Industrial Marketing (Book No.120)

CONTENTS Unit No. 1. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 2. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. TITL E The Nature of Industrial Marketing Introduction Types of Marketing Entities Industrial Marketing Types and Forms Demand Forces Industrial Products Vs. Consumer Product Marketing Relationship Marketing Cross-Functional Relationships Global Scenario and India Impact of Current Developments on Industrial Firms Types of Actions by Industrial Companies Major differences in Supplier-Customer Interaction Summary Keywords Self-assessment Questions Industrial Marketing Environment Introduction Business Environment Micro - Environment Macro - Environment Governmental Influences Competitive Forces The International Environment Modern Trends in Industrial Marketing The Internet Age Trend Towards Increased Globalisation Summary 25 Page No.

Unit No.

TITLE

Page No.

36. Keywords 37. Self-assessment Questions5.

Market Segmentation, Targeting and Positioning 38. Introduction 39. Purpose of industrial market segmentation 40. Benefits of product segmentation 41. Essential requirements of market segmentation evaluation 42. Segmentation Process 43. Market Segmentation Evaluation 44. Target Segments 45. Positioning 46. Communicating the Company's Positioning 47. Summary 48. Keywords 49. Self-assessment Questions Product Planning and Development 50. Introduction 51. Types of Product Lines 52. Product Policy and Strategy 53. Industrial Product Life Cycle (PLC) 54. Delivering Superior Value 55. Value-added Process 56. Product/Market Strategic Development 57. New Product Development (NPD) 58. Managing Products in High Technology Industries 59. Quality Function Deployment 60. Summary 61. Keywords 62. Self-assessment Questions

115

6.

145

13

UnitNo.

TITLE

Page No.

Integrated 7 . 63. Introduction64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

M arketing Comm unications (IM C)

173

Definition of MC Role of Advertising Decision Stages in Developing Advertising Programs Direct Marketing using Direct Mail The Communications Mix Media Selection Personal Selling Relationship-building Process Managing Key Accounts Internet Marketing Communications Sales Promotion Publicity and Public Relations Industrial Product Brand Promotion Summary Keywords Self-assessment Questions

8.

| D istribution C hannels and Logistics80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. Introduction Nature of Industrial Distribution Channels Industrial Channel Structure Functions of Intermediaries Types of Intermediaries Channel Design Logistics Management Supply Chain Management (SCM) Concepts IT Systems in SCM Summary Keywords Self-assessment Questions

205

Unit No. 9.

TITLE

Page No.

Role of Services 92. Introduction 93. Growth of Industrial Services 94. Defining Services 95. Nature of Industrial Services 96. Differences between Goods and Services 97. Service Quality 98. Customer Satisfaction and Loyalty 99. Developing the Service Package 100.Importance of Service Employees 101. Summary 102.Keywords 103.Self-assessment Questions Price and Pricing Strategies 104.Introduction 105.Implications of Price in Industrial Markets 106.Industrial Product Pricing Process 107.Pricing Across PLC Stages 108.Pricing Policies 109.Market Structure and Price 110.Value-based Pricing 111.Pricing Differences between Industrial Products and Consumer Products 112. Summary 113.Key Words 114.Self-assessment Questions

237

10 .

265

205

11 .

Personal Selling and Negotiations11.1 Introduction

301

Unit No.

TITLE 11.2 Importance of Personal Selling 11.3 Differences in Personal Selling in Industrial and Consumer Markets ; 11.4 Tasks in Personal Selling 11.5 The Personal Selling Process 11.6 Handling Objections 11.7 Integrating Personal Selling with other Elements of the Communications Mix 11.8 Negotiation Skills 11.9 Summary 11.10 Keywords 11.11 Self-assessment Questions

Page No.

12.

Strategic Marketing Planning 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 Introduction Need for Strategic Planning Approach to Strategy Strategic Planning Strategic Planning Process Strategic Marketing Planning Process Summary Keywords Self-assessment Questions

323

13.

International and Global Marketing Issues 13.1 Introduction 13.2 World Economy 13.3 Driving Forces Affecting International Strategies and Marketing 13.4 International Marketing Tasks 13.5 International Marketing in Global Strategy

347

323

i

Unit No.

