Chapter Two. Business-to-Business Environment: Customers, Organizations and Markets. Authors Comments

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1 Chapter Two Business-to-Business Environment: Customers, Organizations and Markets Authors Comments This chapter provides additional background for understanding the context of business-to-business marketing. Also, it provides a way of looking at the context for a given business a way of classifying customers and markets that helps in the marketer s first pass at understanding the business environment. Classification of the competitive market and customers does not, in and of itself, provide enough information for the marketer to create effective strategy. However, it provides a sense of the constraints and drivers that will tend to shape the behavior of customers and competitors. The marketer will then need to develop more refined information about the environment to guide the development of marketing strategies and tactics. The value network concept expands beyond the idea of the value chain to include partners and supply chain dynamics (Exhibit 1-6), making it more useful for today s business-to-business environment. What was once vertical integration strategy is now, often, the more flexible approach of collaboration among several partners to create a complex offering. The collaborators form a network with the goal of satisfying a particular set of customer needs. For each new customer, the new network may or may not be comprised of the same value team as the last collaboration. In recognition of this new integration flexibility, the value network concept helps frame the partnership relationships within a market. This network framework aids in understanding who competitors are and their strengths and weaknesses, and in understanding customers and how they create value for their own customers. It is also valuable for the marketer in deciding how to flesh out an offering and determine who should be approached as partners to create superior value for customers. The product life cycle (PLC) and the technology adoption life cycle (TALC) help the marketer understand the dynamics of the market. While it is difficult to predict when a market will change in nature, the life cycle concepts help the marketer understand how the constraints and drivers will tend to evolve when the market does change. We have found that when given a central reference point, students are more easily able to interrelate many of the concepts of business-to-business marketing. The PLC and TALC serve as part of this central reference point a hub or an anchor to understand the interrelationships of many elements of the marketing mix.

2 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 2 These concepts will form the basis for many of the ideas that come later in the book, particularly the concepts surrounding innovation, competitiveness and marketing strategy construction. Opening Vignette TRW Automotive operates in multiple categories This opening discusses the many markets of TRW Automotive. TRW operates in OEM, aftermarket, and service channels with products that range from airbag sensors to braking systems. Each market involves a unique set of customers, though the core product may not change. As an example, consider TRW braking systems. These systems are sold to vehicle manufacturers, usually co-designed with the vehicle manufacturer to meet the specific requirements of the intended vehicle. Quantities are large, and the commitment may extend over several years and/or models. In this case, the vehicle manufacturer is the end user. The same components will be demanded by the service industry when the necessity of repair or replacement occurs. An independent garage or repair shop will not need a large quantity of any one component but will require a great assortment of components to service the many different vehicles, manufactured in many different years, brought in for service by the shop s customers. The end user in this instance is the shop owner or vehicle owner. This channel must deliver a large assortment of several different components, rather than a large quantity of a small assortment. The core product, brake parts, has not changed but the relationship that TRW has with the vehicle manufacturer is direct, while the relationship with the service provider is distanced by several channel intermediaries. Each market segment has very different expectations of services associated with the products. The different markets require very different total offerings. As such, TRW marketing must focus not on product categories, but on customer value. Understand the Different Kinds of Business Customers. Business exists in many shapes and forms. An understanding of the different kinds of businesses and the markets they serve will assist in understanding the varied environments in which business-to-business marketing operates. Additionally, recognizing the variety and impact of external issues related to this business will greatly enhance the ability to plan and strategize appropriately. Kinds of Organizational Customers (PowerPoint 2.2 shows all) An understanding of traditional business patterns reveals that organizations and markets evolve over time to meet the value needs of customers in an environment that s always changing. Commercial Enterprises (PowerPoint 2.3)

