INDUSTRIAL MARKETING

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INDUSTRIAL MARKETING

How to connect to the Business World

PrologueMarketing in the 21st Century

It is gradually understood that marketing is the most critical component in the running of an organization. The inputs are critical throughout the entire strategic planning process and effective implementation for short turn survival and long term sustenance through the building up of sustainable competitive advantage. Marketing also contributes to the survival during severe downturns and subsequent decrease in financial resources, increase number and type of competitors and a more diversified consumer base; disaster and other dynamic environmental factors.

Relationship Marketing:

Marketing in the contemporary context can be viewed as a value adding process directed towards relationship marketing. Following chart represents a critical set of relationships across the boundaries to be involved in such a process:

Supplier RelationshipsInternal Relationships

Producer RelationshipsCustomer RelationshipsCommunity Relationships

Distributor RelationshipsFacilitator Relationships

The process involves all the activities where marketing is involved. Marketers need to be innovative and flexible to make these mutually beneficial.

Importance of relationship becomes even more compelling in view of the highly volatile and uncertain global environment. The nature and strength of such relationships and the overall management of marketing process are significantly affected by changes as the technological shifts, enhanced information availability and the transfer capabilities.

Change in relationship between Marketing and other business functions:

The distinct functional boundaries are becoming irrelevant.Organsations are developing more flexible structures to deal with the rapid changes in the operating environments. This is needed to take care of the issues inherent in the relationships and alliances. The focus now shifts to people and social processes that bind the actors together more than the products and firms as units of analysis.

In the current scenario, marketing is integral to the cross functional network working in partnership. Marketing may even have the role of a prime driver in the network.

Relationship between various functions includes an expanded role for the customers of the organization. In the past one relied largely on customer surveys to determine marketing strategies, customers are now providing important inputs into the decisions of other functional areas an s well. Trend towards customer orientation invariably results in involving the customers in the design process of the new products and even more in the process of product modification.

Changes in the Organisational Structures:

As a consequence of the pressures on margins and continuous volatility in the markets, organizational structures are flatter and the time horizons extremely compressed. Middle management, the bearer of all bad news is gradually getting extinct. This means authority much earlier than in the past. This also involves working in cross functional teams which keep on evolving over time. This workload gets added to the normal responsibility for bottom line performance! The transformation for marketing implies shift from transaction orientation and profit maximization to the management of strategic partnerships. Marketing decisions are made within the framework of matrix or cross functional organizations.

Focus on Customer Satisfaction

Customer satisfaction is becoming the focal point of all long term plans. It therefore is necessary to know who the customers are, why do they buy and what gives them the satisfaction.

Shifting demographics, economic concerns and advances in technology contribute to the change in the role of marketing to the end customers.

Organisational buying has been considerably affected by the economic and political conditions right across the world. Bottom line profitability, intensity of service at all stages of buying and assured quality has become the norms of buying. Purchasing processes have also gone through major changes as a result of the impact of technology and the net.

Customers wants and needs are being considered right at the time of designing and delivery, both of goods and services. One very definitive role is that of point of sale scanning to capture and utilize customer based information. RFID applications could add another dimension to the process.

Changing markets and market conditions require shorter response time. As a result designers and customers are getting more thoroughly involved in the design and manufacturing process to meet more complex and sophisticated market demands.

Value added marketing- the right combination of quality service and value- is the key to market success. Customers perceive high value at a reasonable price; not necessarily the lowest price. Quality goes beyond the obvious and encompasses total experience during the life time of usage

Advances in technology have added value to the goods and services. For example, banks are using high tech CRM initiatives, integrating technology with the human touch to improve the service to the customer.

Quality and value are often defined in terms of service quality. Poor service leads to dissatisfaction resulting in the customer shifting suppliers and brands. Service evaluation depends upon the factors which the customer considers important and is likely to shift with the customer segments.

Importance of internal Marketing:

Comprehensive internal marketing motivates employees to focus on the end customer because after all, service is everybodys business. The pay off comes in terms of more satisfied customers as well as employees.; added value for the brand and better bottom line. When the workforce understands the needs of the customer it is likely to serve them well to have a higher level of retention. Employees are motivated when they feel that they are listened to and feel that their views are considered. This also results in higher employee retention!

Building markets for the Long term:

Relationship with customers has become a primary concern of the marketers. One is shifting from the mass marketing strategies. Relationship, being preferred, implies treating each customer as a unique segment to maximize the share. Hot topics like the markets of one just indicate the 9importance of such an approach. New technologies make it possible to begin outside the company by knowing more about the wants and the needs of the key customer and then working backwards to develop the strategies for the organization and the brand.

The range of marketing relationship extends from a single transaction to vertical integration as shown in the illustration below. Such alliances are improvement to improve the competitive pulsation. Marketing is involved the formation and management of strategic alliances because of their involvement with the customers, resellers or even competitors for the development of new products, technology and markets.

Changes in the environment: Marketing Organisation Ecocycle:

Adoption of natural eco cycle with the addition of human ability to take conscious rational action can be considered as organisation ecocycle. This is shown below:

One can briefly look at the phases of the marketing eco cycle shown in the illustration below:

Entrepreneurial Phase: Spontaneous behaviour and learning gets promoted as organizational culture. Planning tends to be short term in the absence of considered long term planning.

This is followed by the stage of strategic growth when all the weaknesses of the earlier phase are eliminated. Systems and structures get formalized. However, with the success come increased competition and more demanding customer

This leads to the marketing organizations losing the competitive edge, scarcity of resources and environmental threats. Monopoly like situation could result in stronger reactions! Constraints, including being the prisoners of success in the past, inhibit innovation and result in an inability to adapt fast enough.

Organisations now find themselves vulnerable. Crisis can even threaten the existence. This calls for flattening hierarchies, throwing the code books etc.

The catharsis resulting from such a situations forces the organizations to move back the early stages of renewal curve of the cycle. Confusion and uncertainty prevail as managers try to salvage the operations by adapting and innovating. Additional constraints may be generated internally or externally through changes in the corporate culture, mergers and acquisitions, shortage of resources etc.

Difference between rising again and failures depends on the leadership.Organisations survive because of leadership and shared values.

Constant change in the environment affects the life of marketing organization. Many innovative opportunities have emerged from crisis both internal and external. Wars have led to the emergence of new technologies and modes of communication; even the importance to the concept of management!

Changes are inevitable. It is up to the organizations to cease the initiative. Proactive action can resulting creative destruction while laid back approach would lead to destruction.

Business Changes and Environmental Factors:

We give below a summary of many such changes:

Environmental FactorsMarketers have to adopt to the macro environment

GlobalisationIndian companies expanding the world on both sides, as a source and also as a sourcer

IT and ComputerAlliances among the tech oriented

Redesigned Organisation StructuresFlatter Organisations, greater responsibilities, 24, 7 working

Information ageOn line real time availability and sharing of the data

Security, Ethics and CSRImpact on world trade and relationships between businesses and the governments

CHAPTER - I

INTRODUCTION TO INDUSTRIAL MARKETINGMarketing is an extremely exciting field. Dealing with consumer makes it quite glamorous. Focus on the end customer takes most of the attention. This results in the process involved in the way the product is brought to the end customer is normally not getting sufficient attention. A close analysis of this process can be very instructive. One can consider almost any product for this exercise.

We can consider the case of a cell phone. Cell phone has, at a sub assembly level about 15 components. Each of these components is in its turn manufactured and processed by their own manufacturers. Thus even at the simplistic level, we would have 15 transactions taking place between vendor and assembler of the cell phone. After the assembly, the product goes to the distribution channel. This normally would have at least three intermediate stages before it is available to the customer. The entire analysis of marketing concentrates on the end customer cost. As you have seen above, there are a minimum of 18 transactions before the product is offered to the customer. This is the amount of effort that goes in for bringing the product to the customer.

