Industrial Marketing( Week 2 and 3)

8/3/2019 Industrial Marketing( Week 2 and 3)

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INDUSTRIAL MARKETING

This occurs whenever a good or service is sold for any use other than personal

consumption.

Characteristics of organizational buyers

1. Greater total sales volume: the total dollar sales in the business to business

markets are greater than they are in the consumer market even though they are

fewer business buyers than final consumers.

2. Larger volume purchases: they sell to customers who buy in larger quantities

than do final consumers.

3. Fewer buyers: they deal with far fewer buyers than the consumer markets.

4. Larger buyers: unlike in the consumer markets, a few large buyers account for

most of the purchasing in many business to business markets.

5. Geographically concentrated buyers: business buyers are geographically

concentrated whereas personal buyers are found virtually everywhere.

6. Close supplier customer relationship: there is a close relationship between

sellers and customers in business to business markets n because of the smaller

customer base, the greater volume and cost of the average sales and the

importance and power of the larger customers over the suppliers.

7. More direct channels of distribution: many business markets buy directly from

the producer.

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8. Professional buying: business buyers normally take a more formalized approach

in buying than do the final consumers.

9. Multiple buying influences: more people typically influence organizational

buying decisions than consumer buying decision.

10. Complex negotiations: considerable buyer seller negotiations exist in the

purchase and sale of more expensive business products.

11. Reciprocity: business buyers often choose suppliers who also purchase from

them. For instance, a paper manufacturer may buy chemical for its production

process from a chemical company that buys large amounts of its paper.

12. Leasing: many business buyers lease equipment rather than buying.

13. Emphasis on personal buying: because of the characteristics discussed above,

business to business marketers emphasize personal selling than advertising in

designing and implementing their market mixes.

CHARACTERISTICS OF BUSINESS TO BUSINESS DEMAND

1. Derived demand: all demand for business to business goods is derived from

demand for a business to business product that is linked to demand for a

consumer good. If the demand for consumer goods fall off, so will the demand

for all goods entering into production.

2. Inelastic demand: because of the derived demand for business products, there

is less opportunity for markers to stimulate primary demand for through price

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cuts than there is for consumer goods and marketers. Therefore, the primary

demand for business to business products is more price elastic than for

consumer markets.

3. Fluctuation demand: the demand for business goods and services tend to be

more volatile than the demand for consumer goods and services.

4. Joint demand: the demand for a number of business products such as raw

materials and component parts is affected by joint demand. Joint demand

occurs when two or more items are used in combination to produce a product,

For instance, a firm that manufactures hammers need the same number of

handles as it does hammer heads. These two are demanded jointly. If the

supplier of handles cannot furnish the required number, and the hammer

producer cannot obtain them elsewhere, the producer will stop buying

hammer heads.

A CLASSIFICATION OF BUSINESS TO BUSINESS GOODS AND

SERVICES

Business goods and services can be classified in a variety of ways. Business

goods are generally classified according to tax treatment and end use. The major

business goods include:

• Major equipment: this category which is frequently referred as

installations consists mainly of products such as the machinery,

computers, machine tools, stamping machines and robots.

• Accessory equipment: this is used to facilitate production, administrative,

clerical and marketing activities. Examples include calculators; office

equipment and fire extinguishers. They tend to be standardized and less

costly than major equipment.

• Fabricated and component parts: this includes spark plug, timing

devices and switches and they are purchased for inclusion in the final

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product. Business buyers buy such items according to their own

predetermined specifications or by standards common within the industry.

• Process materials: differ from fabricated and component parts in that

most of them cannot be identified or re-grouped in the finished product.

Examples of such products are chemicals, plastics, cement, asphalt and

steel bar stock. They are generally bought per specifications prepared by

the user or bought according to standards developed by a particular trade.

Certain grades of lumber and some chemicals fit into this category.

