s offering to its own customers, the products are often defined and developed to specifically match the buying organization's requirements, Whether the supplier regards this as a minor modification to an existing offering to meet a particular customer require- ment or a major new offering development, the result is an offering created by a partnership between the buying organization and the marketing organization. This process produces a product that is specific to the buying organization’s needs while maximizing the value creation capabilities of the marketer, Because the specifically tailored product is often more technical in nature, i often defined by a written specification whose purpose is to maintain a given level of perfor- mance, The outcome is not just a component manufactured in quantity for volume sales to a bu: ness customer, but a total offering that matches the capabilities of the supplier with the needs of the buyer, facilitated by the relationship between the two organizations. only the core product PRICE As in any transaction, price is the mutually agreed-upon amount (of money or some= thing else of worth) that satisfies both sides in the exchange. Both the buyer and the seller realize an increase in the value they hold as a result of the transaction. Price, the measure of value exchanged, is determined by the market—not by the costs associated with the creation of the offering. In business-to-business markets, price determination can be the final step ina complex design, development, and negotiation, particularly when the product is the result of a collaborative effort. For less complex or standardized products, price may be the result of 4 competitive bidding process. Only for the most generic of products, or when sold in small quantities through industrial distribution, will price in business-to-business markets be based “list” price as in consumer markets. Continuing with the automotive example, the price for the new car is a fixed price based on the manufacturer's suggested retail price (MSRP). Each of the options has a list price as well, and several options may be bundled together and priced as a single package. Automobiles are ent delivers senice,or based an the buser’s preference6 Chapter 1+ Introduction to Business-to-Business Marketing relatively unique as consumer products in that price negotiation is acceptable and expected. Most consumers—in the United States, at least—alo not expect to negotiate on price for most other products thar they buy. Prices for consumers are often fixed and discounted, with some financing provided for high-cost purchases, Pricing for business customers often varies from fixed price, includes far more special discounts and allowances, and involves complex financing. Business-to-business pricing may also involve forms other than a one-time price payment or fee, such as commissions or profit shating. Pricing internationally may also be more complex, particularly if the customer company ig multinational. PLACE In consumer markets, place is about getting the product to the customer in the right form (size package, quantity, etc.) at a useful time (availability of extended retail hours, short waiting periods for special orders, ete,) with minimum inconvenience associated with the place of purchase, and with possession ease (transfer of ownership, such as cash, credit, acceptance of personal checks), Form, time, place, and possession comprise the four types of economic utility and are @ major part of the value delivered to the customer. In consumer markets, providing economic utility often appears as satisfaction of consumer preferences in locational convenience, required purchase quantities/sizes, temporal convenience, and acquisition convenience. In the automobile example, the car company provides economic utility to consumers by locating dealer- ships near population centers or heavily trafficked shopping routes (usually clustered with other dealers—why is this?). The dealerships are set up to routinely process single car purchases in which the car is available immediately or can be quickly ordered. All the activities that facilitate purchasing the car (credit check, financing, registration, etc.) make it possible for the buyer to start the transaction and drive off with the car in a few hours. Economic utility is a necessary (though not sufficient), pivotal part of the concept of valve in business-fo-business markets which often takes on the form of supply chain management, inventory services, and material resource planning. Businesses design their marketing channels to provide maximum value to their customers while minimizing costs associated with the creation of economic utility. This is tue for both consumer and business-to-business channels. The major differences lie in the length and concentration of the channel. The quantities purchased in business-to-business ‘marketing are substantially larger than consumer purchases with timing of delivery a critical factor, Jeading to direct relationships between manufacturer and. ‘customer and eliminating Supply chain channel intermediaries. ee In the example of GM marketing to Avis to add to its fleet, the car manufac ea omtnalite, turer offers cars in appropriate quantities and assortment in the appropriate time cuirof the murserng mix interval. The right cars are shipped to the right locations, perhaps throughout the Overall, supply chain nation. Spare parts are made available in appropriate quantities as well. They also management works © are shipped to the Fight locations atthe right times, This is no easy accomplishment