Now all the 18 transactions would fall into the category of industrial marketing. The total value involved is quite large. We can look to the magnitude of industrial purchases a little differently. General Electrical purchase of products and services is more than the Gross National Product of more than half of the countries in the world.

Industrial MarketingIndustrial Marketing is marketing products or services to other companies, government bodies, institutions (such as hospitals), and other organizations. McDonalds and other companies buy products, such as salt, and services to use in the production of their product. With the exception of the purchase you make from the Mcdonald counter, all the buying and selling in the process involves business marketing or industrial marketing.

It is important to keep in mind the extent of this activity. Purchases by organizations such as companies, government agencies, and institutions account for more than half of the economic activity of any country.

Industrial marketing is unique. The channels of distribution are shorter and more direct. This leads to much more emphasis on personal selling and negotiation. Complex buying processes involved in organizational buying call for totally different and unique promotional strategies. Relationships are also different between buyer and seller when both are organizations. This a different ball game compared to a normal situation than the one when one of the two parties is an individual consumer. Buyer-Seller RelationshipsIn industrial or business marketing, situations where strong personal and business relationships grow between buyer and seller are not as rare. The strategic importance of many purchases is too great for companies to always shop around when making a purchase; they need to make absolutely sure that the product fits their needs and that it will be available when needed at the right cost. Therefore, many companies enter into long-term contracts, build relationships that enable buyers and sellers to plan jointly, and work to secure the future for both companies. Transactional MarketingPurpose of marketing is to make sale.

Sale is result and the measure of success

Business is defined by its products and

the manufacturing facilities. Brand, the consequent image are critical.

Price is determined by competitive market forces; price is an input.

Quality is largely related to the technicalities.

Can be considered as an outcome of the solutions.

Communications are aimed at aggregates of customers.

Valued is created by the products and prices.

Stress is to make the next sale; find the next customer.

Satisfaction is measurable by surveys.

Market share can be used to estimate the customer satisfaction.

Role of internal interface is not significant as internal marketing is not important.Relationship MarketingPurpose of marketing is to create a customer.

Sale is beginning of relationship; profit is measure of success

Business is defined by its customer relationships. Value is added through technology, knowledge, informational and social ties.

Price is determined by negotiation and co-operation between the two parties leading to

joint decision making; Price is an outcome.

Quality is largely functional. Perception of the customer is a sum of the multiple interactions.

Communications are targeted and tailored to individuals.

Marketer is valued for its present and future problem-solving capability.

Effort is to satisfy the customer by delivering superior value.

Market satisfaction can be measured directly by managing the comparatively smaller customer base.

Satisfaction is achieved by managing the internal interface. This makes the role of internal marketing very critical.

Types of Business Relationships

We can start looking at the nature of relationships involved in the context of marketing. Transactions are always important as they form the base of moving forward. On one side are the products which are elementary and do not need any great effort for shopping. There is not much more than the core product. Image of the company or the brand of its products can keep the customer attached to the seller or the products, perhaps by supplementing the promotions. Replacements are easily possible and therefore the competition can always walk in. Someone offering better price or better terms can always make an entry; price sensitivity is critical in case of transactional marketing. There are transactional relationships, situations where buyers and sellers interact with only selfish consideration, without thought of the possibility of future interaction.

Think of relationships as falling somewhere along a continuum. At one end is the purely transactional relationship. At the other end of the business relationship continuum is the partnership, which many writers liken to a marriage.

Someone approaching the relationship approach has to create more value to the customer than what can be provided by the core product alone. They would have developed more specific relationships. This is possible through technological inputs. This may be supplemented by knowledge or information related ties or even social ties. The effort is to go towards developing a partnership.

As we have seen in the table above, a partnership is a relationship characterized by mutual commitment, high trust, and common goals. Achieving partnership status is a marketing objective for many marketing organizations. Partnership status offers much greater opportunities to develop new business. This helps the seller party a chance to gain direct access to valuable information amongst many other benefits.

Issues of Quality: hard and soft dimensions

Transaction marketing does not involve any contacts outside the product per se. Benefits looked for by the customer are embedded in the product itself. Brand image is the only additional benefits that are available to the customer. Customer interface is much broader in case of the relationship marketing. The seller uses the opportunities to provide its customers with added value. With this, the perception of the interactions by the customers gains a lot more importance. It becomes necessary to manage the quality of the interactions. This becomes a lever for gaining customer attention and hence gains in importance. This naturally makes it necessary to carefully control both the hard and soft issues involved in the interactions.

It is normal for the hard quality of interactions to be carefully planned for and also taken care of. But the mode of delivery is equally important to help gain the full benefits. Even small slips could impact negatively on the carefully crafted technical support programmes. We all have the experience of being told how important our call is and still being kept on the hold for 10 minutes. This it self can be quite disconcerting. But worse cases can be cited. Excellent service being offered by rude staff for example takes the sheen away from the entire effort.

Corporate relationships

Corporate relationships can also safeguard the exchange mechanism by ownership or vertical integration. This happens only in an extreme situation but is a distinct possibility. A publisher assures itself of sustained access to printing services by having its own printing press. A medical equipment manufacturer may acquire a wholesaler to provide the selling and distribution services it requires. In these examples, the trading relationship shifts to an employment relationship. Employees work within a set of explicit rules and under an authority structure that is different from what is applicable between two organizations.

Internal Marketing as a prerequisite:

Internal marketing as a process has to be integrated with the total marketing function. Internal market of employees is best motivated for service mindedness and customer oriented performance by an active marketing like approach where a variety of activities are used internally in an active marketing like and coordinated way A thorough and on going internal marketing is a must for the relationship marketing efforts to be successful. It is not possible only for the marketing personnel to carry this through.

Concept of Marketing ContinuumVarious types of goods and services can be placed along the imaginary continuum. Markets for FMCG will be most productive for the transaction type strategy. Marketing of capital goods or even services would suffer seriously with such an approach. Interface has to extend beyond the marketing department on a regular basis.

Time perspective of marketing differs depending on where the product market lies on the marketing continuum. In transaction marketing one concentrates on the outcomes of each transaction. Time perspective has to be much longer in the process of development of relationships. The objective is to look for long run enduring and profitable relationships.

We have referred to the relevance of the product market. Relationship development process is time consuming and therefore expensive. Depending on the product market configuration one decides on the extent of relationship development. Thus, even when one is selling a commodity, product like paper to a large customer, it perhaps calls for a relationship approach.

This is an important issue which makes this approach far more critical in the context of industrial marketing.

Shorter Distribution Channels

In most cases, distribution channels do not include anyone between the manufacturer and the customer who uses the product, or user. Many manufacturers sell directly to the user. Even when the intermediaries are used, this may include one or two members at the most. This is a large difference between industrial marketing and consumer marketing.

Shorter channels result in much closer relationship between manufacturer and buyer. Buyers can have more direct input into the product planning process. This leads to direct relationships between various functional areas within both buyer and seller as a natural outcome. Thus, for example, the accounts payable department of the buyer may talk directly with the billing department of the seller to resolve problems. The arms length relations are avoided to have the full benefit of such a situation.

Emphasis on Personal Selling

Stronger relationships and shorter channels are two reasons why there is a greater emphasis on personal selling in industrial marketing. Direct communication between buyer and seller also increases the need for strong personal selling, because someone is needed to coordinate that communication. Salespeople are the members of the organisation responsible for coordinating their companys efforts at satisfying their customers. That responsibility is greater when the organisation is concerned about creating and maintaining partnerships with its customers.