• Maintenance, Repair and Operating Supplies: They are used in the

production process .Examples of maintenance supplies are blooms, nails,

paint, cleaning compounds and light bulbs. Repair supplies include

bearings, gears, and filters. Typing paper, ink, paper clips, pencils and

lubricating oils are types of operating supplies. All these supplies facilitate

the production process, have relatively short life and are generally less

expensive than most other business goods.

• Raw materials: They are supplied primarily by the Agriculture, lumber,

mining and fishing industries; Raw materials become part of a

manufactured product, are generally bought in large quantities and exhibit

an inelastic demand curve.

• Business services: services provided to firms by banks, insurance

companies, advertising agencies, CPA and law firms, employment

agencies and management consultants are business services.

BUSINESS TO BUSINESS CUSTOMERS

Industrial marketing involves serving different customers:

1) Commercial enterprises: These include the indirect channel members,

original equipment manufacturers and user customers

2) Government organizations

3) Institutions

4) International customers

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ORGANIZATIONAL BUYING PROCESS

1. Problem recognition: business buying process begins when someone in the company

recognizes a need or a problem .This can result from either internal stimuli or external

stimuli. Internally the company may decide to launch a new product that requires new

production equipment and materials or a machine may break down and need new parts.

Externally the buyer may get some new ideas at a trade show, see an advert or receive

call from sales who offer a better product at a reduced price.

2. General need description: This is the stage in the business buying process in which

the company describes the general characteristics and quantity of a needed item. For

standard items this process presents few problems. For complex items however, the buyer

may have to work with other engineers, use consultants etc. to help define the item. The

firm may want to rank the importance of reliability, durability and price and other

attributes desired in the item.

3. Product specification: This is the stage of the business buying process in which the

organization decides on and specifies the best technical product characteristics for a

needed item.

4. Supplier search: This is the stage in the business buying process where the buyer tries

to find the best vendors. The buyer can compile a small list of specified supplier by

reviewing trade directories, doing a computer search or phoning other companies for

recommendations .The newer the buying task, the more complex and costly the item , the

greater the amount of time the buyer will spend searching for suppliers.

5. Proposal solicitation: This is the stage where the buyer invites a qualified supplier to

submit proposals .In response will send only a catalogue or a sales person .However

when the item is complex or expensive, the buyer will usually require detailed written

proposals or formal presentations from each potential supplier.

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6. Supplier Selection: This is the stage of the business buying process in which the buyer

writes the final order with the chosen supplier listing the technical specifications quantity

needed, expected time of delivery, return policies and warranties.

7.Order routine specification: This is the stage of the business buying process in which

the buyer writes the final order with the chosen supplier listing the technical

specifications, quantity needed, expected time of delivery, return policies and warranties.

8. Performance review: This is the stage in the business buying process in which the

buyer rates its satisfaction with supplier deciding whether to continue modify or cancel

them out. The seller’s job is to monitor the same factors used by the buyer to make sure

that seller is giving the expected satisfaction.

BUYING SITUATIONS

• New Task

Here the need or the problem is considerably different from ten past experiences.

Problem recognition may be triggered by internal stimuli or external stimuli. For instance

the firms’ decision to add a new product line may necessitate the purchase of new

equipment, parts of materials. Or a change in customer requirement may necessitate the purchase of new machinery to meet the changed needs. Since both situations are new,

decision makers lack the experience and product knowledge to make comparisons of

alternative products and supplies. In rte new task purchasing situation, decision makers

and influencers enter into extensive problem solving activity. They must obtain a variety

of information to explore alternative solutions adequately before a purchase can be made.

• Modified rebuy

Organization decision makers enter into this situation when they feel that significant

benefits such as quality improvements or cost reductions may be derived from

reevaluating alternatives. Although well defined criteria may be employed in the

purchase decision, there may be uncertainty about which supplier can best fulfill specific

needs. Thus the buyer will seek for additional; information. Re-evaluation of supplier

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alternatives may be triggered by internal and or external stimuli. The modified rebuy

occurs mostly when the firm is displeased with the performance of the current supplier,

• Straight rebuy

This is the most common kind of buying situation in organizational buying. When

purchases are continuing or recurring, little or no information is required, routine

response is the normal buying pattern .Organizational buyers have well developed choice

criteria that have been used and refined over time.

