Unit II

UNDERSTANDING INDUSTRIAL MARKETS AND ENVIRONMENT

(Industrial Marketing Environment, Types of
Customers, Types of buying situations, Segmentation)

LEARNING OBJECTIVES
•Know types of environment and strategies to manage external
environment •Understand the types of industrial customers as well as industrial goods and services. •Know the marketing implications for different types of

customers and products. •Understand the purchasing orientations and practices of

industrial customers.

Industrial Marketing Environment
• Environment refers to the aspects of surroundings. Therefore marketing Environment may be defined as a set of conditions – Social, Legal ,Economical ,Political or Institutional that are uncontrollable in nature and affects the functioning of organization or its particular department • Market is ever-changing, complex and Global in scope • Environment has two components: 1. Internal Environment 2. External Environment

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Industrial Marketing Environment

Understanding Industrial markets

Buyer Seller Interface

Publics Macro Environment

Govt. influences

Types of Environment
AIR & WATER POLLUTION ECOLOGICAL SOLID WASTE DISPOSAL CONSERVING NATURAL RESOURCES WATER, POWER, TRANSPORTATION PHYSICAL LOW-COST, SKILLED MANPOWER COMPANY LOCATION, IMAGE / REPUTATION ENVIRONMENT INTERNAL (S&W ANALYSIS) R & D & PRODUCTION FACILITIES H R & FINANCIAL RESOURCES MARKETING EFFECTIVENESS MICRO (AFFECTS A PARTICULAR FIRM) CUSTOMERS & COMPETITORS SUPPLIERS ECONOMIC MACRO (AFFECTS ALL FIRMS) TECHNOLOGICAL GOVT., POLITICAL, LEGAL CULTURAL & SOCIAL PUBLIC - PRESS, SHARE HOLDERS, INVESTORS & PUBLIC INTEREST GROUPS

EXTERNAL (O&T ANALYSIS)

Physical and Ecological Environment
Ecological Environment • Causes a problem • Due to industrial untreated waste • Use of pesticide and chemicals • Remedies • Government regulation ,emission norms are stringent & industry has to adjust. • Industries response to the welfare activities • • Bhopal gas tragedy, changes in the law to use MIC as an intermediary. “Right to Know”  Companies have to furnish details of the hazardous

products made & used by them.
Physical Environment – Steel plants need iron ore, water & lime stone deposits for setting up. MP, Bihar and Orissa have the concentration of steel plants. Labour intensive Industry in Ludhiana & Punjab for low cost labour

Internal & External Environment
Internal Environment

The purpose of carrying out internal environment analysis is to
define periodically the specific strength and weaknesses of the company. It involves all the factors of the firm including marketing, finance, R&D, manufacturing, organisation structure and human resources .

External Environment
Macro and micro external factors changing continuously. This changes spin out new opportunities and threat.

Industrial Marketing Environment Micro Environment
1. Customer/ Competitor :

An industrial marketer need to gather information on competitors strategy,
objective , strength and weaknesses and reaction pattern The competitive environment is characterised by market structure The type of market structure determines the strength of competition 2. Suppliers: The servival and success of both supplies and buyes depend on their 1. 2. 3. Interdependent relationship Commitment to quality and service Knowledge of external environmental factor

Any interruption in the flow of inputs affect the entire industrial chain

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Industrial Marketing Environment Macro Environment
1. Economics :


• • • •

Features of the economic environment that are relevant to the marketers
include inflation , debt , shortage, and unemployment Increased demand for oil led to increase in prices of oil in the world markets Changes the cost base of most oil based companies & also changed the demand pattern of automobile ( petrol to diesel ). Government policies like subsidizing diesel at the cost of petrol Change in economic condition do not affect all the sectors of market Ex.Change in interest rate affect more to auto industry than textile or other

Industrial Marketing Environment Macro Environment
2. Government / Political / Cultural/ legal influences

increase in global competition , industrial marketer needs to understand the action
of government increases Hire and fire policy of west Vs militant trade unionism & job protection in India

Political Environment includes the stability of govt. , their policies towards the
business & international trade restrictions 3. Technological influences : Typewriters manufacturers had to shift market focus,

change products etc after PC‟s and word processors became common
According to recent technological forecast CAD & CAM(computer aided design & manufacturing )& robotic will affect future marketing

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Industrial Marketing Environment Macro Environment
4. Public:

It consists of various group who help or hinder an industrial organisations effort
to serve markets. Some of these group are press, institutional investors shareholders banks public interest group and general public

5. Cultural and social : The impact is more than in consumer market than industrial markets. Industrial firm decide to have joint ventures with foreign companies or decide to set up factories abroad, there is a need to study the cultural and social aspects of the societies in those countries to ensure the compatibility

Classification Of Industrial Customers
Industrial customers are classified according to following concepts • Classification is done depending upon purchase procedure

adopted by the customers
• Type of firm and its objective of existence is also considered for classification • Purpose of purchase

Classification of Industrial Customers
INTERMEDIARIES / MIDDLEMEN (DISTRIBUTORS) COMMERCIAL ENTERPRISES OEMS USERS

GOVERNMENT CUSTOMERS INDUSTRIAL / BUSINESS CUSTOMERS INSTITUTIONAL CUSTOMERS

PUBLIC SECTOR UNITS (BHEL) GOVT. UNDERTAKINGS (RAILWAYS, DEFENCE UNITS) PUBLIC INSTITUTIONS (GOVT. HOSPITALS) PRIVATE INSTITUTIONS (SCHOOLS, COLLEGES)

MANUFACTURING UNITS (SUGAR, MILK) CO-OPERATIVE SOCIETIES NON-MANUFACTURING UNITS (BANKS, HOUSING)

1. Commercial Enterprises
• Commercial enterprises are private sector, profit-seeking organisations such as IBM, General Motors,etc. • Purchase industrial goods and/or services for purposes other than selling directly to ultimate consumers. • They purchase products for different uses, it is more useful from a marketing point of view to define them in such a way as to understand their purchasing needs at the time of examination of the varieties of products they purchase and how marketing strategy can be developed to meet their needs. • It is more logical to look at commercial enterprises:

• (i) industrial distributors or dealers,
• (ii) original equipment manufacturers (OEMs), and • (iii) users.

Purchasing Practices Adopted by Commercial Enterprises
• Technical & Commercial dept are involved

• Main intention is to improve operational efficiency & contribute to firm‟s
competitive advantage • Purchasing procedure comprises identifying and selecting competent

vendor
• In many cases buyer is required to provide know-how to improve its own products efficiency and quality.

• Many large firms provide facilities or ask them to secure sit near to their
future project sites for timely supply. TATA Motor has set up vendor base near to their Sanand Facility for

Key-vendors and shifted all vendors from Singur to Sanand

A. Industrial Distributors and Dealers
• Industrial distributors and dealers take title to goods;
• They are the industrial marketer‟s intermediaries; • Acting as wholesalers or even retailers

• The intermediaries not only serve the consumer market but also they serve
other business enterprises, government agencies, or private and public institutions.

• They purchase industrial goods and resell them in the same form to other
industrial customers

B. Original Equipment Manufacturers (OEMs)
• These industrial customers purchase industrial goods to incorporate OEMs into the products they produce. For instance, a tyre manufacturer (say,

MRF), who
• sells tyres to a truck manufacturer (say, TELCO), would consider the truck • manufacturer as an OEM. Thus, the product of the industrial marketer

(MRF)
• becomes a part of the customer‟s (TELCO‟S) product.

C. Users
• An industrial customer, who purchases industrial products or services, to support its manufacturing process or to facilitate the business operations is referred as a

user. For example, drilling machines, press, winding machines, and so on are
the products which support manufacturing process, whereas the products which facilitate the operations of business like computers, fax machines, telephones,

and others.
• There may be overlapping of categories means a manufacturer can be a user or an OEM. For example, a car manufacturer buys a drilling machine to support the

manufacturing operation and is referred to as a user. The same car manufacturer
also buys batteries which is incorporated into cars and hence, it can be also referred to as an OEM.

2.Government Customers
• In India, the largest purchasers of industrial products are Central

and State Government departments, undertakings, and agencies,
such as railways, department of telecommunication, defense, Director General of Supplies and Disposal (DGS&D), state transport undertakings, state electricity boards, and so on. • These Government units purchase almost all kind of industrial products and services and they represent a huge market.

Government Customer cont…
• Government department follows rate list and vendor list as approved by DGS&D frequently purchased items. • Some department have their own approved vendor list and rates for supply. All divisions belonging to that firm follow those rate list. • Main Tasks / Procedure : Registration of the firm & its Products, Tender Advertisements, no negotiation in “ Open” tenders, negotiations done in closed / limited tenders. Preparations of comparative statements.