Complex buying procedures involving many members of the buying organisation also require personal selling. Only through personally getting to know each individual and coordinating the sales-purchase process can a business by successful. Multiple personal relationships can strengthen organizational relationships, and these relationships are the responsibility of the salesperson.

We can summarise the differences between consumer marketing and Industrial Marketing in the following table:

Industrial MarketsConsumer Markets

StructureRelatively fewer buyers

Clustering or geographical concentrationLarge number of customers

Mass markets

ProductsComplex, needing customization, allied services important Standardised for mass markets

Buyer BehaviourFunctional involvement, rational motives, importance of relationshipsPsychological motives, family involvement

DecisionsDistinct, observable stagesMental, not observable

ChannelsShorter, more directIndirect, multiple

PromotionImportance of personal sellingAdvertising important

PriceBidding and negotiations a norm; list prices for standard products of low valueList prices and standard discounts

MARKETING FUNDAMENTALS IN INDUSTRIAL MARKETS

Industrial markets at a very fundamental level are quite similar to consumer markets but with a very specific difference motivation involved here are likely to be far more complex. You are all very familiar with the traditional 4 Ps. To clarify the concepts, we shall consider the basic difference in industrial markets against consumer markets. This will cover the traditional 4 Ps.

ProductIn 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 besides selecting the shade, such as a premium sound system, quality of seats or other auxiliaries. The vehicle manufacturer or the dealer may provide options to assist in the ownership process, such as financing, exchange options, insurance and even extended warranty. 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 markets a fleet of new cars to a company. The core product is still the cars, but now the quantity and assortment of models become important as well and can be considered part of the core product. In addition, the car company arranges an availability and delivery schedule. A contract for spare parts delivery becomes part of the deal. The arrangement may also include training of service personnel. The car company may provide some or all maintenance and service. Such a situation is more likely in case of trucks though.

PricePrice is the mutually agreed upon amount (of money or something else of worth) that satisfies both sides in the exchange. It must be beneficial to both the sides. The buyer and the seller must perceive 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 manufacture of the offering. In business markets, price determination can be the final step in a complex process.

The process may include the following steps:

Design,

Development and

Negotiation.

This becomes even more important when the product is the result of a collaborative effort.

For less-complex or standardized products, price may be the result of a competitive bidding process. Only for the most generic of products will price in business-to-business markets be based on a list price as in consumer markets.

PlaceIn consumer markets, place is about getting the product to the customer in the right form (size package, quantity, etc.); at a convenient time (availability of extended shopping time, short waiting periods for special orders, etc.); with minimum inconvenience associated with the place of purchase; and with possession ease (transfer of ownership, such as cash, credit, acceptance of personal checks).

Economic utility is a necessary part of the concept of value in business-to-business markets. It very often takes the form of supply chain management, inventory services, and material resource planning.

Bussinesses design their marketing channels to provide maximum value to their customers while looking for economy, reducing costs involved in the process of offering the customer the economic utility. This is true 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, leading to direct relationships between manufacturer and customer and eliminating channel intermediaries.

PromotionIndustrial marketing has a totally different emphasis on the parts of the promotion mix (advertising, sales promotion, personal selling and public relations) than is commonly found in consumer marketing.

Manufacturers attempt to create awareness of and interest in their products by intensive use of advertising. In consumer markets, advertising thus plays the largest role in the promotion mix.

Personal selling is the most used method in Industrial markets. It is the most effective type of promotion in the industrial marketing milieu. It allows for the intensive use of a dialogue, which allows rapid and accurate feed back to the marketer.

We have earlier discussed that products in industrial marketing are often the result of collaboration between the supplier and the customer. This collaboration requires the building of relationships between individual in their respective organizations. A strong personal selling and the ensuing dialogue helps in this effort. The carmaker in our example may have a sales team focus on providing information and personal service to the executives and employees of the buyer company involved in purchasing, managing, and maintaining the rental car fleet.

The organisation operating in the current marketing scenario has to make the optimum use these resources for identifying the needs of the customers. This is the driving force which defines the role of marketing towards meeting the customer needs. This is extremely important while approaching the industrial markets.

Derived DemandThe nature of demand in industrial markets is significantly different from the consumer demand. Derived demand is caused by the chain of suppliers and producers that contribute to the contribution of the total offering. This comes out of the demand of goods and services by the individual consumers.

Yarn is needed to weave fabric. Fabric is needed to make clothes which in their turn are needed to make shirts let us say. All these demands are derived demands a result of the ultimate consumer demand for shirts.

Demand in industrial markets is derived from consumer demand. Because of the derived nature, demand is leveraged greater swings affect this demand than in consumer markets. A small percentage change in consumer markets leads to much greater change in business markets.

The Bullwhip EffectThe volatility of derived demand can be easily comprehended by a look at the concept of the bullwhip effect. It shows how the end result is far more exaggerated at the end point. Consumer demand can vary as a result of seasonality or other market factors like spurt or drop in the market demand. Upstream suppliers of services and components that contribute to the total offering experience a leveraged impact. This can cause wide swings in demand.

Suppliers in the chain forecast production and inventory levels based on existing order rates. When consumer demand drops, the order rate drops and supply chain members compensate with lower production and inventory levels. The initial correction is normally much greater than the difference between the old forecast and the actual demand that would be logical.

Discontinuous demand Discontinuous demand is the result of the quantity demanded in the market. When it makes large changes in response to the market conditions discontinuous demand is experienced by the manufacturers. The shift in the market conditions takes place in large increments rather than as a consequence of incremental changes in demand. When a consumer goods manufacturer experiences an increase in demand, additional raw materials and supplies are consumed. Suppliers of these items face greater demand. They may be tempted to increase production capacity. This in turn increases the demand for raw materials and supplies.

When the demand reaches a significantly high level, it may need new production capacity, a discontinuity in supply capacity is the end result.Inelasticity of Demand Demand fluctuates more in industrial markets but it is also inelastic in the short term. A manufacturer may have integrated a component or a product into the design of its own offering to customers. As a result it may not be able to substitute another component for that item. It is even more likely in the industrial markets as it is necessary to maintain a significant differentiation from the competitors. If the items cost goes up because of unforeseen factors, the manufacturer has the choice of continuing production by paying the higher price. The alternative available would be to change the manufacturing process or design by use of alternatives. This may alienate customers who may not be expecting any changes. The customers reluctance to dissatisfy its customers is a major source of inelasticity.

VolatilityWe have already referred to the bullwhip effect. It is only a part of cause of volatility of industrial markets. Small changes in consumer buying attitudes have a potential for major changes in the total demand. The demand being largely derived in nature has major contribution towards this. This leads to a false sense of security in the industrial markets with the expectation that short term demands would continue for long. This leads to inertia as its worse contribution.

Rapid changes in the economy can have major impact. The slow down in mid 90s resulted in a sharp drop in the demand. Unfortunately this came immediately after the expansion in the industrial markets as a consequence of liberalization in early 90s. The slow down in late 90s resulted in the manufacturers holding back on the investments. Major shift in demand emerged in early 2000. It therefore needed tremendous efforts in early 2000 to resume additional level of production. Additional capacity creation has only started now in 2005.

Joint Demand

Joint demand refers to a situation where two or more products are used together and as a result are in demand together. One can consider software and hardware, tyres and automobiles and bats with balls as suitable examples.

Joint demand can create challenges for the products based on technology. When a superior technology comes in the products and services linked to the old technologies are likely to suffer. Thus the demand for rotary telephone instruments suffered with the advent of newer push button models. But the advent and popularity of cell phones has resulted in a dent in the likely demand of the landline phones. With the introduction of C.D.M.A. Technology the rate of growth of cell phones using G.S.M. technology got impacted.