3 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 3 o Industrial Distributors (PowerPoint 2.4) o Value-Added Resellers (VARs) (PowerPoint 2.5) o Original Equipment Manufacturers (OEMs) (PowerPoint 2.6) o Users or End Users (PowerPoint 2.7) Government Units (PowerPoint 2.8) 85,000 local, state, and federal units (1998) More than 35% of GNP. (More recent data shows significant growth) Largest consuming group in United States Nonprofit or Not-for-Profit Organizations (PowerPoint 2.9) Hospitals, churches, colleges, nursing homes, etc. Understand the Different Categories of Business marketers. Just as there are several types of businesses that purchase goods and services, there are several categories of organizations that work to satisfy those businesses. The goods produced can be a method to classify business organizations. Producer Types (PowerPoint 2.10) o Raw Materials Producers (PowerPoint 2.11) o Component Parts and Manufactured Materials Producers (PowerPoint 2.12) o Capital Goods Manufacturers (PowerPoint 2.13) o Accessory Equipment Suppliers (Power Point 2.14) (Not detailed in the text) Accessory equipment suppliers are companies that make equipment that works with some other equipment. The accessories may be added to a bundled offering by a systems integrator, VAR, or other channel intermediary of some kind; they may be added to a bundle offered by an OEM; or the business customer may purchase them separately. Some examples of accessory equipment include clean room supplies for semiconductor manufacturing, floppy disks for computers, and telephone headsets for businesses telecommunications systems. In most cases, the supplier of the primary product or service does not make the accessory equipment because an independent supplier can make it more quickly with higher quality or for less cost. Customer Needs Influenced by Classification of Markets Some students may have been in marketing principles courses that defined raw materials as limited to the raw form of materials as removed from their natural state (iron from mines and so on). This limitation does not serve to help understand customer behavior. Consider whether or not a component remains in its final form and is identifiable as that component after use by the customer or whether it has been molded or formed into an entirely different identity. The appliance manufacturer stamps a sheet of steel sold by a Steel Producer into the housing of a refrigerator. The steel is no longer recognizable as

4 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 4 the product sold by the steel company. The customer (appliance company) purchased the steel as a raw material, though the steel company sold it as their end product. Conversely, when a computer manufacturer purchases a disc drive for inclusion in a desktop computer, the drive is still a drive after application by the customer (computer company). The computer company purchased the drive as a component, incorporating it as is into their product. Buyer behaviors and the associated decision process are often different based on whether the buyer sees the purchase as a raw material or a component part. As a general rule: If the purchaser maintains the final form and function of a purchased item, it can be considered a component. If the purchased item is no longer identifiable, it can be considered a material (raw or otherwise). Gain an appreciation of the different kinds of competitive market structures and their effects on buying behavior. Classifying the Business-to-Business Market Environment Publics (PowerPoint 2.15) Financial Publics, Public Interest Groups, Internal Publics (PowerPoint 2.16) These public communities are o not direct participants o have interests because of economic or societal effects of activities o should often be considered as stakeholders in the buying center The Macroenvironment (PowerPoint 2.17) The Demographic Environment: Issues that fall into this section include o Demographics of your customers customers, to fully understand what drives your customer decisions o The age of a firm, which may relate to its business model or attitude toward risk and innovation o The size/standing of the customer in its market o Customer locations often industries of similar type locate near each other to take advantage of common labor pools and other business services unique to their particular industry (Automotive Detroit, HiTech/Semiconductors Silicon Valley/San Jose, CA, Austin, TX, etc.) The Economic Environment Applying the Accelerator principle/bullwhip effect, the economy impacts consumer willingness to spend.

5 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 5 The Sociocultural Environment Just as in consumer markets, different industries may have cultural preferences, the way a company or an industry does business. The Natural Environment A large impact on business refer to the text example of McDonald s switch from foam to paper packaging. The Technological Environment Rapid changes in technology can obsolete a firm s way of doing business. Consider beginning to tie together Marketing Myopia with firms that resist new technology or stay with an older technology rather than innovate. Note the text examples of vacuum tubes, mainframe computers and instant/digital imaging (Polaroid). This may also be an appropriate time to introduce Market Ownership covered in detail in Chapter 5. The Competitive Environment (PowerPoint 2.18 lists the types) Exhibit 2-1 describes the four common forms of competition. Discuss the 80/20 rule; oligopolies are natural examples 80% of a supplier s sales volume is likely to come from 20% of its customers. Understand how the value chain concept is extended by the value network concept and by the special case of integrated supply chains. Value Creation Value Networks and Supply Chains Value Creation and the Value Chain, (Exhibit 1-5 and 2-2, PowerPoint 1.21) are generally discussed from the view of one organization. This part of the book extends the concept to Value Networks and Supply Chains. Value Networks (Exhibit 2-3 and PowerPoint 2.19) can be viewed as an alternative to vertical integration, based on the combined notions of rapidly changing markets and hypercompetition. The Value Network business model is common in Silicon Valley as it avoids the costs associated with development of vertical/internal supply.