• Orders Finalized on lowest bidders (suppliers offering Lowest prices /
Landed Costs

3. Institutions
• Public and private institutions such as hospitals, schools, colleges, and universities are termed as institutional customers. • Some of these institutions have rigid purchasing rules and others have more

flexible rules.
• An industrial marketing person needs to understand the purchasing practice of each institute so as to be effective in marketing the products or services.

4. Cooperative Societies
• An association of persons forms a cooperative society. It can be manufacturing units (e.g. Cooperative Sugar Mills) or non-manufacturing organisations (e.g. Cooperative Banks, Cooperative Housing Societies). They are also the industrial customers.

• If the Institute is a Govt. Hospital Purchasing practices of Govt. units
Followed Similarly a private School / College follows practices of commercial enterprises

• However, better to study each major institution

Classification of Products & Services
RAW MATERIALS (IRON ORE, CRUDE OIL) MATERIALS & PARTS (ENTER PRODUCT DIRECTLY) MANUFACTURED MATERIALS (STEEL, FUEL OIL) COMPONENT PARTS (BEARINGS, TYRES) SUB ASSEMBLIES (EXHAUST PIPE IN M.C.) INDUSTRIAL PRODUCTS / SERVICES CAPITAL ITEMS (USED IN PRODUCTION / OPERATIONS) SUPPLIES / SERVICES (TO SUPPORT OPERATIONS) LIGHT EQPT (COMPUTERS, HAND TOOLS) HEAVY EQPT (MACHINES, TURBINES) PLANT/BUILDING (FACTORIES, OFFICES) SUPPLIES (LUBRICANTS, ELECTRICAL ITEMS) SERVICES (LEGAL, COURIER)

Buying Situation Types
• New purchase (or New task),
• Change in supplier, and • Repeat purchase;

New Purchase
• The industrial buyers buy the item for the first time in this situation. The need for a new purchase may be due to internal or external factors. For

example, when a firm decides to diversify into new purchase situations the
buyers have limited knowledge and lack of previous experience. Therefore, they have to obtain a variety of information about the product, the

suppliers, the prices and so on. The risks are more, decisions may take
longer time, and more people are involved in decision making in the new purchase decisions.

Change in Supplier
• This situation occurs when the organisation is not satisfied with the

performance of the existing suppliers, or the need arises for cost reduction or
quality improvement. The change in supplier may also be necessary if technical people in the buying organization ask for changes in the product

specification, or marketing department asks for redesigning the product to
gain some competitive advantage. As a result, search for information about alternative sources of supply becomes necessary. Even though, certain attributes or factors can be used to evaluate the suppliers. There may be uncertainty regarding the supplier who can best meet the needs of the buying firm. Therefore, the modified rebuy situation occurs mostly when the buying firms are not satisfied with the performance of the existing suppliers

Repeat Purchase
If the buying organization requires certain products or services

continuously and products/services had been purchased in the past then the
situation of repeat purchase occurs. In such a situation, the buying organisation reorders/places repeat orders with the suppliers who are

currently supplying such items. This means that the product, the price, the
delivery period, and the payment terms remain the same in the reorder, as per the original purchase order. This is a routine decision with low risk and less information needs, taken by a junior executive in the purchase department. Generally, the buying firms do not change the existing suppliers if their performance is satisfactory.

Industrial market segmentation
• Industrial market segmentation is a scheme for categorizing industrial

and business customers to guide strategic and tactical decision-making,
especially in sales and marketing. While government agencies and industry associations use standardized segmentation schemes for statistical surveys,

most businesses create their own segmentation scheme to meet their
particular needs. • While similar to consumer market segmentation, segmenting industrial

markets is different and more challenging because of greater complexity in
buying processes, buying criteria, and the complexity of industrial products and services themselves. Further complications include role of financing, contracting, and complementary products/services.

Importance of Market Segmentation
• The goal for every industrial market segmentation scheme is to identify the most significant differences among current and potential customers that will influence their purchase decisions or buying behavior, while keeping the scheme as simple as possible • This will allow the industrial marketer to differentiate their prices,

programs, or solutions for maximum competitive advantage

Two-Stage Market Segmentation
(Wind & Cardozo Model)
• Yoram Wind and Richard Cardozo (1974) suggested industrial market segmentation based on broad two-step classifications of 1. 2. macro-segmentation and micro-segmentation

• This model is one the most common methods applied in industrial markets today. It is sometimes extended into more complex models to include multi-step and three- and four-dimensional models.