In case of joint demand, the demand of both the products is almost simultaneous. This is against the case of derived demand. In that situation, consumption takes place much further downstream by a consumer several steps away from the manufacturer.Complexity of Demand One of the major implications of derived demand is that business marketers must understand their customers customers. Only when the firms are customer focused; they are able to fully understand their customers network of derived demand. This can help the industrial marketer to design products and services to give full benefit customers. This, on their part requires anticipation of changes in levels of demand as a result of the changes in their customers market.

The impact of the discontinuity of demand can be reduced when the industrial marketers participate in the relationship with the customer on a continuing, ongoing basis. As a result of complacency, marketer allows a competitor to take advantage by offering a lower price or better product. The resultant loss of short-term business is very likely to result in the loss of opportunities to be the supplier of the customers over a much longer time span.

In industrial markets, modification or supplementing of the product design is often needed. This ensures that a product will further enhance customer value.

The dialogue between customer and marketer is required to must quickly communicate complex concepts. These are more complex and therefore difficult to understand than those required in consumer marketing. This obviates the need of this process to be on-going.

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 normally not significant. 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. High switching costs can also come from the working relationships established on a personal level. This may be less tangible than the other logistical linkages but perhaps can be very significant.

Market StructuresIndustrial markets have much smaller number of customers as compared to the consumer markets. Firstly, there are fewer organizations than there are consumers. The organizations differ greatly in their nature. Hence, their needs for products and services differ.

Many market segments have very few organizations constituting them. Many market segments with differing needs implies that mass marketing approach can not be particularly effective.

Segments have smaller numbers of buyers. Each buyer has a different idea of what product provides the best value. The marketers shall have to customise offerings to specific perceptions that add value to the target customers. Absence of economies of scale makes the costs high. This means that the product must have a great deal of value built in justify prices. As an alternate the marketer has to identify and then target numerous segments whose needs allow a basic product design with minor customized modifications.

Concept of Value

It is important to understand the concept of value in the industrial markets. It is applicable in consumer markets as well. They buy the disk for it entertainment value. It is important for both sides to derive a benefit. Value is a sum of all the benefits that customer receives in the process of using a product or services. The marketer tries to sum all the benefits the customer can derive from the use. The same goes for costs incurred by the customer.

There are costs involved in purchasing and maintenance at the very obvious level. But there are time costs and effort costs in the purchasing process, as well. Purchasers also have to face the hidden costs associated with usage. Costs related to the learning time and the mistakes made while learning how to use the product can be considered falling in this category.

The sum of all these costs can be considered as the evaluated price. The definitions of the best value can changes with time. This is a function of experience and technology as well. Competitive situation in the market place also has its influence on what is considered as best value. When a new technology is introduced, the leader automatically obtains the best value positioning. As the products get commoditised the situation changes radically.

The customers perception of benefits and costs includes the product and the service but goes much further. This also includes brand image, the economic utility provided by distribution such as availbility and appropriate quantity. Of course this includes evaluated price. Evaluated price includes all the costs that are subtracted from benefits to produce value.

The direct activities are important. The support activities are very important as these make it possible to perform the direct activities. For instance, marketing creates brand image, which is valuable to customers because it provides assurances of quality. Marketing is then a direct activity. Human resources recruits, trains, and motivates the people who take care of the marketing and other activities. Therefore, human resources management is a support activity.

It is very important to note all prospects are not similar. Segments exist, based on what value the prospective customers are looking for and what they are willing to spend for their value satisfaction.

The third implication is that direct and support activities are equally important. Without critical links, the whole chain falls apart. This does not allow for the creation of customers value.

SummaryIndustrial marketing considers marketing to the companies that buy to make other products and to sell the offering in same or modified form to the other customers; this also includes marketing to the government and non profit organizations.

Industrial marketing differs from consumer marketing in the nature of customers, their size and locations. Nature of industrial demand differs in a significant manner. But the most important difference is in the decision making and the nature nd importance of buyer seller relationships.

Demand for industrial markets operates in a totally different manner. This demand ultimately flows from the demand of consumer markets. This adds to the volatility of the demand.

Channels of distribution are much shorter. There is greater emphasis on personal selling.

Relationship management is the core of industrial marketing. Relationships have to be carefully managed.

Most of the participants are likely to spend reasonably long time in this interesting and exciting field of Industrial Marketing.

CHAPTER - II

CLASSIFYING CUSTOMERS AND MARKETSIndustrial marketing concentrates on the buying organizations. Its application by a specific organisation is largely governed by the situation in which it may be operating.

Different customer groups can be clubbed together on the basis of how their buying processes operate. This can provide an insight into what creates value from their own views.

We give below an approach towards understanding the segmentation. Segmentation is the basic step in marketing and helps in decisions on the marketing strategies:

Commercial enterprisesThese are the organizations looking for adding value from the use of services. This includes the following:

Distributors These wholesale intermediaries work as middleman and provide utilities of form, time, place and possession. Assortment of products available from the distributors helps manufacturers meet the customers demand. This is their contribution towards adding value in the process.

Large organizations use this method to approach customers which do not justify the cause and offer involved in direct sales.

These intermediaries normally take ownership of the goods from the manufacturers.

Value Added ResellersThese are the intermediaries who supplement the products and in this process provide enhancement to the manufacturers products. They normally offer the customer a system solution. This requires integrating software and hardware and the solution tailored to meet customers need. They normally draw on many manufacturers to create system solutions. In the process they develop expertise in integration and system solution. In fact they create value network at user level.

Original Equipment Manufacturers (OEMs)

They purchase goods to incorporate them in their own manufacture for the end user. They are usually large volume users and therefore draw very serious attention of industrial marketers. We can consider for example Maruti purchase tyres from MRF. Diesel engine manufacturers buy fuel injection equipment from MICO.

This also helps the business in the replacement market. Customer is very likely to go for the same brand when the time comes for replacement.

Interesting point to note is that the core product does not change its nature. So, in case it has a brand value, it adds to the value to the end user.

A small machine tool manufacture adds value by using the control systems from Siemens. In most of the case, one tends to use a brand which is accepted in the market to avoid any loss of image.

End UsersThese are the customers who are targeted by the manufacturers. It has traditionally been considered as undifferentiated. The situation is changing gradually as the customers become far more sensitive. Having a brand image becomes important. This largely accounts for the gradual importance of branding in the industrial markets.

Government as PurchasersDirect purchase by Government always forms an important part of the total business. This might appear anomalous in these days of liberalization. But a careful analysis will show that in reality at least one fourth of the business is handled by the Government departments at the state and central level.. We are not considering the purchasers of public sector undertakings as these should ideally be considered with commercial enterprises.

The purchases that can be considered are as follows:

1. Routine purchases to carry forward the activities of Governmental administration.

2. Purchases for maintenance of the infra structure under government control.

3. Purchase for activities meant to generate projects of capital nature.

This is a very important area. Here, we can include activities of irrigation department for construction of dams; road construction etc. Atomic energy and space has a substantial level of activities. These would also get in here.

Complexity and standardization is the norm. This results in significant negotiation. Nature of the government set up leads to the involvement of very large and diverse group in the process. Competitive bidding is almost always required to get away from the effects of favouritism and undue influence. Negotiated contracts would be possible only in exceptional circumstances where issues of technology would be extremely important and would have major effect on research and development being planned.

Preferences for certain types of suppliers like public sector undertakings, small scale sectors also come into the picture. These at times may have nothing to do with the value the customer may be looking for and therefore can be very frustrating.