TITLE 13.6 International Buyers 13.7 International MIS System 13.8 International Market Entry and Expansion 13.9 Investment in New Ventures 13.10 Summary 13.11 Keywords 13.12 Self-assessment Questions

Page No.

14.

Future Trends 14.1 Introduction 14.2 Growth Factors 14.3 Expansion Plans of Major Companies

375

347

14.4 Macro Level Indicators 14.5 Routes ahead for Indian Companies 14.6 Paths to Progress 14.7 Summary 14.8 Keywords

Industrial Marketing

1.1 INTRODUCTION Marketing is the identification of a customer's needs and wants. All marketing activities directed by industrial companies start and end with the customer, more so in the case of industrial marketing that deals with raw materials, components, equipments and systems. Industrial marketing now represents an important sub-function of the marketing discipline. It is sure to gain more importance as a result of the globalisation and liberalisation of the Indian economy. The important aspect of industrial marketing is to create value through the right package of benefits for the customers with products and services that focus on the buying organisation's needs and objectives. It is necessary to understand the forms and types of industrial marketing and the demand forces that shape the products and policies of industrial firms. It is also necessary to understand the concepts of cross-functional relationships and relationship marketing as applied to this branch of marketing. These concepts and underlying principles help us understand the differences between industrial product marketing and consumer product marketing. Two examples of actions taken by Indian industrial companies set the stage for delving deeper into the fascinating world of industry and explore its close links with marketing. 1.2 TYPES OF MARKETING ENTITIES As we all know, marketing is a set of activities concerned with creating value for shareholders and other stakeholders by creating exceptional value for customers. Marketers are the business as well as marketing professionals who make decisions about marketing. Depending on the contexts, there are different types of marketing applied across types of customers, sellers, products and services. Organisations and their marketers have to select and use technologies appropriate to their specific context. Some typical marketing contexts are summarized in Fig. 1.1 ("Marketing of Consumer Nondurables such as Personal/ Home care products (e.g. Soaps, Detergents, Fairness "S Creams). Can also include consumer durables variant (e.g. Air Conditioners, Water Purifiers, Refrigerators, Audio/DVD Players) Marketing of Technological Products & Services such as J Steel Wires, Ropes, UPS systems for PCs, Large Batteries, Diesel Locomotives.

Unit 1

The Nature of Industrial Marketing

ing activities in the case of and systems. ing discipline, lisationofthe ght package of ; organisation's of s industrial idustrial firms, ationships and iand underlying ; marketing and stria! companies explore its close

Project M arketing 'M arketing N on-profit Com panies or SM Es

C C onstruction of IT Park w ith Full Infrastructure, Road J F lyover, B rew eries, Su gar or C em en t P lant, A irport I Terminal.^

I M arketing to C haritable Institutions, Sm all & M edium | E nterprises (S M E s) involved in social w ork, N G O s. Fig. 1.1 : Type of Marketing Contexts

Typical Marketing Characteristics Typel:The emphasis is on identification of customers' needs and techniques of segmentation, targeting and positioning supported by branding and communication. This marketing model is suitable for mass marketing. Type2:

for shareholders Marketers are the narketing. ;d across types of ters have to select marketing contexts as Personal/ s, Fairness es variant (e.g. Air ,Audio/DVD rv ices such as Large Batteries,

The importance is on orientation, power of buyers, technological complexity. This model usually involves identifiable customers and relies heavily on selling products and services. Type 3: The value of a single order constitutes a significant proportion of turnover in a period. Execution time is usually in terms of months and years. It involves heavy investments by the seller in terms of manpower, machinery, services, financial allocations and cash flow techniques. Type 4: The firm is not driven primarily by profits or shareholder value. Competition may not be a significant factor in strategy. Products and services are driven by social needs and obligations such as in disaster recovery - such as rescue work after an earthquake, flood, tsunami or rail accident. 1.3 INDUSTRIAL MARKETING___________________________ _ _ ^ _ _ Industrial marketing refers to the marketing of products and services to business organisations, which can include manufacturing companies, government undertakings,


private sector enterprises, educational institutions, hospitals and distributor organisations. On the other hand, consumer marketing refers to the marketing of goods and services to individuals and families. Consumers generally buy consumer goods for their own consumption. By now it is well accepted that the industrial market differs from the consumer market in most aspects. The sellers of industrial products therefore need to understand an organisation's buying behavior, needs, resources, purchasing policies and procedures to create customer value. Industrial marketing was, and sometimes still is, considered the 'non- glamorous' counterpart of consumer marketing.