INDUSTRIAL MARKETING ENVIRONMENT

Industrial buyers and sellers operate in a dynamic environment. One constantly poising

new opportunities and threats. The industrial environment could be divided into three

levels namely the interface level, the publics’ level and the macro environment level.

The interface level

This involves those key participants who immediately interface with an industrial firm

(buyer or seller) in facilitating production, distribution and purchase of firm’s goods and

services. Supply inputs are transformed by a company and its competitors into outputs

with added value that move on to the end markets, the move being made through thefirms interface with industrial distributors and dealers, manufacturers representatives and

the company’s own sales people. That move is made possible by a firms interface with

facilitating institutions such as banking, transportation, research and advertising firms.

Participants in the interface level include:

Input supplier-Input goods such as the raw materials, labour and capital are

supplied by organizations to industrial firms for use in producing output goods

and services. The survival and success of a firm depend on the knowledge and

relationship with its input suppliers. Interruptions in the flow of inputs cause

repercussions in the entire industry affecting not only production and marketing

plans but also the production and marketing plans of the suppliers.

Distributors-Most organizational buyers buy from five or more industrial

distributors. Industrial distributors, contact potential buyers, negotiate orders,

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provide buffer inventories, credit and technical advice to potential buyers. They

are particularly important when joint demand is present because they bring

together the heterogeneous inputs needed for the production of end products .

Facilitators-advertising agencies and public relations firms provide the necessary

communication flow between the sellers and buyers through the formulation of

meaningful information and media strategies. The use of advertising in reaching

potential buyers and the multitude of buying influencers is vital in the overall

communication strategy. Transportation and warehouse companies facilitate the

free flow of goods that must be delivered in usable condition to industrial

customers and distributors when and where they are required. When goods are not

delivered on time and in usable solutions, buyers can be forced to shut down

production lines. Resources as they move from the supply inputs to end users

must be financed and insured.

Competitors-competitors actions whether domestic or foreign, ultimately

influence the company’s choice of target markets, distributors, product mix, and

in fact its entire marketing strategy.

PUBLICS

Publics are distinct groups that have actual or potential interest or impact in eachfirm’s ability to achieve its respective goals. Publics have the ability to help or hinder

a firms effort to serve is markets.

Financial publics-Financial institutions such as investments firms and stock

brokerage firms and individual stakeholders invest in an organization on its

ability to return profits. When they become unhappy with the management or

dissatisfied with a company’s social polices, they sell their shares.

Independent press-industrial organizations must be accurately sensitive to the

role that the mass media play and how they can affect the achievement of the

marketing objectives. The independent press is capable of publishing news

that can boost or destroy the reputation of a firm as well as the sales [potential

of a product.

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Public interest groups-industrial marketing decisions are increasingly affected

by public interest groups. Clearly, these various public interest groups limit

the freedom of the suppliers and buyers in the industrial market. While some

organizations respond by fighting, others accept these groups as another

variable to be considered in developing strategic planning, working through

public affairs departments to determine their interests and to express favorably

the company’s goals and activities in the press. The impact of these groups

however is felt by all participants in the interface level.

General public—although the general public does not react in an organized

way towards a firm or an industry, as interest groups do, when sizeable

portion of a population shifts attitude towards a firm or industry, there is

definite impact.

Internal public-the board of directors and managers as well as blue and white

colour workers are important emissaries between an organization and other

participants in the interface and public levels. Corporate policy must give

consideration to employees and others who are held responsible for the overall

operation of the firm. Employee morale is an important factor in all business

decisions. And when morale is low, organizational efforts suffer. A firms

employees spend more than two thirds of their time off the job, interactingwith their families and the community , so employees attitudes do influence

the public.

