Sales and marketing under different business models

Petri Parvinen

Sales Management

HSE+TKK, 23.4.2009

2

’Business Model Evolution’

ProjectsProjects

ProductsProducts

ServicesServices

• Economies of scale• Resource building

• Economization• Specialization

• Economies of scale• Resource building

• Economization• Specialization

• Commodization and price erosion

• Mass tailoring• Product life cycles

• Commodization and price erosion

• Mass tailoring• Product life cycles

3

Three Basic Business models

• Project business (Cash flow only when agreed)– Relationship management and marketing skills, Selecting the right

customers, Setting limits to what is done, Understanding customer value creation processes, Reliability of sales and distribution

• Product business (I’d like one in exchange for €)– Quality and completeneness of productization, Understanding buyer

behaviors, Capacity of sales and distribution, Active, aggressive and driven sales people, Partnering and alliances to satisfy customer needs

• Service business (Cash flow unless otherwise agreed)– Process engineering and process management, Modularisation,

Customer intimacy, Installed customer base

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Why is productization such an issue?

1. Scale benefits• R&D

• Production

• Sales

• Marketing

• Distribution

2. Concentrating on deep but narrow competences

3. Finnish (or other lousy) marketing culture

4. Lack of planning, systematic processes and analytical judgment in marketing

5

What are the key issues in project marketing?

Project marketing success factors (Cova & Holstius 1993, Huerner 2004)

• Structural efficiency and ability to invest• Ability to create local presence• Entrepreneurial attitude towards risk• Referencing• Demand co-creation with customers

6

Project marketing vs. product marketing

• After the chasm, everything changes– Customers– Competition– Channels

Tul

ovir

ta ja

liik

evoi

tto

Early market

The Chasm

The Bowling Alley

The Tornado

Main Street

End of Life

PROJECTMARKETING

PRODUCT MARKETING

7

PROJECT VS. PRODUCT BUSINESS

PROJECTBUSINESS

PRODUCTBUSINESSNUMEROUS IT

START-UPS

8

Case: SAS Institute - ABC Tech

• Activity based costing systems and projects• Both initally in project business• SAS new strategy productization• SAS buys ABC in 2001• Attempts to convert ABC into product business• Separation of product and project based businesses as

a result

9

Project Marketing vs. Product Marketing

• Features of project marketing– The product is a unique project– Specific to a certain environment– High degree of services– Complex client relationships on a

number of different levels– Interaction for a long period of

time– Few, well-known customers– Marketing is patchy through time– Product branding assumes low

priority (corporate branding = key)– Local, known, closed and

networked markets– Ad hoc project organizations

• Features of product marketing– Standard / modular product– Compatible with multiple

environments– Low service content– Simple, clear customer

relationship– Short interaction with customer– Many faceless customers– Continuity in marketing– Product branding is central– International, open and

competitive markets– Market, product or matrix

organizations

10

Project Marketing vs. Product Marketing

• Critical success factors in project marketing

– Competence in relationship marketing

– Picking the right clients

– Clearly demarcated concepts

– Knowledge of clients’ business processes

– Reliability of distribution channels

• Critical success factors in product marketing

– Productization capability

– Knowledge of buyer behavior

– Distribution channel capacity

– Active and aggressive marketing people

– Partnerships and alliances

11

Project Marketing vs. Product Marketing

• Critical success factors in project marketing

– Competence in relationship marketing

– Picking the right clients

– Clearly demarcated concepts

– Knowledge of clients’ business processes

– Reliability of distribution channels

• Critical success factors in product marketing

– Productization capability

– Knowledge of buyer behavior

– Distribution channel capacity

– Active and aggressive marketing people

– Partnerships and alliances

12

Service business models

• Continuum:

• Special features of industrial services– Legal and contracting issues– Operative liability– Project financing

Strategicoutsourcing

Strategicoutsourcing

O&M (operate and

maintain)

O&M (operate and

maintain)