Definitions of Industrial Marketing Industrial marketing is a human activity directed towards satisfying the needs and demands of organisations through exchange processes. Industrial marketing is the marketing to customers who utilise the products and services they buy for manufacturing some other products, not for personal use. Industrial marketing consists of all the activities involved in the marketing of products and services to the organisations that use these products and services for the production of other consumer or industrial products and services.

The other common terms used for Industrial Marketing are: Organisational marketing Business marketing B2B marketing

Why is it be necessary to focus on industrial marketing as a separate and specialised branch of marketing?Because the companies (sellers) that make computers, chemical plants, transmission towers, etc have to deal with other companies (buyers) - and not individuals. Buyers have their own needs, resources, policies and purchase procedures. In quite a few instances, there are widely dispersed consumers and points of actual usage. The other characteristics which differentiate the industrial buying process from the consumer buying process are: i) discerning and technically competent buyers

n) longer production cycles

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m) high value of purchases iv) relatively few customers v) durability, maintenance and service requirements (post-purchase transaction) vi) high costs of product failures or serious product complaints vii) environmental influences (STEP or PEST analysis *) (* see Unit 2) An important aspect in industrial marketing is to create value through the right package of benefits for the customers with products and services that focus on the buying organisation's needs and objectives. However, the recent upturns and downturns in the Indian economy have redefined the essential commonalities between the two. In addition, the large number and quality of differences between consumer marketing and industrial marketing are narrowing down, and both branches are adopting many of the specialized approaches. For example, one of the specialised approaches in industrial marketing is Key Account Management (dealt with in a later unit). This approach has now been effectively transported to consumer product marketing quite successfully. Hopefully the day is not far off when both branches will be given equal status by academicians, industrialists, entrepreneurs and practicing managers. By its nature, industrial marketing strategy cannot be easily delinked from corporate strategy, while changes in consumer marketing strategy are relatively easier to carry out. In most cases of industrial purchases, particularly those involving capital goods and machinery, the purchases are made not only for meeting immediate requirements, but also in anticipation of future increased sales. If businessmen feel a recession is round the corner, all purchases will slow down. If he feels the business environment and economy is improving, investment in capital goods and purchases will show an upward trend. Hence, a good interpretation of the business market is essential in segments in which the industrial buyer operates. This requires very close interaction with the customers and their operating staff on their likely purchase policies and timing of purchase decisions - which can take from a couple of days or weeks (routine purchases of items like steel hardware or small motors) to a couple of years and more (purchases for a new grass root refinery or for new passenger aircraft).


Je Activity A; a) Mention two ways in which industrial product buying influences differ from those of consumer product influences.

b) The purchase of industrial firms will decrease/increase when the business economy is on the upswing.

1.4 TYPES AND FORMSAlthough the classification of industrial products is given in a later chapter, it is important to briefly highlight some types. There are numerous ways by which the types and forms can be arrived at, but a few of the various items are given for illustrative purposes.

Table 1.1: Types and forms of industrial productsI. Industrial products 115. Standard or fixed items (Mass-manufactured) 116. Customised items Examples Gaskets, cabinets, wires Tail-light assemblies, large steel enclosures, fuelinjection assemblies for automobiles Small stabilisers, inverters, ATMs Large transformers, large generators, Large turbines

Industrial Equipment

1. Standard items 2. Customised items

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ffl. Industrial systems

1. Standard

2. Customised

Small control systems in plants, Gear boxes, UPS systems Distributed control systems, Integrated software, airconditioning systems.