MACRO ENVIRONMENT

This level of the organization is made up of components that have less specific and less

immediate implications for managing the organization effectively.

I. Economic component Economic conditions greatly influence an organizations ability and willingness to buy

and sell. Thus emerging changes in the economic environment both at home and abroad,must be closely monitored.

It includes the following factors;

GNP

Inflation rates

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Balance of payment position

Debts and spending

Taxation rates

Interest rates

Consumer’s income

Corporate profits

II. Social component

This describes the characteristics of the society where an organization exists.It includes factors such as;

Literacy levels

Values of people

Educational levels

Geographical distribution

Customs and believes

III . Legal component

This consists of legislations that have been passed.

It describes the rules or the laws that all the company members must follow.They include all laws affecting the organization e.g.

Consumer health policy

Energy policies and conservation Acts

Employment Acts, etc.

IV .Political component

Comprise those elements related to the government affairs. This includes;

Type of government Government attributes towards certain issues

Lobbying efforts from interest groups

Progress towards passing of laws affecting certain industries, etc.

V. Technological component

Given the rate of technological change in industries such as telecommunications,

computers, and semi conductors, large buying firms are developing forecasting

techniques to enable them to estimate time periods in which major technology

developments might occur. Marketers must also monitor technological change if they

hope to adapt marketing strategy with sufficient speed and accuracy to make the more

scientific breakthroughs.

This includes;

New procedures

Approaches to new plan of goods and services

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Addresses the issues of new equipments and new ways of improving productionthrough the use of computers /robots.

VI.Demographic influences

Industrial firms cannot ignore the demographic environments because of the derivednature of industrial demand. World population explosion and changing population

structure of the world has a major impact on industrial demand.

INDUSTRIAL MARKETING SEGMENTATION

Successful industrial marketing strategy rests on the marketer's ability to identify,

analyze, and evaluate attractive market segments. Effective market selection is necessary

if the firm is to allocate its resources so that those markets served contribute to the

achievement of organizational objectives.

Few firms have the resources to pursue actively all potential markets, ”nor could they

justify doing so on a return-on-investment basis." Thus, the task facing the industrial

marketer is to identify, evaluate, and choose those markets in which it can compete most

effectively. In choosing markets to serve, however the firm is not only choosing its

customer base, it is choosing the competitive, technical political, and social environments

in which it will compete. This is not an easy decision to reverse. As Raymond Corey

points out,

Having made the choice, the company develops skills and resources around the markets it

has elected to serve. It builds a set of relationships with customers that are at once a

major source of strength and a major commitment. The commitment carries with it the

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responsibility to serve customers well, to stay in the technical and, product-development

race, and to grow in pace with growing market demand. Market choices, then, must be

based on an evaluation of the company's distinctive competencies and differential

advantages in the areas of marketing, manufacturing, and technical strengths.

MARKET SEGMENTATION

Market segmentation is the first in a series of steps that ultimately enables a firm to

maximize the return on its investment. Attractive market segments must be identified and

evaluated, target markets selected, and decisions made as to how the firm will compete in

those markets before positioning and marketing mix strategies can be developed.

Industrial customers, like consumers, differ in their needs, resources, and buying

attitudes. A practical approach to understanding these differences is to identify variables

by which potential buyers can be segmented. Market segmentation strategy, then, is

undertaken to identify groups of firms whose purchasing requirements and responses to

marketing programs are similar. Market segmentation, however, is not the same as target

marketing. Market segmentation strategy is the process of dividing a market into distinct

groups of buyers whose marketing responses to products and/or marketing mixes may be

similar. Thus, the firm (1) identifies different ways to segment the market, (2) develops

profiles of each resulting segment, and (3) evaluates each segment's attractiveness. Target

marketing, on the other hand, is "the act of evaluating and selecting one or more of the

market segments to enter.

