Business-to-Business Marketing

1. Business-to-Business Marketing Haas School of Business UC Berkeley Fall 2008 Zsolt Katona

2. Agenda today • Review of course structure • Needs and decisions in B2B markets • Introduction to INDUSTRAT

3. 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

4. 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

5. Evaluation • Group work/simulation results 50% • Final presentation 20% • Participation 30%

6. Introduction to B2B marketing • Definition: B-to-B marketing is • marketing to organizations, • marketing products that will be used to create other products.

7. 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 (!)

8. Key distinctions • Higher importance of Process and Relationship benefits compared to Functional benefits. • High degree of buyer-seller interdependence (strategic relationships) • Materials management • JIT • MIS systems… • Complex buying decision process • longer • more people involved (DMU) • more “structured” (DMP)

9. Three types of benefits • Functional benefits • technical specifications • quality • Relationship benefits • trust • flexibility • customization • Process benefits • cost of transport • reliability of supply • MIS, materials management

10. Utilitarian Products Model: Know → Feel → Do Rational evaluation of alternatives: trade offs Choice heuristic: ‘Buy the Best’ Low Involvement Products Hedonic/Ego-Expressive Products Model: Feel → Do → (Know) Emotional evaluation: feeligs Choice heuristic: ‘Buy What I Like’ Model: Know → Do → (Feel) No evaluation of alternatives: confirmation Choice heuristic: ‘Buy the Familiar’; ‘Buy the Cheapest’ Consumers’ Purchase Decisions

11. Marketing weapons Know benefits Mkt. potential Consider Aware Try Prefer Prototypical DMP for a utilitarian product (consumer goods) Also called: - AIDA - Hierarchy of effects

12. 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

13. Example: Brake Pads Weapons: Pass rate: DMP steps: Trade shows Trade Publications Brochures Promotion expense Material scientists Development engineers Production engineering Price, delivery service Aware of company 90% Aware of product line 80% Short-listed for bid 40% D-spec check 10% 10% b-check pre-production check 5% secondary supplier primary supplier 4%

14. 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?

15. 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 Mgr. uses the Guide ☺ Map? Mgr. thanks Sec. ☺☺ The O.A.G. Funnel Inv. goes to finance Inv. to accts payables Bob pays !! Sec. gets renewal invoice

16. 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

17. 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.

20. INDUSTRAT The Strategic Industrial Marketing Simulation Jean-Claude Larréché & David Weinstein

21. Objectives of INDUSTRAT Review of strategic concepts Application in an industrial marketing context Focus on prime industrial marketing issues

22. 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 strategicdecisions Competitive environment

23. The Pedagogical Approach A Simulated Environment

24. The Economic Environment Population: 250 million

25. Korex Products Strategic Product Attributes Resistance: Ohms (W) Suspension: Micro-seconds (Msc) Frequency: Kilo-hertz (KHz) Density: Micro-grams per mm3 (MGC) Non Strategic Product Attributes, e.g Liquid Powder Fiber Solid

26. Lomex Products Strategic Attributes Convexity: Degrees (De) Conductivity: Micro-Seconds (MSc) Purity: Percent (%) Maximum Energy: Micro Watts (MW)

27. The “Competition”

28. INDUSTRAT’s Competitors KARR KERR Firm 1 Firm 2 KIRR Firm 3 Firm 5 KORR KURR Firm 4

29. The Economic Environment CENTRAL WEST EAST

30. Account Size Small Medium Large

31. End-Product Applications Communication Instrumentation Consumer Goods

32. Korex Market Macro segmentation Communication Consumer goods Instrumentation large medium east small central west

33. The Adoption Process Testing Awareness KARR Supplementary Supplier Major Supplier

34. Purchasing Process Dynamics

35. Korex Market Micro-segmentation General Manager Production Engineering Purchasing

36. Dynamics of the PurchasingProcess Awareness Testing Supplementary Major General 100% Production Purchasing Engineering 0%

37. Industry Dynamics Market growth Competition Technology Economic environment Korex ? Lomex No new competitors Introduction of Lomex Collaboration No further scientific innovation expected Four Korex technologies One Lomex technology Growing GNP Inflation Antitrust intervention

38. Direct Selling and Distribution

39. Corporate Resource Allocation Internal Transactions Finance Dept. R&D Dept. Sales Dept. Corporate Marketing Dept. Technical Dept. Production Dept. Sales force Expenditure R&D Expend- diture Technical Support Inventory Holding Costs Manufac. Costs Corporate Communication Expenses Commission Marketing Expenditure Budget Net Marketing Contribution Marketing = Profit Center Sales Revenues Advertising Expenditure Promotional Expenditure Market Research Licensing Fees Licensing Revenues Client Companies Advertising Agency Promotional House Mkt Res Firm Licensors Licensees External Transactions

40. Administrative Structure Corporate Resource Allocation Marketing Expenditure Budget Marketing = Profit Center Net Marketing Contribution

41. Administrative Structure Internal Transactions Production Dept. Finance Dept. R&D Dept. Sales Dept. Technical Dept. Corporate Marketing Dept. Sales force Expenditure Technical Support Inventory Holding Costs R&D Expend- diture Manufact. Costs Corporate Communication Expenses Commissions Marketing = Profit Center

42. Administrative Structure External Transactions Marketing = Profit Center Sales Revenues Advertising Expenditure Promotional Expenditure Market Research Licensing Fees Licensing Revenues Market Research Firm Licensors Licensees Client Companies Advertising Agency Promotional House

43. Administrative Structure External Transactions Marketing = Profit Center Obsolete Inventory Sales Loans Repayments + Interest Joint R&D Funds Loans Partners The Bank Exporters

44. 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