When Combined & Assembled When Combined & Assembled When Combined & Assembled When Combined & Assembled Complete Low Voltage Power Distribution

End to End Entire high voltage to low voltage power distribution network

Fig. 1.2 : Stages of Integration

Motors, Wires, Electrical APLE Transformer Cables Substation


As can be seen from Table 1 and Fig. 1.2, there are stages of integration in the spectrum of industrial products and services offered by any industrial firm. In the electrical power distribution industry, the firm can consider a narrow scope of supply such as raw materials and components or a broad range of products, equipment and systems along with a broad range of services offering end- to- end solutions as a total turnkey package.

JS$ Activity B;Mention any two types of: a) Standard industrial products 1.________________ .______________________________________

2.b) Tailor-made industrial equipment 117. 118. _________________________ _________________________

c) Turnkey projects I_____

2. ___________ 1.5 DEMAND FORCES The demand for industrial products and services is usually derived from the ultimate demand for consumer goods and services. Industrial demand is therefore called derived demand. For example, the demand for hot rolled /cold rolled steel sheets does not exist by itself .It is demanded for the production of automobiles, trucks, steel cabinets, motorcycles, etc. which are ultimately bought by the consumers. The demand for industrial products is dependent upon the demand for consumer products. Consider the materials and components that are used in a Bajaj. motorcycle. Some of the components are manufactured by Bajaj Auto, but the finished product reflects the efforts of over 500 suppliers or industrial firms, that deal directly with the firm. In purchasing a

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motorcycle from Bajaj, the customer is stimulating the demand for a wide array of products such as springs, aluminum castings, lamps, electrical wires and other items manufactured by other industrial companies. If we take the example of a company selling radiator coolant, to be used on new cars to be produced, to an automobile manufacturer, a fall in demand for cars will result in a fall in demand for more coolant.

Fig. 1.3 : Concept of Derived Demand Fluctuating DemandBecause demand is derived, the industrial firm needs to monitor demand patterns and changing buyer preferences in the consumer market, often on a worldwide basis. For example, a decline in lending rates (interest rates on loans and borrowings) can trigger a demand for new homes nationwide. A higher disposable income among consumers can generate an increase in demand for luxury goods and household appliances. A downturn in the economy creates the opposite effect of sluggish consumer demand and hence, lowers offtake. So the demand for many industrial products tends to fluctuate more than the demand for consumer products.

Stimulating DemandMany industrial companies, particularly those involved in making raw materials and semifinished goods for other industries, have to not only monitor final consumer markets, but also develop a marketing program that reaches the ultimate consumer directly. If Gujarat Ambuja Cement wants to expand the market for its cement, it has to advertise to reach out to ultimate consumers, just as INTEL has to promote 'INTEL INSIDE' brand for PCs and Salem Steel (part of SAIL) has to promote for stainless steel kitchenware.

Industrial Marketing i

Joint Demand Joint demand occurs when an industrial product is useful only if other products also exist. For example, a diesel generator set cannot be used if either the diesel engine or the electric generator is unavailable. A similar situation exists for motor pump sets, cable joint kits and cables, basic hardware and software for PCs etc. Hence, some industrial products do not have industrial demand, but are in demand only when available jointly with other products.

JSZ Activity C:The four major types of demand related to industrial product marketing are: 1.___________________________________________________________________ 2.________________________________________________________'____________ 4. 1.6 INDUSTRIAL PRODUCTS VS. CONSUMER PRODUCT MARKETING Table 1.2 : Consumer Market Vs. Industrial Market Areas Characteristics of Industrial Markets Characteristics of Consumer Markets

1. Market characterisation

Geographically concentrated Relatively fewer buyers Customer & actual users may be different Derived demand High technical complexity Customised items in large number of cases Cost of maintenance is high Requirement is usually high

Geographically spread out Mass markets Customers and users are usually some Direct demand from customers Low complexity Standard items available off the shelf Cost of maintenance does not arise Requirement is usually low

2. Products

3. Technical

10

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services requirement 4. Buyer behaviour

Requirement of presales services and post sales services for most items Functional departments Rational buyers Technical expertise required Stable interpersonal relationships Pre-dispatch customer inspection stage may be applicable

Requirement is virtually non existent Family involvement Impulse buying behaviour No such requirement Non personal relationship No such stage exists

5. Channel characteristics

Sales through direct channels and few intermediaries Short channels required Less stock holding by channel members Personal selling is most powerful