ame when car companies have production schedules to match with delivery schedules aoe eevee gs and the assembly plants are not all located near the myriad of rental company va ied cacudora outlets, The process of coordinating the flow of value and components that make up Inaxinized value—value the total offering —for example, from the iron ore mine through the steel fabricators, cas determined bythe from the rubber tree plantation through the installation of tires on the vehicles—is g eagle ile referred to as supply chain management. This effort involves many cornpanies, a ecvieen operating as both buyers and sellers, creating value tha is ulimately ceptable in sapeccfitanppy the eyes of the consumer. Seldom is a company fully vertically integrated to own chain. and manage the entire supply‘Chapter 1 + Introduction to Business-to-Business Marketing PROMOTION Business-to-business marketing places different emphasis on the parts of the promotion mix (advertising, sales promotion, personal selling, and public relations) than is commonly found in consumer marketing, Consumers are inundated with advertising as manu- facturers attempt to create awareness of and interest in their products. In consumer markets. advertising plays the largest role in the promotion mix. In business-to-business markets, the capabilities of advertising can seldom be leveraged, Generally, we know advertising as a monclogue—a one-way communication.” Feedback from the customer i$ not always encouraged and is not automatic. Advertisers must make a separate and purposeful effort 10 know how their customers have responded to promotion campaigns (or wait for sales results), In the new car example, the carmaker advertises heavily in television, radio, print, and the Internet to build brand awareness and beliefs. Dealers also advertise in television, radio, and newspapers to provide information and incentives to buy (sales promotion), Dealerships have salespeople who work with consumers to help them through the buying process. The relationship formed is usually a temporary one, focused on completing the transaction and getting the consumer happily through the first few weeks after acquiring the new car. In business-to-business markets, personal selling is the most used and effective type of promotion. Personal selling, as a dialogue, allows rapid and accurate feedback to the marketer. As noted earlier, products in business-to-business marketing are often the result of collaboration between the supplier and the customer. This collaboration requires the building of relationships between individuals in their respective organizations, necessitating a strong personal selling (dialogue) effort. The carmaker in the example (GM) may have a sales team that manages the account with the car rental company (Avis). The efforts of the sales team focus on providing information and personal service to the executives and employees of the car rental company involved in purchasing, managing, and maintaining the rental car fleet. ‘Two of the major differences, then, between consumer and business-to-business promotion are the closeness and the duration of the relationship. In business-to-business marketing the relationship is offen closer and longer lasting than in consumer marketing, with the individuals having developed personal ties, For many consumer products, contact between the consumer and the marketer is con- fined to advertising, the relatively short-lived transaction period, and maybe a consumer response to a follow-up survey. The marketing concept states that. de success the fom In the preceding section, we have discussed the traditional four Ps of the market- ‘tld be contextually ing mix, highlighting the differences between the four Ps in consumer marketing VAT Seuave, and the four Ps in business-to-business marketing. Configuration of the four Ps, qc eg whether in consumer marketing or business-to-business marketing, should be inucooninate way tat driven by the marketing concept. provides value to the ‘The marketing concept has been the philosophy a the forefront im the field <#\mer and do som of marketing over the las ily years. It says that, to be successful, a company Mit should understand customers" needs, meet those needs with a coordinated set of jvm mars for laine activities, and do so in away that meets organizational goals. A firm that operates 0 be) a market-driven’ under the culture of the marketing concept focuses all of its efforts and resources customer-driven firm is toward satisfying the needs of its customers. This is distinctly different from — “P/iig the marketing organizations that operate in a production, sales, or marketing department [77007 Mommie culture,” In each of these cultures, marketing is a distinct yet dependent part of the rm vonribures ws ihe organization, often viewed as an expense rather than as a generator of margin. marketing efjort Marketing Philosophy and Culture ‘concep, recognising thatConsumer demand is the Aieantey of goods 0 services desired 10 be expressed as a fun ‘of marker price) Derived demand is the demand experienced by the chain of suppliers and Chapter 1 + Introduction to Business-to-Business Marketing The marketi roles of other functions in meeting the needs of customers. ept implies that marketing is the driving foree in the organization, defining the 0 FURTHER DIFFERENCES BETWEEN BUSINESS MARKETING AND CONSUMER MARKETING Exhibit I-1 summarizes several potential differences between business marketing and consumer marketing. Depending on specific circumstances, all these factors may or may not be present in any