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Requirements for Effective Market Segmentation

1. Measurable: Information on the variables of interest should exist and be

obtainable either through secondary or primary information sources.

2. Relevant: The variables chosen should impact on decision making fm a

significant number of potential customer groupings and Develop marketing mix

for each target market selected relate to important differences across customer

groups regarding responses to different Marketing programs

3. Operational: The variables chosen for evaluation among customer groups

should be related to differences in customer requirements and buying behavior.

They should indicate marketing approaches’ with respect to products, pricing,

communication, or distribution.

The purpose behind segmenting the industrial market is to enable-the marketing firm to

allocate its resources more effectively to maximize return on investment. Thus, not only

should the resulting market choices be sufficiently large and profitable to warrant

attention, they should be different enough to enable distinctive marketing programs.

It should be noted, however, that market segmentation is not always practical,

particularly when the market is composed of oligopolistic buyers, a single large customer,

or when the "market is so small that marketing to a portion of it is not profitable.

Market Segmentation Involves Costs. Market segmentation strategy involves costs in

obtaining and analyzing data and in developing and implementing separate marketing and

manufacturing plans to serve segments effectively. Market segmentation efforts, then,

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must result in sufficient additional sales volume and profits to justify its costs. Thus,

before embarking on a segmentation analysis; some estimation of the costs versus the

benefits must be made.

BASIS FOR SEGMENTING INDUSTRIAL MARKETS

There is no magic formula for segmenting the industrial market. In approaching this task,

the marketer will have to try different segmentation variables, either alone (which may be

sufficient in some cases) or in combination. For segmentation variables to be

meaningfully evaluated, however, they must be based on characteristics that are easily

identified, understood, and discernible. While consumer markets are typically segmented

on the basis of demographic or psychographics variables, industrial marketing

segmentation is approached on the basis of what has been termed macro- and micro

segmentation. Macro segmentation approaches the task on the basis of differences

between industries and organizations, such as size, geographic location, or product

application. Micro segmentation approaches it on the basis of the differences in criteria

that are more directly related to the purchasing decision-making process and behavior of

those individuals involved in the decision making units'" Because of the fundamental

differences between organizational and individual buyer behavior, Wind and Cardozo

have recommended that market segmentation be approached in two stages: (1) identify

meaningful macro segments and (2) subdivide those macro segments into meaningful

micro segments.

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MACRO VARIABLES

Table below lists some of the macro variables that industrial marketers can use to identify

and evaluate potentially attractive markets during the first stage of market segmentation.

Most of those variables are not difficult to identify and are easily obtained through

secondary sources of information such as trade directories and publications, general

business magazines and directories, government reports, and market research companies

as well as company sources of information.

Some Macro Variables used to Segment the industrial Market

Industry -Agriculture mining construction, manufacturing, transportation, wholesale,

retail, finance, services

Organizational Characteristics

Size of characteristics Size of customers' parent company, size of customers' business,

and number of plants sold

Plant Characteristics -Size of customers' plant, age of customers' plant, inventory turn-

over, and degree of automation

Location -Distance from plant, state of plant, and suburban/urban/rural location

Economic Factors -Cyclically of customers' industry

Customers’ industry -Growth rate of industry and customers' growth stage within the

industry; ultimate customer of customers' product

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Competitive Forces -Degree of competition in customers' industries, ease of entry

customers’ industries , and ease of customer

switching

Purchasing Factors -Decentralized versus centralized, and number of levels of

purchasing authority

End-use -Marketers Residential commercial contractors, coal/ore miners, foresters,

federal/state highway maintenance departments,

banks/insurance/ brokerage houses

Product Application -Small appliance, computer, television and airplane manufacturers

Industry Characteristics

Many firms produce products and services that can be targeted to different, even

dissimilar, industries. For example, computer manufacturers can market their products to

such diverse industries as health, finance, manufacturing, and retailing. For these

marketers, effective market segmentation and subsequent marketing programs will rest

on a clear understanding of the similarities and differences between these industries. For

example, while retailers, banks, and hospitals will have some common needs with respect

to computers, many of their requirements will be markedly different, as will their

attitudes and approaches toward purchasing

Significant differences may also be present within an industry. Consider, for instance, the

sale of computer equipment and software programs within the finance industry. While

commercial banks, stock brokerage houses, savings and loan associations, and insurance

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companies are all part of the finance industry, their product and service requirements with

respect to terminals, data handling, and software programs will be considerably diverse.