Sales through many intermediaries Long channels required Stock holding by channel member Advertising and heavy promo tion through media are required High advertising budget (usually 5-10 % of sales) List pricing usually adopted List price selling is common No price negotiations in most cases Simple pricing policies No negotiations

6. Promotion

Low advertising budget (usually 0.5 to 5% of sales) Transaction-based pricing is common Competitive bidding is involved Price negotiations are prevalent Complex pricing policies Negotiations take place on other commercial terms

7. Price

A key element of difference between industrial marketing and consumer goods marketing is the service component (see Table 2). The industrial organisation evaluates the quality of the physical entity and the quality of the attached services. The requirement of pre-sales services and post-sales services is directly related to the complexity of the products. A small desktop UPS system for a single user PC would hardly require any visits by service personnel, but a turbo-generator in one of MSEB's power generating stations would 11


requires a totally different level of services with high customer expectations of technical expertise. It is therefore important for the industrial marketing sales person to understand the buying process that an organisation follows in purchasing a product after a careful analysis of customer needs in terms of products and services. Successful industrial companies have achieved quantum jumps in market share by attaching the customer service component in the value chain. It represents the evergreen frontier in forging lasting relationships with customers. 1.7 RELATIONSHIP MARKETING This centers on all marketing activities directed towards establishing, developing and maintaining successful exchanges with customers. The relationship marketing concept places heavy emphasis on the importance of communications between the customer and supplier as well as emphasizing mutual satisfaction of objectives. This essentially requires an ongoing two-way communication between the customer and the supplier where customers are able to take the initiative in communicating. In industrial markets where individually tailored products are more the rule rather than the exception, products and services are modified to suit the micro-segments of the markets. These efforts are often supplemented by one-to-one communication which is made possible by using modern technology. Today, this is possible not only in face-toface encounters but also through well-designed websites, call centers and so on making two-way communication possible. Partner Advocate Customer Prospect

I

Fig. 1.4 : Relationship Ladder

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The ideal form of relationship building follows an elaborate process where suppliers move up the ladder (see Fig. 1.4) from prospect to customer to advocate to partner. Partnership represents relationsfiip marketing at its peak. Different types of communications and messages are required for each stage of the process as well as for different individual or micro-segments of customers. The forms of relationship discussed above when combined with customer data management has led to the modern-day concepts of customer relationship management (CRM). This topic is explored further in a later unit. To summarise the characteristics of the industrial market customer: Industrial market customers are institutions, commercial organisations and government departments. A single purchase of an industrial product customer is far larger than that of an individual customer. The demand for industrial products is derived from the ultimate demand for consumer products. Buying decisions by industrial firms often involve multiple buying influences, rather than a single decision maker. Relationship marketing provides an essential key to success in industrial markets.

J& Activity D: Tick the correct answer : a) The level of services required for marketing a room air-conditioner and a computer networking system will be: D D ifferent D The sam e D Dependent on the customer location

b) The two major types of services associated with industrial product marketing are: 1. _______________________________________________________

2. ___________________________ _ _______________________


1.8 CROSS-FUNCTIONAL RELATIONSHIPSIndustrial marketing success depends to a large extent on such functional areas in the firm such as engineering, R & D (Research and Development), manufacturing and technical services. Planning in the industrial setting thus requires more functional interdependence and a closer relationship with total corporate strategy, than planning in the consumer goods sector. Changes in industrial marketing strategy are more likely to have on impact on capital requirements for new equipments, changes from traditional engineering and manufacturing approaches and shifts in development activities- any of which could have company-wide implications. E.g. If engineering considerations dictate the change of manufacturing process of bumpers (in automobiles) from pressed steel to molded plastic (or reinforced plastic), a total shift in manufacturing facilities and production personnel would become essential. Other functional areas affect all industrial marketing decisions with respect to the 4 P's product, price, place, and promotion - directly or indirectly. In turn, business decisions in R &D or manufacturing or procurement as well as adjustments in the overall corporate strategy are influenced by marketing considerations. Some of the functional areas that need to be integrated with industrial marketing planning are given in Fig. 1.5.