Long-term exclusive

contracting

Long-term exclusive

contractingOMRUOMRU

Emergency & support contracts

Emergency & support contracts

Monthly fee

contracts

Monthly fee

contractsSpot servicesSpot services

13

Ekokem

• Customer lenses determine business model in waste business– Politician Service– Corporation Service– Infrastructure department Product– Government Project

14

Case: ABB

• Corporation-wide transformation process since 1992

• Aim to increase service content in all businesses• Driving force behind business model

transformation = lowering hardware prices schematically

• Aim to increase share of services surrounding own hardware from 20% 80%

15

Case: ABB

• ABB : Typical office building cost structure in 40 years: – Use 50 %– Renovation 25%– Financing 15 %– Building 10 %

• Services adhering to this:– Follow-ups and monitoring – Tech maintenance– Modernization and updating– Lighting and ventilation– Life cycle costing and assessment services

16

Case: Wärtsilä

• Industries: power plants, ship engines ja propulsion engines

• Service business area only profitable on a continuous basis• Service offering:

– Extensive O&M-contracts– Field services– Updates and modernizations– Tech support and professional expert services– Spare parts– Training services (Wärtsilä Land and Sea Academy)

17

Case: MyLab

• ”Service business is also an opportunity for smaller businesses, but requires:

a) Letting go

b) Investing

c) Creativity

d) Technological anchor

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Profit and margins

• Operating margins in product business up to 90%• Project business usually 30-50%, some

modularized mature projects 70%• Industrial services, e.g. after sales 40-50% of

revenue, margin 50%– Service business is very good from an

investment appraisal point of view (ROI, ROCE)

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CHANGING BUSINESS MODELS

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TWO INFLUENTIAL LIFECYCLES

Commoditization of matured offerings needs

business model innovation

Commoditization of matured offerings needs

business model innovationWinning over ”the

majority” of customers needs business model

innovation

Winning over ”the majority” of customers needs business model

innovation

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How does a business model change?

StrategyStrategy

OperationsOperations

NetworkNetwork

Accounting& Finance

Accounting& Finance

Material components Of biz mod = back yard

ReputationsReputations

ProductmeaningsProduct

meanings

Industry recipes

Industry recipes

ConstraintsConstraints

Beliefs and cognitions

Actions and

outcomes

Customerlenses

= front yard

Tikkanen, Lamberg, Parvinen & Kallunki (2005)Tikkanen, Lamberg, Parvinen & Kallunki (2005)

Effort #1

Effort # 2

Effort # 3

Effort # 4

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Crafting the offering = no. 1 priority

1. What is the competitive

advantage / value added?

2. What does the offering include/not include?

3. Execution quality, particularly:

• Pricing

• Distribution

• Marketing channels

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Case: Kone (& Partek)

• Central synergy motivation behind merger = moving service business understanding to Partek

• Partek mining, tractors, fertilizers nothing to do with service sold off

• Kone hardware business growth (excluding acquisitions) same as Partek 1960-2000

• Kone de facto growth fourfold, cumulative profitability tenfold

24

Case: GE-Instrumentarium

• Buyer’s lenses can be fundamental to business-making logic

• Instrumentarium ultimately sold to GE due to buyer GE’s ability to understand and serve clients and its service business model

• Olli Riikkala has stated that the ability to present Datex Ohmeda equipment the way that customers worldwide want to is the primary reason for accepting the acquisition

Business models determine distribution channel

• Project marketing

– Direct sales

– VARs

– (Representation)

– Internet as support

• Product marketing

– Bundling to OEM

– Professional distributors

– Retailers

– Direct mail and giveaways

– Internet both directly and as support

Marketing channels

• Project business

– Personal sales

– Trade fairs

– Seminars

– PR

– Relationship marketing

• Product business

– Advertising

– Direct marketing

– Articles and review in magazines and newspapares

Summary

• Buyers’ lenses determine business model• Productization has ”economics” reasons• Service business models maximize value from

customerships