Business-to-Business Marketing Haas School of Business UC Berkeley Fall 2008 Zsolt Katona Agenda today • Review of course structure • Needs and decisions in B2B markets • Introduction to INDUSTRAT 2 Course objectives • To learn – how general marketing concepts apply to (differ in) the industrial business context – some new concepts • To experience a realistic industrial marketing environment – complex daily decisions but need for long-term strategic thinking – typical B2B setting – interacting teams – time pressure 3 Assignments • Simulation related (group work): – After third decision, write-up a strategic plan • corporate goals (mission statement) • how to achieve these goals – Final presentation (more details later) • in view of the planed strategy... • Industry / Firm analyses • ~15 minutes • Class participation 4 Evaluation • Group work/simulation results 50% • Final presentation 20% • Participation 30% 5 Introduction to B2B marketing • Definition: B-to-B marketing is – marketing to organizations, – marketing products that will be used to create other products. 6 Some distinctions • • • • • • fewer customers fewer transactions with higher $ value marketing is more a general management function high degree of functional interdependence higher degree of product complexity derived demand (!) 7 Key distinctions 1. Higher importance of Process and Relationship benefits compared to Functional benefits. 2. High degree of buyer-seller interdependence (strategic relationships) - Materials management JIT MIS systems… 3. Complex buying decision process – – – longer more people involved (DMU) more “structured” (DMP) 8 Three types of benefits Functional benefits - technical specifications - quality Process benefits - cost of transport - reliability of supply - MIS, materials management Relationship benefits - trust - flexibility - customization 9 Consumers’ Purchase Decisions Utilitarian Products Model: Know → Feel → Do Rational evaluation of alternatives: trade offs Choice heuristic: ‘Buy the Best’ Low Involvement Products Model: Know → Do → (Feel) No evaluation of alternatives: confirmation Choice heuristic: ‘Buy the Familiar’; ‘Buy the Cheapest’ Hedonic/EgoExpressive Products Model: Feel → Do → (Know) Emotional evaluation: feeligs Choice heuristic: ‘Buy What I Like’ 10 Prototypical DMP for a utilitarian product (consumer goods) Try Prefer Consider Know benefits Aware Mkt. potential Marketing weapons Also called: - AIDA - Hierarchy of effects 11 Prototypical DMP steps for an industrial good • Need recognition • Product definition and specification • Development of procurement strategy – make or buy? – formation of buying center! – design sourcing system • Search/qualification of potential sources – simultaneous vs. sequential evaluation – RFPs: open/closed bids, existing vendors • • • • Selection of suppliers - final negotiations Design of an order routine (contract) Order Performance feedback and evaluation 12 Example: Brake Pads Weapons: Pass rate: DMP steps: Trade shows Aware of company 90% Trade Publications Brochures Aware of product line 80% Short-listed for bid 40% D-spec check 10% Promotion expense Material scientists Development engineers b-check 10% pre-production check 5% Production engineering Price, delivery service primary supplier 4% secondary supplier 13 Example: OAG • OAG – Official Airline Guide – – – – – Publishing public flight information ~100k customers Monthly subscription: $20 80% gross contribution Family business • In 1982 AMEX decides to enter the corporate travel business and becomes interested in OAG. • What should OAG do? – Should it sell? – What negotiation power does it have against AMEX? 14 The O.A.G. Funnel Problem: Mgr. stuck in Chicago at 2:00 am. He is pissed !! Mgr. complains to Secretary Sec. complains to Travel Agent Travel Agent recommends OAG Sec. orders OAG Sec. receives OAG + invoice Inv. goes to finance Inv. to accts payables Bob pays !! ☺ Mgr. thanks Sec. ☺☺ Mgr. uses the Guide Sec. gets renewal invoice Funnel Analysis • The DMP often has important strategic implications in B2B markets. • Never