Finance Capital Budgetting ^requirements, ROI fory new product Accounting Cost History & forecast of future costs

R&DConcept Product development t Evaluation

Industrial Marketing Planning

Procurement Interpretation relevant trends ^supplies; SCI

of in

Logistics Delivery support consistent with customer needs.

Customer Services Post-sales technical services

Manufacturing Forecast of production capacity;, costs

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Fig.1.5 : Industrial Marketing Planning-functional Integration


Geographical proximity to allow just-in-time delivery and faster closer ties aimed at improving product and service quality along the supply chain.

Many corporations and business houses are building e-commerce capabilities and transforming these into offerings that provide more customer value. A variety of responses can be found to the liberalized regime in India and to the new opportunities available as a result of widespread globalization.

Examples Videocon group is moving from consumer electronics to power generation, oil drilling, petroleum refining and telecom sectors. Reliance group has moved from textiles and man-made fibers to oil exploration, telecom, petrochemicals, construction, power generation and distribution. ITC is moving from tobacco, edible oils, paperboards and hotels into biotech & rubber.

Many Indian business houses are considering takeovers of European and American companies through the acquisitions route. It is seen that industrial marketing programs involve a customised mix of physical products, engineering and service support and ongoing information in the pre-sales and post-sales phases. Clearly, relationship marketing is at the heart of industrial marketing.

Âctivity FtName any two Indian companies that are involved in both consumer products and industrial products. 1. __________________________________,_______________________________

2.1.10 IMPACT OF CURRENT DEVELOPMENTS ON INDUSTRIAL FIRMS

16

The relative importance of strategic issues might vary from one industrial organisation to another. But there are a few common developments over the last few years that are creating a major impact on many firms.

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1. Intel-n ation alisation

,

:

Internationalisation is. a factor that is affecting both the developed and the developing nations in a variety of ways. For industrial firms, internationalisation can extend the size of the market as well as the number of competitors. It also raises issues of relationship with potential partners overseas and the organisation of activities across national boundaries. Dell Computers that sources, manufactures and sells computers across the world, has to continuously deal with such issues in dealing with competitors from Japan, Taiwan and Europe.

2. E -C om m erceThere is a huge impact of data communications on organisations and within organisations. Entire organisations are being transformed by the development of powerful information and communication Technologies (ICT). The growth of ecommerce around the world has reached tremendous proportions, especially, in industrial markets. The industrial buyer organisations have much easier and faster access to competitors' offerings around the world. No industrial firm can ignore to understand how e-commerce is changing the business environment. Industrial firms whether old or new, small or big are adapting themselves and using e-commerce to complete more effectively in industrial markets. E-commerce principles are dealt with in a later unit.

3. Shift in corporate and business strategyTill the nineties, the private sector in India was profit driven and it did not matter whether the public sector Companies made any profit. The new economy has brought new rules of governance and corporate responsibility, with the numerous measures in liberalisation and the opening up of various sectors of the economy. Previously, only ONGC was allowed in the field of oil exploration, but today a host of private companies (Reliance, Essar, Videocon) are ready with business ventures in this field The opening up of the Indian economy has emphasized a greater need among industrial units for: Market knowledge New competences (such as financial management)

17


Development of abilities to work in teams and partnerships

;' .

Less centralisation of organisation structures

4.

Knowledge Management

Industrial organisations need to continuously innovate in order to survive and generate adequate returns from products and services. This can only occur if an organisation is able to both generate and integrate knowledge from both inside and outside the organisation. This knowledge is to be managed in order to develop new products and services and remain continuously competitive. In today's conditions of a fast-moving world, constant improvement and change have become essential for survival and success. The rapid developments in information technology have thrown up many more opportunities to expand business in new ways. There are other factors and influences that are changing the bigger environments for industries involved in industrial products or B2B (business to business) markets. It has become fundamentally important for industrial firms to analyse the growth stage of the industries as well as to identify the specific factors causing rapid changes in the industry growth cycle. The driving forces in an industry are the major causes of changing industry and competitive conditions- some forces originate from the external environment (e.g. software piracy) and some originate from within a company's immediate industrial environment (e.g. the entry of MNCs in the Indian automobile sector) 119. Increased globalisation: Globalisation results when industry players seek customers in foreign markets or when production activities move to countries where manufacturing costs are the lowest. The large corporations and medium size companies involved in the industrial sector are now finding it more profitable to shift their production base and marketing focus to countries that are showing higher GDP growth rates (such as India, China, Malaysia, Brazil) 120.Growing use of the Internet: Industrial companies are using the Internet to reach beyond their borders to find the best suppliers and further to collaborate closely with them to achieve gains in efficiency and cost reductions. They are also using a range of Internet technologies and applications to strengthen their internal operations (e.g. ERP or Enterprise Resource Planning Systems). 121. Product innovation: Successful new product introduction has always strengthened the market positions of innovating companies by grabbing market share from