However, as a matter of principle, there is no difference between commercial enterprises and government as the customer would also be looking for value. Multiplicity of issues and individuals involved makes the matter extremely complex. It therefore also needs careful recognition of buying center influences.

Defence Purchase

A very important component of Government purchases is that of arms and ammunitions. This would include buying both of defense department and ordnance factories.

The specifics related to the government purchase get further accentuated.

Most of the transactions are large. As these are invariably related to the security of the borders, these get into much greater level of secrecy and confidentiality.

In India, the situation gets more complex as the munition is largely produced by the govt. owned ordnance factories or imported. In case of imports the value being large the senior levels of the armed force, bureaucracy and political leadership also gets involved. This allows full play to the international arms merchants. Because the veil of secrecy on the process, the decisions almost always lead to the accusations.

One has to consider all these factors carefully when looking at dealing with defence.

Non Profit OrganisationsNon profit organizations customers such as hospitals, educational institutes NGOS involved in social services fall into this category. At a first look, they may appear to be very price conscious. But a careful analysis would show their interest in value.

Many of these organizations are subject to public scrutiny. This tends to make their buying procedures and behaviour similar to Government. Manufacturers

Industrial markets can also be classified on the basis of the nature of their outputs. This has an influence on the buyer behaviour and hence helps in proper segmentation.

Raw Material ProducersSuch customers have significant contribution. They look for the possibilities of value added. Supplier of sugar to a large hotel may have to look specifically as to how value addition is possible. It needs some creativity at times. For the hotel or transport operator sachets would be of interest for example.

Here, the raw material loses identity when combined into the customers product. The customer of the fabricator does not quite know the sources of steel utilized. The material has lost its identity. Only if the brand is as strong as Tisco, the fabricator may try to leverage it but the benefits may not be noticeable.

Component PartsComponents and material retain their identity even when fully incorporated into the final product. Parts such as small motors are utilized in the disc drive. The contribution of the component is still recognizable in the finished goods.

AccessoriesAccessories may be added in a bundled form. Vendor of the primary product does not make the accessories. These are normally offered by the manufacturers who have enough expertise in design. They normally will have volume of production to have the economy of scale. This allows them to offer better products faster and cheaper. Accessories manufactured must have the right standards. Branding can help pushing the market.

Capital Good Manufacturer

These are big ticket purchases and considerable risk for the customer. Buying process is lengthy and requires detailed specifications to ensure that needs of globalization are met completely. Customer must place tremendous importance of trust in the supplier. It is essential for the marketer to understand the customers view point. The supplier has to carefully analyse the customer needs. This shall help them come up with alternatives or modifications to make their offerings distinctive, better and different.

Customers in such situations expect services like installation, education and assurances on after sales service.

Importance of customers needs

Different types of organizations have different environment in which the people take buying decisions. Capital goods are major decisions as they are normally used for production purpose. These decisions are also likely to bind the customer to a particular technology or a specific mode of production. This in its turn implies being bound to a specific vendor. Such magnitude of the decisions makes it important enough to involve the senior most levels of the buying organizations. It therefore involves many people within the organizations.

A routine purchase would not generate such a level of interest and decisions may proceed in a more straight forward manner.

INDUSTRIAL MARKETING ENVIRONMENTThe environment in which the business operates is extremely important to the operation of industrial markets. This can have major significant bearing on the selection of strategy to be successful. Some of these factors are examined below.

PublicsThis includes interested parties who may not be directly involved as customers or channel members. Their interest might be on the effect of the marketing activity on the economy and society.

FinancesWe can consider lending institutions, investors venture, capitalists and other members of the financial community under this category. Their interest is to maximize the financial performance. They would naturally prefer the organizations that are able to offer such an optimisation of the resources They can influence corporate action with their ability and muscle. These entities have the resources available which are needed by the organisations. The entrepreneurs or even the senior managers may have to deal directly with the venture capitalists, bankers and brokerage house to explain the vision and strategy.

Public sector financing institutions have a major role in investments. So far they have been less than active in running of the company. Their role and level of activity is likely to increase significantly in the near future.

Press and the visual media Media, largely financial media can enhance and even destroy the position of the companies in the market. It is extremely important to take care of them. Their importance is increasing in India. This can be noticed by the increasing circulation of Financial Dailies. It is also apparent with the popularity of CNBC, NDTV Profit and even more new business channels. Public Interest GroupsThey often get the attention of opinion makers. Good public relation efforts must be combined with a strategy to minimize the negative impact of marketing activities. Best example in Indian context is the hue and cry raised against Enron; Arundati Roy and Medha Patkar and activities of Narmada Bachao Andolan.

Internal PublicsThe reputation and image of a firm is influenced by the attitudes of its employees. The feeling of goodness gets communicated by word of mouth by current and past employees. It is therefore important to promote belongings and ownership so that positive attitudes get reflected.

This group has been traditionally ignored by almost all the groups in India with te exception of Tatas and Godrej. Importance of this group is now being gradually recognised.

Macro environmentThis includes the characteristics of the population across different regions. All these have influence on consumer consumption which in its turn has an effect on business.

The Economic Environment

The state of the economy affects customers willingness and ability to buy. This affects personal income which influences derived demand in industrial markets. Interest rates contribute to the costs and company profits. The economy has a major impact on the channel members similarly. Poor economy affects the competitive situation as well. Competitors will also have lesser willingness to undertake new initiatives in an un favourable economy. On the other side of the coin, competitors may be desperate and willing to attack when hurt badly in a poorly performing economy. Public policy may also be influenced by the state of the economy.

The internal environment of a company is also affected by the economy. Fewer resources are available for new initiatives.

It is essential to have a grasp of the trends in the economy. This will help a marketer to anticipate the response of various participants within the marketers environment. This will allow the proper strategizing to evoke a suitable response.

The Socio cultural EnvironmentThe culture of the society in which the business operates has an impact on what people buy, why they buy it and use it to create the value for themselves. It also affects the mode and style of buying, and even the reaction to marketing stimuli. At a very fundamental level, this is quite similar to the situation in the consumer markets.

A culture is all the symbols and themes that reflect a societys norms and values. In any large society, multiple cultures and subcultures may be relevant.The Technological EnvironmentThe technological environment has been the moving force behind the industrial marketers. Technology enables customer service to be re designed and significantly improved. This is made possible as more information is readily available to marketers. Technology, however, is changing at an ever increasing pace. This obviates the need for being prepared.

Technology was a major contributor to the demise of vacuum tube electronics powerhouses such GE and RCA.

Competitive EnvironmentMichael Porter shows the importance of competition. Theodore Levitt has dwelt on this issue in depth. You are all familiar with various types of competitive situation. We give a summary below:

Pure Competition Many buyers and sellers exist with no one having over powering influence on the price no leverage positions. The market is significantly larger than any one player either buyer or seller.

Generally exist in commodities, such as raw materials and agricultural products.

Price is a major component of the marketing mix. Products are not differentiable; thus, sellers seldom deviation from the price is fairly rare.

Monopolistic Competition

Many buyers and sellers, but product can be differentiated. A range of prices is possible.

Products can vary in terms of quality, features, style etc. Specialty steel fabrication or advertising services can be considered as examples.

Branding, advertising, personal selling etc. help in the process and are important to differentiate.

Oligopolistic Competition

Market consists of a few sellers who are very careful to each others strategies.

Products can be uniform or non uniform. Typical examples include autos, airlines, steel industries.

Few sellers exist because of barriers to entry.

Price is aimed at maintaining stability; any shift in the capacity or technology changes the stability carefully arrived at. Chaos in airline industry currently is a good example.

Pure Monopoly

Consists of one seller,

Examples are Postal Service; Railways;

New competitors to the products and services provided by this group are generally small, niche players in the market.