aiven business situation. While all of these differences are discussed in the follow- ing chapters, a few are crucial for understanding the context of business-to-business marketing and are highlighted in the immediate discussion, The first is the nature ought. given marker of demand; of particular note is the difference between consumer demand and derived demand. tions (usu Derived Demand and Business-to-Business Supply Chains ‘The demand for nylon fibers by consumers does not exist. Nylon is, however, demanded to spin yarn because yam is demanded to weave fabric because fabric producers that contribue i demanded to make clothes; all of these demands are derived demands—a result tw the erection of a road offering, Wie initial consumer demand, 0 will not be any dem on the chin of suppliers Supply chain isthe chain thirty years, Manufacturers’ and of entities and a that results in products provided to end-users of the ultimate consumer demand for nylon clothing items. Demand in business markets is derived from consumer demand. As we mentioned previously. the chain of organizations, operations, and transactions traceable back to raw materi als extracted from the earth has come to be known as the supply chain. Supply chains have become very important to business competition over the last twenty 10 xrvice companies’ internal operations received the most attention in the 1980s in order to meet global competition. Through concerted efforts aimed at process improvement, global companies squeezed id ‘arts with aw materials @ great deal of cost out of their internal operations, and at the same time realized ‘and traces the low of improved product and service quality. With these improvements in place, the cost partials cand sub of materials, components, and supplies rose to account for welll over half the sell- assemblies through suppliers. manufacturers 2 price of produc "| at the same time, variation in supply timing and vagaries of supply quality accounted for a sizable share of product quality mediaries 10 the final problems. So in the late 1980s and early 1990s attention focused on improving customer Inthe exes of and integrating supply processes. akin praipaleaos ‘The derived nature of demand has several consequences that characterize supply chains are stable vei flexibfe enough 10 ‘meet varying market business-to-business markets. Among these are the bullwhip effect and volatility of demand. Supply chain management is intended to mitigate the problems demands, (Compare caused by these effects and so make the whole supply chain more competitive, this concept tothe value nenwork, iniroduced in THE BULLWHIP EFFECT Because of the derived nature. demand in business markets is leveraged—greater swings occur than in consumer markets—thus the term volatile in Exhibit 1-1. A small percentage change in consumer markets leads to much greater changes in business markets. The volatility of derived demand is partially explained by the bullwhip effect.'? As consumer demand varies, either as a result of seasonality or other market factors, “upstream” suppliers of services and components that contributed to the total offering experience a leveraged impact. This leveraging can cause wide swings in upstream demand as inventory levels, order chapter)Chapter 1 + Introduction to Business-to-Business Marketing Business-to-Business Consumer Market Structure + Geographically concentrated + Geographically dispersed + Relatively tewer buyers * Mass markets, many buyers + Oligopolistic competition + Monopolistic competition Products + Can be technically complex * Standardized + Customized to user preference * Servioe, delivery, and availabilty only some + Service, delivery, and availabitity very important ‘what important * Purchased for other than personal use + Purchased for personal use Buyer Behavior + Professionally trained purchasing personnel * Individual purchasing + Functional involvement at many levels ‘+ Family involvement, influence * Task motives predominate + Socialipsychological motives predominate Buyer-Seller Relationship Expectations + Technical expertise an asset + Less technical expertise ‘= Interpersonal relationships between + Nonpersonal relationships buyers and seliers + Little information exchanged * Significant info exchanyed between between participants on a personal level participants on a personal fevel * Changing, short-term relationships + Stable, long-term relationships encourage ‘encourage switching foyalty Channels © Shorter, more direct + Indirect, multiple relationships * Organization involvement as part * Littleno customer supply chain involvement Promotion + Emphasis on personal selling, dialogue + Emphasis on advertising, monologue Most communications invisible to the consumer + Companies compete for visibility and * Consumer seldom aware of business-to- Awareness by consumer market business brands and companies Price * Complex purchasing process or competitive * Usually list or predetermined pricas bidding, depending on purchase type Demand * Derived + Direct * Inelastic (short run) * Ebstic + Volatile (leveraged) + Discontinuous Less volatile EXHIBIT 1-1 Business-to-Business versus Consumer Marketing Summarizing the Differences10 Chapter 1 + Introduction to Business-to-Business Marketing timing, and order quantities adjust to the new level of end-use demand, The initial correction is usually greater than the difference between the old and new demand levels, This is not solely a result of human overreaction. The ordering and inventory systems throughout the supply chain must make rapid adjustments and work through inventories that are too high or add extra product Lo inventories that are too low for the new demand conditions.'