6 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 6 Exhibit 2-1: Competitive Forms in Business-to-Business Markets Pure Competition Many buyers and sellers exist with no single entity having much effect on the price no leverage positions. The market is significantly larger than any one entity (buyer or seller). Generally exists in commodities, such as raw materials and agricultural products. Price is a major component of the marketing mix and products are not differentiable, thus sellers seldom deviate from the market-clearing price. Monopolistic Competition Many buyers and sellers but product is differentiable such that a range of prices is possible. Products can vary in terms of quality, features, style, and so on, such as in specialty steel fabrication or in advertising services. Branding, advertising, personal selling, and so on, important to differentiate branding. Oligopolistic Competition Market consists of a few sellers who are highly sensitive to each other's strategies. Products can be uniform or non-uniform. Typical examples include autos, airlines, steel industries. Few sellers exist because of barriers to entry. Price has often been aimed at maintaining stability (note chaos in airline industry). Pure Monopoly Consists of one seller. Examples are Postal Service; utilities; and, before government action, Standard Oil. "New" competitors to the products and services provided by this group (such as windmill power companies), are generally small, niche players indistinguishable (or barely visible) in the market. The Network model has many advantages/disadvantages, among them: Advantages: Rapid development; ability to change partners as markets and technologies change. Minimal investment in infrastructure. Flexibility not bound to a particular facility after it is obsolete (but before fully depreciated!) A natural alternative for a market owner, but not for a share driven company. Disadvantages: Potential conflicts of interest, as flexibility allows a firm to have many partners, particularly when one firm has a key portion of a total offering and more than one Lead Collaborator, in a competitive situation with other potential networks, seeks that technology to serve the same customer. No direct control or ownership over critical elements of the network or supply chain. Less opportunity to take full advantage of economies of scale.

7 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 7 Reinforce and extend your understanding of the product life cycle and its impacts on business-to-business markets. Introduce the technology adoption life cycle and its implications for targeting and positioning. Changes in Markets Over Time Both the Product Life Cycle (PLC) Exhibit 2-5 (PowerPoint 2.20), and the Technology Adoption Life Cycle (TALC) Exhibit 2-6 (PowerPoint 2.21) are discussed. The PLC serves as a hub or anchor that most concepts are related to throughout the text. Discuss the PLC noting the changes over time not only impact sales revenue. Why the sales revenue changes is important. In this context, the different stages of the PLC can be related to customers with different needs and attitudes, particularly with respect to innovation. When the TALC and the PLC are superimposed on the same grid, Exhibit 2-7 (PowerPoint 2.22), students should be able to see that, as the product becomes mature, the number of new users declines while the PLC shows that sales continue (for a period) to previous adopters. Key Terms capital goods chasm culture demographics end user industry standard macroeconomy market development gap monopoly monopsony oligopoly original equipment manufacturer (OEM) product life cycle (PLC) publics technology adoption life cycle (TALC) tornado user value added resellers (VARs) value networks

8 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 8 Answers to Questions for Review and Discussion 1. What are some of the differences between marketing to typical commercial enterprises and marketing to government agencies? Differences in marketing between typical commercial companies and government agencies will generally recognize that government agency purchasing can be subject to more public scrutiny than commercial firms. Creating value to government units is likely to involve the meeting the interests of a more diverse set of stakeholders than for business customers. The buying center may be geographically dispersed as many agencies may be involved. The needs of the customer may include a social agenda as well as political objective. 2. Classify the following businesses as VARs, users, component producers, or raw material producers. a. A supplier of copper to a wire manufacturer b. A supplier of rear axle assemblies to a heavy truck manufacturer c. A distributor of private telephone exchange equipment (PBX) and installation services d. A supplier of pigments to a paint manufacturer e. A maker of automated assembly equipment f. A supplier of small motors to disk drive manufacturers a. raw materials producer b. component producer c. value-added reseller (VAR) d. raw materials producer e. capital goods manufacturer f. components producer 3. How can the agenda and focus of financial publics and public interest groups create seemingly opposite goals for business-to-business marketing managers? Opposing goals of financial publics versus public interest groups will run the gamut of responses concerning economic gains versus public or social well-being. A firm that recognizes its responsibility as a corporate citizen will consider the long-range societal impact of its actions as well as its short-term financial results. In this modern economy, it is not unusual for a firm to work with/partner with as many interested parties as possible to create an overall acceptable solution. 4. Defend the validity and importance of internal publics. The company s human resources make it possible to perform the necessary activities within the value chain. If these are not performed well, the value produced by the company is degraded. Internal publics are the people within the organization most of whom have an interest in the performance of the firm. If the organization does not meet the needs of these internal publics, they can react by not doing the activities in the value chain that need to be done. Additionally,