Industrial markets by and large have oligopolies. This can operate either from the suppliers side or from the buyers side. The marketing strategy is precarious. Partnership can always break apart because the problems of decision making by a group of organizations.

Partnership evolving over the last few years is an interesting and positive development. Very few companies have resources to pursue basic research or comprehensive technical development. It is necessary to look at partnership that exists for evaluation of a new technology. Standard weakness of such alliances is the uncertainty it puts on the impact this will have an impact on the future. We can consider a joint partnership for new versions of video technology. IBMs efforts to work on software systems with the open systems to compete with Microsoft can also fall into this category.

Governmental Activities Influencing the Industrial Marketing EnvironmentGovernment has a major role in the systematic progress of economy. Towards this purpose it may have to take care of the following in controlling the economy as follows:

1. Protect companies from each other.

2. Protect consumers from unfair business practices.

3. Protect the larger interests of society by restraining irresponsible business behavior.

4. Work towards reducing the income inequality in society.

5. Make efforts to reduce unemployment and inflation. This will help in reducing the hardships of the people at large which will go towards stabilizing the economy.

To take care of all these issues referred to, government has to get involved in the following activities:

1. Regulating agencies like Monopolies commission

2. Deciding on the policy issues related to Import/export regulations.

3. Control of Fiscal and monetary policies

4. Funding of support for social services etc.

5. Funding for Research and Development

6. Taxation proposals to take care of the raising of resources while encouraging the economic development

It may even be considered that with the opening of the economy, the effect of the government on its environment would vanish. As we can see by the list above, this cannot vanish but can only reduce. Ideally government must ensure that business is allowed to operate without any shackles on the freedom of action. At the same time, they ensure a balance growth.

Changes in the Market Place

It is necessary to understand the evolution of the markets. It is useful to understand how the markets have developed in the past and how they are likely to change in the future. For instance, markets are generally not oligopolies from the very beginning. Usually they start out as a temporary monopoly when a company introduces a product with a radically new technology. As this product is improved, the customers learn more about the product and its technology. This results in the market becoming more competitive as new and more entrants are attracted.

When there are minimal barriers to entry, the product easily becomes a commodity. This leads to the market moving towards pure competition; with many players and slim margins. This is an ideal situation for the consolidation. A few competitors may emerge by developing the brand identity and working on operating efficiency. The competitors who cannot match costs or develop suitable differentiation drop out. The market evolves to an oligopoly.

The marketers utilise the concept of Product Life Cycle for their offering or markets to anticipate the behavior of customers. This can also help in understanding the general nature of competition, both at the moment and it is likely to be faced in the near future. The nature of competition reflects a mature industry much more than it does in an introductory market. Customers, such as Dell Computers, Compaq and IBM, know their needs and how to meet them. Competition exists and is well entrenched.

The usefulness of the PLC has two limitations. The PLC gives only general guidance on what to expect. It is not useful in predicting changes from one stage of the PLC to the next. It is not helpful in suggesting strategies or actions that can be suitable during the current PLC stage or some future stage.

The Technology Adoption Life Cycle

While the PLC has limitations on its usefulness, it stresses the reality that things will change. The marketers must be capable of adapting to survive the likely changes in the marketplace.

It is important to look at the different nature of products or offerings as well. PLC may be help in understanding the marginal innovations which help in extending the useful life of the products. In the case of break through innovation, additional insight may be gained by examining another life cycle than can be superimposed on the PLC, the technology adoption life cycle (TALC). The TALC focuses more on the kinds of customers and how they come to adopt the new technology.

The TALC describes how a breakthrough innovation gets adopted in the market. Geoffery Moore has developed the innovation diffusion He updated the groupings on the basis of his research. He did not just change the names of the groups, though. He uses the TALC as a framework for explaining two principal observations about how technology markets evolve. The first observation is the existence of a chasm, a break in the sales growth curve for a new technology. The second observation is the chaos that occurs in a period of rapid growth which Moore calls the tornado. The tornado eventually produces the emergence of a dominant supplier. These two observations and the implications of the TALC have potential for providing useful guidance to the business in the industrial markets.

Moore suggests that there are natural breaks in the TALC curve. In the illustration given above, a relatively large break- the chasm occurs between the visionaries and the pragmatists. This occurs because pragmatists will not treat visionaries as credible references when it comes to adoption. Pragmatists want proven solutions, with little trauma in their adoption. Pragmatists will not buy until other pragmatists buy and provide references. It is difficult, though, to find the pragmatists who buy first and then provide references for other pragmatists. Visionaries, on the other hand, try to make quantum jumps in the way they compete. Hence, they adopt an innovation before all the pieces are in place to make the product work well, that is, before a whole product exists. The visionary buyers then create or buy customized pieces of the system to make the whole thing work. The trial-and-error process of sculpting such a customized solution can create a state of chaos within the adopting organization. Thus, visionaries tend to obtain a reputation for wreaking havoc within their organizations.

To cross this chasm, Moore claims that the vendor of an innovation must pass through the first two segments the technophiles and the visionaries. These are necessary because the whole product cannot be defined and then developed until enough experience has been gained. Then the vendor must find a beachhead, or foothold, nice among pragmatists on the other side of the chasm. This niche must have need for the product that is so compelling that pragmatist buyers will take the risk of buying without the assurance of references from other pragmatists who have already adopted. The vendor must find such a niche, create a whole product to meet the compelling need of these buyers, and offer the whole product to these buyers through proper positioning. The proper positioning means that the one or two most compelling benefits of the whole product are clearly communicated and delivered.

If the market is large enough, a groundswell of demand can develop. The market goes into a period of rapid sales growth, the tornado. This portion of the TALC superimposes directly onto the growth period of the PLC. Moore claims that, in a tornado, the market wants to support the market leader. This occurs because the buyers, pragmatists that they are, face the least internal chaos if the systems they are buying are the recognized standard. There will be plenty of peripherals and software that will work easily with the leaders product. There will be plenty of consultant expertise available to help them through problem periods. As upgrades become available, adoption of these upgrades causes the least internal upheaval if they are backward compatible with the leaders product that was purchased earlier in the tornado.

Moores ideas give a framework for interpreting the dynamics of their markets. Even though many of these are not fully established, they offer interesting insights. Regis Mckenna, an authority on One to One Marketing in industrial markets suggests the concept of market ownership. This focuses on innovating the value proposition to the market rather than on the technology itself.

(This part is largely based on the following references:

G. A. Moore Crossing the Chasm Marketing and Selling Technology to Mainstream Customers Harper Business 1991

Everett M. Rogers Diffusion of Innovation 4th Ed. Free Press 1995)

Conclusion

Classifying products and markets is useful for segmenting the market. Different products helps one understand different value propositions the customers may be looking for. Careful analysis also helps identify the constraints faced by the seller organizations.

Markets are operating in an environment which is influenced by many and various factors, government being an important competition even in these days of open economy.

Competition is always very important to understand the industrial markets. It is necessary to understand how the markets change. PLC and TALC offer two such frameworks. Interesting though these concepts are, these have to be taken for guidance only.

Chapter - III Nature and Character of Industrial MarketingMarkets offer a very unique medium for meeting the individual and organizational needs. They quickly and almost automatically adjust and allocate the resources for the optimum utility. The customer is looking for the means for a value satisfaction. Markets co-ordinate to ensure such a provision is made available to the customers.

Purchasers are looking for value. They only shall determine what is of value to them. Based upon this they decide what they are willing to pay for the offerings. Situation and time could have critical influence on this as well. Thus for a breakdown situation the producer would not consider any negotiations. For the same components and parts for routine supply the normal negotiations would take place. If annual business is being

Under consideration, these negotiations can indeed be very tough!