* ‘A good example of the bullwhip effect can be seen in the story in Exhibit 1-2, a story about Ford and Firestone. Because of the recall of tires, Ford stopped production in its assembly plants. This had a ripple effect back through the supply system feeding the assembly plants. Ford “sneezed,” and the industry “caught a cold. In response to the tremendous need to find replacements for 6.5 milion tires recalled by Firestone in ‘August of 2000, Ford Motor Company halted production of its popular Explorer sport utility vehicles (SUV) and Ranger pickup trucks at three facilities in August, 2000. (Ford recalled an additional 3 million Firestone tires on its ov, without Firestone cooperation, in May 2001.) The tires, originally ‘intended for use in approximately 3 percent of annwal production of these vehicles, were redirected to the replacement market, Most of the recalled tires had beer used as original equipment on Ford SUVs anid were also the primary tie installed on current production models. The preduction shutdown was estimated to cost Ford $100 million in profits tor the quarter. Overall, the Firestone tire recall was | expected to reduce Ford 2000 protits by $500 million. {The added 13 million tires recatied in 2001 pushed the total expense to Ford for the tire problem to near $3 billion.) Ford and Firestone ate not the only companies whose profits suffered from the production shutdown, Ford builds the largest selling SUVs in their markel. Each vehicle is comprised of many Components and systems provided by several major automotive suppliers. Though not common house: hold namos as they are not major participants in. consumer markets, companies such as Dana, Eaton, ‘ArvinMeritor, TRW, Lear, and Visteon are major suppliers to Ford SUVs, many of the items specifically ‘designed and bullt for these vehicles and not used by other manufacturers. In a dramatic example of the volatility of demand in business-to-business markets, all of these suppliers announced reduced ‘earnings, either partly or substantially a result of the Ford production halt. Eaton Corporation reported a 49 percent drop in third-quarter net, partly because of the Ford production cuts (previous reports set the reduction attributable to Ford at 10 percent of quarterly results), ‘and Dana Corporation said its third-quarter results were 82 percent below the prior years results. While fot entifely attributable to the Fard production halt (Dara is @ supplier to the heavy truck market, also in a slump), Dana announced it wauld cut 2000 jobs from tts work force of 80,000 in an effort to hoost fourth-quarter earnings The impact of the production shutdown does not end with components and systems. The International Natural Rubber Organization (INRO) reported that rubber producers who sold rubber to INRO as buffer stock are now enthusiastic bidders to put the inventory back on the market. The now ‘defunct INO had been seeking bidders for its. 136,000-metric tons of buffer stock. Heavy rains in Indonesia had cut raw material supplies at the same time there was an increased demand from tire makers to replace the recalled tires, Of course, there were additional complications. While rubber “producers were interested in buying back the stock they sold to INRO, they were alse concerned about ‘possible product degradation dle to less than ideal storage conditions, The Firestone tire recall had Generated concern about using old rubber to manufacture tires. As a result, any firm that purchased ‘the material was told that it was INRO butfer stock. One rubber trader related the feeling that INFO rubber may be old but it could stil be used in low-dernand applications, such as bicycle tites, canvas shoes, tires for vehicles used in China (low-speed applications), or on agricultural vehicles EXHIBIT 1-2 Assembly Lines (and Tires) Stop Rolling Sources: The Wall Street Journal, various articles (September-December 2001); Business Week (September 18, 2000).Chapter 1 + Introduction to Business-to-Business Marketing More recently, a slowdown in orders for U.S. companies” automobiles has resulted in bullwhip effects in the auto parts supply chain. Reduced demand and competitive pressures pushed U.S. automakers to slow down their payments to parts suppliers creating an even tighter cash situation in the supply chain, Coupled with rising energy costs, many parts suppliers, such as Collins & Aikman and Metaldyne, sought debt financing at elevated interest rates (0 survive the cash crunch. Others, such as Tower Automotive Inc., and Intermet Corp., Sought protection from creditors through Chapter 1! bankruptcy.'! Even Alcoa, Inc., a supplier of aluminum to the automakers, faced financial pressure, even though Alcoa's markets are diversified. This diversification gives Alcoa the ability to balance poor performance in one sector with better performance in other industries. It also gives Alcoa more leverage in setting prices, since it is not completely dependent on one industry. Still, reduced demand from automakers and rising energy prices combined to weaken Alcoa's performance in early 2005.5 Another fi " ctor in the leveraged, discontinuous demand of business Discontinuous demand ‘markets is the issue of capacity throughout the supply chain resulting from the ihe cimiion in which desire of manufacturers to closely monitor capacity utilization, When a consumer tty demanded i goods manufacturer experiences an increase in demand, additional raw materials and supplies are consumed. Suppliers