use/accept the ‘standard’ DMP. • Use Funnel Analysis, a simple qualitative method to uncover the DMU/DMP in an organization. – Method: interviews, focus groups – Main uses: • Diagnose bottle necks • Forecast sales • Targeting: optimize sales strategy 16 Implication: Communication strategy • Personnel selling is rated by industrial marketers more than twice as effective as other communications media • 90% of sales budget is personnel selling • But… – Bain and Co. 17 18 19 INDUSTRAT The Strategic Industrial Marketing Simulation Jean-Claude Larréché & David Weinstein 20 Objectives of INDUSTRAT Review of strategic concepts Application in an industrial marketing context Focus on prime industrial marketing issues 21 INDUSTRAT Features Strategic Marketing Long term perspective Marketing as a profit center Marketing strategy based on segmentation, positioning and portfolio approach Marketing mix decisions secondary to strategic decisions Competitive environment 22 The Pedagogical Approach A Simulated Environment 23 The Economic Environment Population: 250 million 24 Korex Products Strategic Product Attributes Resistance: Suspension: Frequency: Density: Ohms Micro-seconds Kilo-hertz Micro-grams per mm3 (W) (Msc) (KHz) (MGC) Non Strategic Product Attributes, e.g Liquid Powder Fiber Solid 25 Lomex Products Strategic Attributes Convexity: Degrees (De) Conductivity: Micro-Seconds (MSc) Purity: Percent (%) Maximum Energy: Micro Watts (MW) 26 The “Competition” 27 INDUSTRAT’s Competitors KARR KERR Firm 1 Firm 2 KIRR Firm 3 KORR Firm 4 KURR Firm 5 28 The Economic Environment WEST CENTRAL EAST 29 Account Size Small Medium Large 30 End-Product Applications Communication Instrumentation Consumer Goods 31 Korex Market Macro segmentation large medium east small central west 32 The Adoption Process Testing Awareness Supplementary Supplier Major Supplier 33 Purchasing Process Dynamics 34 Korex Market Micro-segmentation General Manager Production Engineering Purchasing 35 Dynamics of the Purchasing Process Awareness General Testing Supplementary Major 100% Production Purchasing Engineering 36 0% Industry Dynamics Market growth Korex ? Lomex Competition No new competitors Introduction of Lomex Collaboration Technology No further scientific innovation expected Four Korex technologies One Lomex technology Economic environment Growing GNP Inflation Antitrust intervention 37 Direct Selling and Distribution 38 Corporate Resource Allocation Production Dept. Finance Dept. Manufac. Costs Inventory Holding Costs Marketing Expenditure Budget Internal Transactions R&D Sales Dept. Dept. R&D Expendditure Sales force Expenditure Advertising Expenditure Client Companies Advertising Agency Technical Support Promotional Expenditure Promotional House Market Research Mkt Res Firm Corporate Marketing Dept. Corporate Communication Expenses Commission Marketing = Profit Center Sales Revenues Technical Dept. Net Marketing Contribution Licensing Fees Licensors Licensing Revenues Licensees 39 External Transactions Administrative Structure Corporate Resource Allocation Marketing Expenditure Budget Marketing = Profit Center Net Marketing Contribution 40 Administrative Structure Internal Transactions Production Dept. Finance Dept. R&D Dept. Manufact. Costs Inventory Holding Costs R&D Expendditure Sales Dept. Sales force Expenditure Technical Dept. Technical Support Commissions Corporate Marketing Dept. Corporate Communication Expenses Marketing = Profit Center 41 Administrative Structure External Transactions Marketing = Profit Center Sales Revenues Advertising Expenditure Client Companies Advertising Agency Promotional Expenditure Market Research Licensing Fees Licensing Revenues Promotional House Market Research Firm Licensors Licensees 42 Administrative Structure External Transactions Marketing = Profit Center Joint R&D Funds Obsolete Inventory Sales Partners Exporters Loans Loans Repayments + Interest The Bank 43 Decisions for your First Period No market research available No R&D allowed No licensing allowed Avoid radical changes Familiarization Gather information Organize your team 44