Thus, in some instances, further subdividing of individual industries maybe necessary to

obtain a more detailed segmentation. Scheme

Organizational Characteristics

Demographics. Industries and organizations within industries, like consumers, have

different demographic characteristics. Larger organizations, like larger families, have

different purchasing requirements (e.g., volume purchasing, normally accompanied by

quantity discounts) and will respond differently to marketing programs than will smaller

firms that purchase in smaller quantities. Thus, when companies are segmented on the

basis of size, larger producers may want to avoid small firms because their low volume

needs cannot be served profitably. On the other hand, smaller producers may want to

avoid large companies because their volume requirements exceed production capacities.

Customer location can also be an important segmentation variable. In the industrial

market, for example, on-time delivery is an important factor in serving customers. Thus,

due to effects on inventory, transportation, and warehousing, marketers may want to

avoid those customer markets that are located too far away or are too dispersed. Location

also affects sales force organization and deployment. Borg-Warner, for instance, which

produces mechanical seals for slurry coal pipelines, would want to provide more

coverage in those areas where coalmines are concentrated.

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Decentralized versus centralized procurement is another important macro

segmentation variable due to the influence it can have on the purchasing decision. As

discussed in Chapter Five, when purchasing is centralized, the purchasing managers'

power and specialization, the criteria emphasized, and the composition of the buying

center are strongly affected. Thus, purchasing factors provide a good base for isolating

specific needs and marketing requirements of individual organizations within industries

and enable the marketer to organize the sales force to serve chosen customers better

within markets (e.g. national versus local account sales force organization).

Segmenting organizations by demographics is crucial in deciding which markets to serve

and in the development of marketing strategy for the long run as well as the short run.

And, as Table outlines, organizational demographic analysis can also include evaluating

plant characteristics, economic factors, industry forces, and competitive forces as well as

organizational size, location, and purchasing variables. Business Marketing, a well-

known trade publication, for instance. 'Points out that organizational demographics is an

important tool in selling business to business and that too few industrial marketers make

use of these important variables in developing and implementing their strategies.

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When customer demographics are analyzed in conjunction with potential sales and profitability,

firm gains valuable information that can be applied to the development of long-range as well as

short-range strategy. For example, when customers are segmented on the basis of decentralized

versus centralized purchasing factors, the firm might want to organize its selling approach to

serve national accounts versus local accounts. Further, when sales personnel are more aware of

the unique demographic traits of their respective customer base, they are in a better position to

approach or serve those accounts on the basis of their distinctive differences.

End-Use Markets. Many firms also produce products and services that can be offered to a

multitude of end-use markets. For example, International Harvester manufactures such heavy-

duty equipment as wheel loaders, excavators, off-highway trucks, and long skidders. These

various equipments, for instance, can be marketed to residential and commercial contractors,

coal and ore miners, foresters, and federal and state highway maintenance departments. Banks

and other commercial lending institutions also offer a multitude of end-use services to such

markets as mining, agribusiness, construction and engineering, and shipping and marine. "Such

opportunities differ in different markets and since the future of a multi end-use product or service

is tied to the future of its market,” market segmentation via the end use of products by market is

a key component in identifying attractive markets to serve.

Product Application. Many products are used in several different ways. For instance, small

electrical switches are used in the production of small household appliances, computers,

televisions, and even jumbo jets. Thus, markets can be segmented on the basis of product

application.



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Industrial Marketing( Week 2 and 3)