9 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 9 each and every member of the firm has the opportunity to represent the firm in a positive manner thus enhancing the value represented by the firm. 5. How can market-sensitive internal publics improve a firm s competitiveness? If the internal publics have an interest in pursuing the strategy of the firm, if they know how to pursue this strategy, and, often, if they have the authority and capacity to make improvements themselves to strategic initiatives and to their execution, then they will tend to take actions that improve performance. If they are customer oriented then many of their improvements will tend to result in more value to customers. A market-driven firm can instill a sense of ownership on the part of each individual that can contribute value to the total offering. 6. Should technology play a major role in your approach to your customers? Why or why not? In business-to-business marketing, the marketer can get caught up in the product s technology. This is reinforced as the marketer markets to technophile and visionary customers. Once the market evolves to the point where the marketer needs to address pragmatists, the marketer must understand that the technology becomes secondary to the benefits or solutions that the customer/organization will receive. Marketers and sales personnel need to make sure that the benefits are truly valuable to pragmatists and that communications are couched in terms that focus on these benefits. Relationships built on technology can be subject to the technology s obsolescence. 7. How do oligopolies support the 80/20 rule? Oligopolies support the 80/20 rule in that 80% of a vendor s sales volume is likely to come from 20% of its customers the largest volume customers. This requires marketing strategies and tactics that focus heavily on these customers and often require strong, collaborative relationships. 8. Describe the areas of validity and fallacy associated with the study of the PLC. validity fallacy more relevant at category level differences between products and firms anticipates general behavior impacted by individual firm strategies offers general guidance only not predictive between stages 9. What market characteristics make it unlikely that pragmatists will easily follow the role model of visionaries? Pragmatists generally need to have two things in place before they will adopt. They need the existence of a fully functional offering that has been proven to work. Secondly they need assurance that offering has been tried successfully and that adoption represents a minimum of disruption to their operations. Visionaries are not good references for pragmatists because they adopted the new technology before it was formed into a fully functional whole product. They generally created just the disruption within their organizations that the pragmatists hope to

10 Chapter 2: Business-to-Business Environment: Customers, Organizations and Markets 10 avoid. Consequently, pragmatists do not have anyone to look to as a reference at first, thus contributing to the chasm. Note Question #6, above. 10. Relate the PLC and the chasm, with particular emphasis on the market factors that undergo change from introduction to rapid growth of an offering. The chasm generally occurs very early in the growth period of the product life cycle. The chasm the period in transition occurs because pragmatist buyers are not yet satisfied that a whole product exists or has been proven. Marketers have not yet found and developed the segments in the pragmatist market that are most likely to adopt. Until they do, the growth part of the product life cycle will not take off. After pragmatist buyers begin to buy, the suppliers of the new products much undergo rapid and wrenching changes internally. The supplier must shift from a start-up to a growing company, with procedures more standardized and more professional management. This can involve several cultural as well as structural changes. As markets grow, the firm may embrace a decentralized decision structure, develop an infrastructure to achieve economies of scale, and redesign the offering in face of new economic realities of competition and high volume. Outside the organization, the competitive environment will change as more competitors enter the market that has now been demonstrated to exist. Many of the company s employees may find that their skills are more adaptable to smaller organizations and may elect to leave; at the same time, the organization must recognize that the skills required of employees in a growth-oriented, high volume company may not be possessed by the current staff.