But the seller is equally and deeply involved in the process as well. Total sum of the costs of all the activities involved have to be low enough to result in a surplus. Otherwise the seller can always opt out. Such a situation always reduces the number of players in the field and therefore can result in pushing the price up as a consequence

.

Price therefore coordinates activities of various players in the marketplace. Prices can increase when the demand shoots up. This in turn slows down the process of purchasing. This offers an opportunity for new players to get into the system. On the other hand a glut in supplies will push the price down and result in pushing the availability down.

Players in business and industrial markets have to be capable of adjusting to the environment. They have to be very good at judging the value creating quality issues. Sellers have to avoid complacency. They should be able to adapt to create economies in operation by improving their own operational efficiency and adding value to their products or offerings.

Supply ManagementIndustrial markets require the entire chain creating value to work in unison. This needs proactive management of the supply function. An auto manufacturer has to ensure that the vendor has the ability to produce the right components in right quantity at right time. This involves the sub supplier being taken care of as much as the vendor be interested in taking care of the customer. Information sharing and joint panning can be used to coordinate the work. This means that one goes beyond simply negotiating on price. Rack rate is not three only factor to be taken in consideration. One has to consider the total cost of acquisition and usage to have a proper picture of the efficiencies possible.

Managing RelationshipsWe have touched on the importance of relationships in the industrial marketing milieu. It is important for marketers to understand the customers preference. These are invariably a function of the market conditions and the buying situation. We can study it by having a look at the following table.

The spectrum of Buyer Seller Relationships

Transactional ExchangeCollaborative Exchange

Availability of AlternativesMany AlternativesFew Alternatives

Supply Market DynamismStableVolatile

Importance of PurchaseLowHigh

Complexity of PurchaseLowHigh

Information ExchangeLowHigh

Operational LinkagesLimitedExtensive

Based on Joseph P.Cannon and William D. Perreault Jr., Buyer Seller Relationships in Business Markets, Journal of Marketing Research , Nov. 1999.

Customers prefer transactional relationships when the market is competitive with many alternatives available to them. This is usual for routine decisions in a stable market.Here purchase is not very important and is easily noted by the absence of any operational linkages. One can observe this in commoditised markets like stationery supplies, hardware etc.

In a dynamic market where technology is ever changing and the need of technical inputs is high the customers will be looking for collaborative exchanges. When the seller is considered significant in importance and purchase important the clients will seek closer relationships. The closest partnerships arise both when the purchase is important and when there is a need, from the customers perspective to overcome procurement obstacles that result from fewer supplier alternatives and more purchase uncertainty(Cannon & Perreault as in the table) Such relationships always involve operational linkages and very high levels of information sharing. Such a situation arises in the case of large value capital equipment, software and critical components and spare parts.

Switching costs play a very important part for the collaborative customers. Organisations invest the relationships with the suppliers in many ways.

They invest money, they invest in people, as in training employees to run new equipment; they invest in lasting assets, such as the equipment itself; and they invest in changing business procedure like inventory handling. (Barbara Bund Jackson, Build customer relationships that last; H.B.R. November 1985)

Because of these investments customers are reluctant to switch as similar costs shall have to be repeated when a new supplier is selected. Another risk faced by the organizational buyer relates to the danger of making a wrong choice.

The industrial marketers have analyse the situation carefully to decide on the effort invested in building relationships. It is useful to make efforts to build trust through frequent visits and discussions with the teams from across the functions. The method is expensive and even entails a certain amount of risk. These efforts utilize both intangible and tangible assets. These must only be committed when the business proposition calls for it.

Customers looking for routine products or services do not show any great loyalty and are liable to switch the supplier. It is a challenge to work out a suitably attractive combination of product, service, technical support and other benefits to win and retain business in such a situation. The mode of delivery with various innovative initiatives can be of help.

Model for Building Relationships

Buyer Seller relationships are very important in industrial marketing. This is an extremely complex phenomenon. Metaphor of courtship and marriage is very often used and also happens to be the most relevant. Theodore Levitt observes that The relationship between a seller and a buyer seldom ends when a sale is made. Increasingly the relationship intensifies after the sale is made and helps determine the buyers choice next time around. The sale then merely consummates the courtship, at which point the marriage begins. The quality of marriage determines whether there will be continued or expanded business, or trouble and divorce.

The relationship development can be split into four phases. These are Awareness, Exploration, Expansion and commitment. We discuss these briefly below. Awareness:

The buyer and seller are barely aware of each other at best. Seller would tend to get adequate information of the specifications, buying processes etc. Buyer may get to know of the offerings from the publicity and trade shows.

Exploration:

This is the typical stage where the parties probe each other. Seller may approach the prospects. Even a trial order could be obtained. Dependence on each other does not exist at this stage. Association can gradually develop or can be terminated without any major difference to either side.

This is affected by the nature of attraction between the two parties. This is a function of the payoff that could be available out of the interaction. The benefits can be tangible or intangible. Thus sharing the same college or an association can be considered for this purpose. The buyer looks for all the usual benefits like quality and price. Associations supplement these qualities. The seller of course looks for steady business at a good price.

Controlling costs and restructuring operations have been stressed in the Indian industry in the last decade. This makes it necessary for the manufacturers to look for long standing relationships and to examine the opportunities for value addition. This can cover issues like joint designing and product development. The process leads to reducing the number of vendors and give benefits for the manufacturer.

Communication and negotiation help in the process of development of relationship. It is necessary to be direct rather than beat around the bush in stating the goals, preferences and needs. This avoids the pitfalls in the development of relationship in future. The frankness needs a level of reciprocity to allow for a speedy growth in the relationships. When the partners take the trouble of, go to the bother, and expend the psychic and physical energies necessary to negotiate the potential for association has to be evident. It is similar to the stage of courtship. One offers to have coffee second or third time when one wishes to continue the association.

Concessions obtained from the negotiations have to be beneficial to both sides. Evenness and honesty should be the hallmark at the time of negotiations. This indicates a just use of power. This enables use all the resources beneficially. Such resources can be available in many forms like expertise, economic benefits and status.

Direct experience has an important role to play in carrying the relationship beyond the stage of exploration.

Expansion:This is the stage when the participants move further from probing to enlarging the scope. Account development is the normal indication of this stage. Cross selling and up selling are the manifestations of this phase. The expansion leads to gradually increasing dependence between the buyer and the seller. Commitment:Commitment shows the need to maintain a relationship which is considered valuable and important. This may lead to the two parties sharing a belief in the effectiveness of the relationship in future. Buyers and sellers may even consider exchanging the employees. Relationships can be further strengthened by sharing systems and even equipment. Social relationships can also be strengthened to supplement.

Dissolution of Relationship:Relationships can always be dissolved either by mutual consent or otherwise. This is quite easy at the earlier stage. Mutual dependency increases when the relationship lasts longer. Costs of switching become significant.

Parties in business retain the relationships largely because of the two following reasons:

a) Relationship is rewarding in either of these: financial, psychological or strategic.

b) There are no alternatives or the exit is too costly.

This can be seen in the case of software of process equipment manufactures. Performance below the expected level is tolerated for some time. When a partner suffers from a number of letdowns, the dissatisfaction goes very high. The consequent negativity in the relationship darkens the view of the future.

In the inter organizational context, formal notice and dialogue is quite usual. Thus the distributors might be invited for a formal meeting and notice being given to improve performance.

Marriage metaphor can be considered in many contexts. For situations that allow gradual development and reliance on the trading partners, the metaphor is particularly befitting. It focuses on the mutual problem solving, the development of efficient routines and the reinforcement methods.