of these items experience greater demand and are required to increase production capacity, When the demand on suppliers marker condiions changes up or down In response to chirnges the murket makes large reaches a level that is the maximum that existing facilities can efficiently produce, Te rransitonjrora one the capitalization of new production capability is required, resulting in a disconti- rer sitet another nuity in supply capability. If the supplier elects to invest in additional capacity, the “Hts Mase addition not only provides increased capacity to the marketplace of the suppliet ‘mutt cromenel but also creates demand in the markets of producers of manufacturing equipment changes in demand and other production and infrastructure-related products. In this scenario, the inereased demand for manufacturing capability in the first supply chain impacts the supply chains for several other markets, Multiply this scenario by all manufacturers who experience an increase in business and thus increase the supply requirements of all their suppliers, and the power of the leverage of consumer demand is obvious. A small change in consumer behavior can impact an entire economic structure, that is, “a rising tide raises all ships.”!® While demand fluctuates more in business markets, it is also inelastie in Elasticity of demand increments rather than the short term. Your customer, a manufacturer who has incorporated your prod- refers 1 the perventuse Uuct into the design of its own offering fo customers may not be able to substitute “sein guantre another component for that item, particularly if, as a business marketer, you have | “emittded relative to managed to maintain a significant differentiation from your competitors. If the item's cost is driven up by unforeseen factors, the manufacturer has the choice of —pmduees u change in continuing production by paying the higher price or ceasing the manufacturing demu tha isles in process, alienating its own customers who may be expecting delivery. Your M*euve thun rhe customer's reluctance to alienate its customers is a major source of inelasticity: Ifthe change in the supply situation that caused the price increase is expected 10 continue, the manufacturer eliminates use of the component by design in the next generation of its product offering, be inelastic VOLATILITY The bullwhip effect, or leveraging, described here can help us. understand logistics-oriented supply chain effects on business-to-business demand, The bullwhip effect, however, is only part of the cause of volatility in business-to-business markets. Because of the volatility in business-to-business. demand, small changes in consumer buying attitudes are closely watched as potential indicators of changes in our economy. The inelastic nature of the percentage change in price. price change percentage price change, then demand is satd to412 Chapter | + Introduction to Business-to-Business Marketing derived demand may lead the uninitiated business marketer to a false sense of security, believing that the short-term persistence of demand translates into long-term stability We have seen many examples in history in which sudden environmental chenges have destabilized entire markets. Rapid changes in the economy can have medium-term—or faster— impacts on derived demand. The almost 30 percent drop in consumer purchases of large automo- biles in 1974 and again in 1979, coincident with each oil crisis, is an example of a fast-actin: economic event. Many suppliers to the automotive industry found orders stopping immediately, not to return until it was financially too late for the supplier to recover. Again, in the Ford and Firestone example discussed in Exhibit 1-2, the situation in which Ford ceased production of a very prof- itable, high-volume vehicle was caused by a combination of events. The resulting lower earnings reported by suppliers of components for the Ford Explorer could not have been anticipated A relatively slow-acting event was the “dot.com bust” that occurred in 2001-2002. What started as some disappointing earnings reports for publicly traded e-commerce companies turned into a full-scale recession whose impacts lasted several years. When stock prices initially began falling in the spring of 2001, many analysts felt that this “correction” was necessary and the “dip” would turn around by year’s end. It didn’t. Other factors and events—the terrorist attacks of September 2001, scandals at Worldcom and Enron, for instance—exacerbated the worsening economy. The effects of the downturn spread to other sectors, as well as globally. The effects were slowed and mitigated within the United States due to lower interest rates and tax cuts. which kept consumers consuming. Eventually, in 2004, businesses increased their capital spending and began slowly hiring back workers. Complexity--A Rationale for Relationship Marketing One of the major implications of derived demand is that business marketers must understand their customers’ customers. Only if marketers are customer focused are they able to fully understand their customers’ network of derived demand, The business marketer can design products and services to fully benefit customers and, hopefully, anticipate changes in levels of demand insti- gated by the customers’ market. The impact of the discontinuous nature of demand can be lessened by business marketers’ participation in the relationship with the customer on a conti- nuing, ongoing basis. If, as a result of its complacency, a business marketer allows a competitor to take advantage of its inattention by offering a