Macro-segmentation
• Macro-segmentation centres on the characteristics of the buying organisation [as whole companies or institutions], thus dividing the market by: 1. 2. 3. 4. 5. 6. 7. Company / organization size Geographic location SIC code (standard industry classification), Purchasing situation Decision-making stage. Benefit segmentation Type of institution

Macro-segmentation
• Company / organization size: one of the most practical and easily identifiable

criteria, it can also be good rough indicator of the potential business for a company
• Geographic location is equally as feasible as company size. It tells a company a lot about culture and communication requirements.

• SIC code (standard industry classification), which originated in the US, can be a
good indicator for application-based segmentation. However it is based only on relatively standard and basic industries and product or service

• Ex. classifications such as sheet metal production, springs manufacturing,
construction machinery, legal services, cinema‟s etc. • Different technologies or have innovative products are classified under the „other‟

category

Macro-segmentation
• Purchasing situation, i.e. new task, modified re-buy or straight re-buy. This is another relatively theoretical and unused criteria in real life. As a result of increased competition and globalisation in most established industries, companies tend to find focus in a small number of markets, get to know the market well and establish long-term relationship with customers. • Decision-making stage. This criterion can only apply to newcomers. In cases of long-term relationship, which is usually the objective of most industrial businesses, the qualified supplier is normally aware of the purchase requirement, i.e. they always get into the bidding process right at the beginning

Macro-segmentation
• Benefit segmentation: The product‟s economic value to the customer which is one of the more helpful criteria in some industries • It “recognises that customers buy the same products for different reasons, and place different values on particular product features • For example, the access control industry markets the same products for two different value sets: Banks, factories and airports install them for security reasons, i.e. to protect their assets against. However, sports stadiums, concert arenas and the London Underground installs similar equipment in order to generate revenue and/or cut costs by eliminating manual ticket-handling.

Macro-segmentation
• Type of institution, e.g. banks would require designer furniture for their customers while government departments would suffice with functional

and durable sets.
• Hospitals would require higher hygiene criteria while buying office equipment than utilities

• And airport terminals would need different degrees of access control and
security monitoring than shopping centre„s

Micro-segmentation
• Buying decision criteria • Purchasing strategy, • Structure of the decision-making unit • Perceived importance of the product to the customer‟s business • Attitudes towards the supplier

Micro-segmentation
• Buying decision criteria :product quality, delivery, technical support, price, supply continuity • Purchasing strategy, which falls into two categories • First, there are companies who contact familiar suppliers (some have vendor lists) and place the order with the first supplier that fulfils the buying criteria. These tend to include more OEM‟s than public sector buyers. • Second, organisations that consider a larger number of familiar and unfamiliar suppliers, solicit bids, examine all proposals and place the order with the best offer

Micro-segmentation
• Structure of the decision-making unit can be one of the most effective

criteria. If this is the case, the supplier can develop a suitable relationship with
the person / people that has / have real decision-making power. For example, the medical equipment market can be segmented on the basis of the type of institution and the responsibilities of the decision makers • Perceived importance of the product to the customer’s business automotive transmission, or peripheral equipment, e.g. manufacturing tool • Attitudes towards the supplier: Personal characteristics of buyers (age, education, job title and decision style) play a major role in forming the customers purchasing attitude as whole.

Nested Approach to Segmentation
(Bonoma & Shapiro Model)
• “They proposed the use of the following five general segmentation criteria which they arranged in a nested hierarchy: 1. 2. Demographics: industry, company size, customer location Operating variables: company technology, product/brand use status, customer capabilities 3. Purchasing approaches: purchasing function, power structure, buyerseller relationships, purchasing policies, purchasing criteria 4. 5. Situational factors: urgency of order, product application, size of order Buyers‟ personal characteristics: character, approach

Case Study
• Since the mid-1980s, Sona Steering Systems (later renamed as Sona Koyo Steering Systems Ltd) has been a competitive player in the Indian auto component industry. The firm has made remarkable progress in competitiveness through numerous initiatives over the past two decades. Starting as a singlesource supplier of simple mechanical steering systems, the firm has systematically improved competitiveness, evolving into a capable Deming Prizewinning firm with capabilities across the industry value system. By November

2005, the firm had many customers and, for some of them, had