SummaryMarkets co-ordinate and bring efficiency to the economic system. For complex products and uncertain situations, buyers and sellers must find means to co-ordinate further.

Buyers and sellers develop high performance relationships quite often. The process can be compared to that of courtship resulting in a marriage. It includes gradual probing, building on trust, customization and overall deepening of dependence.

In some contexts, this development may not occur naturally. In such a case it may be necessary to protect the investments by either side.

Chapter - IVPerspective of the BuyerIndustrial markets consist of three important segments. These are Commercial organizations, governmental sector and the institutions.

These have unique and identifiable characteristics. It is necessary for the marketers to understand these unique dimensions to decide on the relevant marketing strategy.

We consider below important feature with a special emphasis on the commercial buyers. Most of these are applicable to the other segments as well.

Commercial Enterprises: The unique featuresSizeA significant feature here is the heavy geographic concentration of such organisations. As it is, the players in the industrial markets are much fewer. They are also much larger. Large buyers are indeed very important in the industrial markets because of their muscle and large and at times overpowering presence in the marketplace. Thus, in auto sector, importance of Maruti, TELCO or Hyundai is self evident.

Small manufacturers are also an important component of the total business. Almost two thirds of all manufacturers employ less than 50 persons. Organisational buyers in smaller set ups have different needs and orientation. It is necessary to adjust to such needs.

Geographical concentration:

There is major concentration in the industrial markets. This develops naturally as a result of the growth in clusters. Clusters offer natural advantages. Most large metropolitan areas are lucrative business markets. This implies that a large potential exists in a specific area even though the needs of the buyers may differ significantly.

This implies that the selling organizations can concentrate the efforts in such areas of high potential. This makes the use of the own sales force effective and economic. It is also much easier for them to take care of physical distribution easily.

The Purchasing OrganisationProcurement is usually taken care of by a separate department. This is organized to ensure that the personnel in this department acquire a suitable level of technical competence and expertise. As products and materials become more sophisticated, buyers have to more knowledgeable about material characteristics, manufacturing processes and specifications.THE GOALS OF PURCHASING

GoalDescription

Uninterrupted flow of materialsRegular flow of supply and services to allow operations

Manage inventoryMinimise the inventory levels

Improve qualityImproving quality by suitable evaluation and selecting the offerings

Managing supplier relationsSelecting suitable suppliers, develop and sustain relationships

Achieve lowest total costPurchasing the most economic offerings , simultaneously maintaining the operations at efficient level

Assist in obtaining competitive advantageImprove the competitive position by reducing the costs of the supply chain and capitalizing on the capabilities

It is important for the marketer to understand the objective and goals for which the purchasing organizations operate. They have a very large number of objectives and they have to achieve a balance amongst these objectives. These are summarized above.

Understanding Total Cost:To have full benefit in terms of savings and growth it is necessary to understand the concept of total cost and value of a good service. It requires a careful consideration of the following:

Factors involved in bringing the products in the supply chain like transportation

Costs involved in acquiring and utilising the offerings over their lifetime. This has to take care of the costs of spare parts and servicing as well.

Quality, reliability and other such attributes.

Costs of installing and operation of the equipment.

Cost of disposal after the life of the product is over. This takes intro account the realisable value or the nett cost of getting rid of the product

Value of the offerings to the customers of the buyer.

The above really refers to the total cost of ownership. Here one has to consider the total cost over the usable life of the offering. Thus a premium product with better support is justified over a product with a lower ticket value.

It is important to note here that even the services have a total cost of ownenership. Many organizations are outsourcing services like market research or market analysis to reduce the total cost of ownership.Reducing Costs:

It is important to reduce the costs involved in the process of ordering. A method to achieve this by evaluating ordering and cost of carry of inventory is to determine the Economic Order Quantity. This is the level of arrived at by balancing the costs ordering and storing. This, at times may involve forward buying in large quantities than needed currently to avail of the discounts that may be available.

Another method used quite often is Value Analysis. It involves a thorough analysis of costs and value associated with a component or part. To be effective, value analysis must take into account the value in use. The key question always is whether it is possible to reach the same level of operations with a lower cost.

Importance of Purchase in the Profitability of the Firm

In the current competitive environment, direct contribution by various departments is very important. We can look at the illustration given below highlighting this contribution which purchase is capable of towards improving the profitability of the operations.

Profit Impact from Marketing and PurchasingMarketing ImpactPurchasing Impact

Net RevenueRs. 12,00,000Rs. 13,20,000Rs. 12,00,000

Cost of goods 9,00,000 9,90,000 8,10,000

Gross Margin 3,00,000 3,30,000 3,90,000

Promotion 1,00,000 1,20,000 1,00,000

Expenses 1,50,000 1,50,000 1,50,000

Net Profit 50,000 60,000 1,40,000

We have taken a hypothetical case where the company wants to improve the profitability. Increased business needs push in the market resulting in the increase in the promotional expenses. Ten per cent increase in the business results in 20 % improvement over the net profit level. Against this, a decrease in the cost of goods purchased results in a major improvement in the bottom line. Cost savings the efficiency in purchasing has a direct impact on the net profit levels.

Purchasing Philosophy

Purchasing has traditionally been characterized by what is best described as the adversarial philosophy. This involves increasing competition between various vendors. Such competition is expected to reduce the price while increasing the attention and service. Buying from a large number of sources is likely to lower the quality of relationship and at times may also result in problems of availability, service and support. An alternative to this is called preferred supplier system. It seeks to maximize the benefits of collaboration between the buyer and selected suppliers. Such partnering relationships are likely to result in such situations of mutual benefit as given below:

Higher volume purchase of strategic importance.

Specialised and customized offerings.

Unique products with no other sources.

These result in contribution of greater value to the buyer besides offering benefits to the seller. An obvious benefit is significantly reducing the number of vendors. This is used by almost all the major companies. Bajaj Auto, for example claims to have reduced the number of vendors from thousand plus to a few hundred in the first stage itself.

Single sourcing is when a buyer to satisfy all needs in a given area. For example a company may decide to buy its maintenance supplier from one vendor. This can even be achieved by negotiate adversarially without any concern about the other side. This is meant to illustrate that partnering is a matter of philosophy. Multi sourcing or even single sourcing can be achieved in either of the situations.

Trends in PurchasingWe have already discussed the importance of purchasing to the organisation. In the current scenario, like all other areas, purchase has also been facing downsizing. More is being purchased in the same time by reducing the number of suppliers. This means reducing the shopping time as also reducing the number of transactions to be tracked.

This also involves developing closer strategic relationships Important responsibilities are also moving outside the organisation selectively.

Ethics in Purchasing:

Ethics in business is gaining importance these days. This is of even greater concern in purchasing. Buyers act on behalf of their companies and deal with the outsiders. They are also susceptible to economic pressures.

It is important to first recognize the ethical implications of the situation. Individual has to be keen to operate in the right manner. Probability of being caught in the act can be a deterrent to some but ideally the persons must have a strong desire to behave in an ethical manner.

It is very important for the buyers to offer conditions suitable for Fair Competition. This involves offering all the competitors an equal opportunity. This means giving every one an equal access to the buying opportunity.

Gifts are a normal part of the purchasing situation. It is deemed to be effective in enhancing the ability to sell by strengthening the relationships. The issue here is the type and value of the gift. At what level can one consider it as a help and when can it be considered reaching levels which can be unethical?

CHAPTER VSEGMENTATIONEveryone consumes goods and services. A considerable amonut of goods are bought are bought by people other than those who ultimate consume these. Similarly, the decision maker with regard to purchase could neither consumer nor even purchaser. It is important for the marketer to carefully differentiate between these three categories.

Influence of the end customer decisio