lower price or better product, the loss of short-term business could translate into lost opportunities to be the supplier of the customer's next generation needs, Consequently, business marketers must be diligent in their efforts to continually reinforce buying decisions and create more value for their existing customers. ‘Another factor that separates business-to-business markets from consumer markets is the complexity created by the various attributes that make up the total Outsourcing Is the purchasing of part of the ‘company's continuing business offering, Partly in response to this complexity is the complex nature of ‘peraons, such as the buying decision process. Complexity on both sides is obvious when one stud- recruiting ies the outsourcing of product research and development, the acquisition of such ea things as computer information systems, manufacturing facilities or equipment, eee or anew power plant. However, on the other end of the spectrum lie products that iaecoinplat the Wek are not very complex, such as office supplies. While the products themselves are internal: not particularly complex, attributes of the offering such as quantity discounts, plementary products, and delivery schedules create complexity. All in all this pervasive complexity reinforces the differences between business-to-business and consumer marketing. The differences that we have discussed do not stand alone but combine to create unique difficulties and opportunities.‘Chapter 1 + Introduction to Business-to-Business Marketing OPPORTUNITIES THROUGH RELATIONSHIPS _ In business-to-business markets, additional product design effort is often needed to ensure that a product’s complexity will enhance customer value rather than detract from it. The dialogue between customer and marketer must quickly convey complex concepts that are generally more difficult o understand than those required in consumer marketing. As already noted, communications in business marketing must often focus more on personal selling than in consumer marketing. The sales force becomes the focal point for developing the relationships that will enhance the position of the selling organization in its attempt to address the complex and diffused buyers’ decision processes. Marketing based on building close relationships with customers becomes the glue that holds all the other pieces together to create value by ensuring that the customers’ uniqueness is accommodated. In contrast, relationships in consumer marketing are often part of “customer service” and are often treated as sources of costs rather than enhancement to interaction with customers One effect of the necessity for close relationships is that switching costs—the costs of switching suppliers—become very high for both the customer and the supplier, In consumer markets, switching costs usually are not nearly so constraining. High switching costs in business- to-business markets can result from the investment that the partners make in matching buying, ordering, inbound logistics, and delivery systems to each other—the creation of an efficient, specialized supply chain, High switching costs can also come from the working relationships established on a personal level, which may be less tangible than the logistical linkages. However, such personal linkages can be just as close and binding and just as difficult to break. Because business-to-business customers realize that commitment to a supplier creates such high switching costs, they become very careful about whom they choose as suppliers and often establish back-up, second-source relationships with other suppliers. Meanwhile, suppliers seek out other customers so that they are not so reliant on a single large customer, Once all these primary and secondary relationships are established, the high switching costs make the supplier-customer relationships difficult to split, making it difficult for new partners to enter the picture. Partners need to realize, though, that they cannot abuse these locked-in relationships with poor quality or service or unten- able demands, Durable partnerships break at times and the aggrieved partner makes it difficult for the penitent party to re-establish the relationship. Market Structure Another major difference between business-to-business and consumer markets is that, usually, business marketers face markets with a much smaller number of customers than consumer marketers face, The reasons for this are quite simple, First, there are simply Fewer organizations in existence than there are consumers. Second, organizations dilfer greatly in what they do and how they do it. Hence, their needs for products and services differ greatly. This means that many market segments (discussed in Chapter 7) have relatively few organizations populating them. Having many market segments with differing needs implies that mass marketing approaches will not be particularly useful, Our natural instincts as consumers, conditioned to mass marketing approaches, are often contrary to effective business-to-business marketing logic. Mass promotion is not particularly efficient or effective as a tool to communicate with the business-to-business market. In consumer markets, the high cost of mass media is spread out over a large audience such that cost per contact is low. If mass media do not or cannot reach enough prospective customers, due to small populations in target segments, then cost per contact remains high and more efficient means of communications must be sought. This high- cost business model analogy extends to other aspects of marketing as well. Since business 13