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companies that do not innovate or continue with their old products. Productsinnovation has been a key driving force in industries such as digital cameras, mobile phone sets, MP3 music players, LCD television sets. d) Entry or exit of major firms: entry of foreign MNCs into India (e.g. in The the auto sector- Ford Motors, Hyundai Motors, Toyota Motors, General Motors) has shaken the automobile industry in India that was traditionally up dominated by Maruti-Suzuki, Fiat and Hindustan Motors. Similarly, the exit of a major firm changes the competitive situation by reducing the number of market leaders (e.g. the exit of Fiat, Italy through Indian partner Premier their Automobiles)t) Regulatory influences and government policy changes: Government actions t can force significant changes in industry practices and strategic approaches. In India f there has been significant de-regulation in industries such as oil exploration, f telecommunications, banking electricity generation and distribution industries.

# Activity G;Two forces that are changing the way in which industrial products companies are carrying out business are:

1.11 TYPES OF ACTIONS BY INDUSTRIAL COMPANIES

There are various actions that the industrial firm takes to consolidate its position and improvestrategic responses to the above influences. The major types of actions at the companylevel are summarised below: Actions to: i) Gain more sales and market share i) Respond to changing market conditions 19

i) Enter existing and new markets with products and new product applications and expand to new geographical territories


iv) Merge with or acquire smaller or bigger companies depending on financial strength v) Form strategic alliances and partnerships vi) Build defenses against threats from existing and new competitors or from the external environment vii) Restructure internal operations to reduce costs and to make the company totally customer-oriented viii) Enter new businesses and diversify Example I KOEL (Kirloskar Oil Engines Ltd.) is a Pune-based industrial firm manufacturing diesel engines and components for the automobile sector. It has a strong market position in small (3 HP to 20 HP) and medium size (20 Hp to 500 HP engines. Their applications are largely in agriculture, power generation and other industrial applications. The strong market share is primarily due to the company's continued focus on quality and reliability, its distribution infrastructure and its strong service capabilities. The Company is expanding its product portfolio especially in the 500 HP and above range to enhance its presence in this range where it has relatively low market share. Simultaneously, the company is also reducing the overall costs of its engines trough improved fuel efficiency and power-to-weight ratio of its engines. KOEL has progressively expanded its product portfolio over the last few years and is now better diversified in terms of its exposure to specific market segments like agriculture, power generations, tractors, industrial and marine applications and auto components. This has helped the company improve its stability against cyclical downturns in industrial user industries. The company is addressing the capacity constraint through fresh capacity additions. KOEL's auto components division manufactures engine bearings, valves, bushes and thrust washers for the automobile sector, engine manufacturers and the railway. The main thrust of future growth in this division is expected to come from exports, which accounted for above 16% of the total revenue of the division in the financial year 2004-05. The company is therefore planning intensive capital investments to gear up for this future growth.

20

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E xam ple IIAn example of a company that has aggressively followed the strategy of a low-cost provider is the West Bengal-based Xenitis Group. This firm is just five years old and was among the first Indian companies to Sell PCs priced below Rs. 10,0007-. The sales turnover has grown from Rs.7 cr. in 2000-01 to Rs. 178 cr. in 2004-05. In 2 years' time, it is expected to reach a turnover of Rs.lOOOcr. Its brands are: Aamar PC in the east, Aamchi PC (West); Aapna PC (North) and Namma PC (South). Xenitis Group was funded with an initial investment of Rs.25 Lakhs and founded by two managers with experience in IBM and HCL Technologies. The company has set up a Rs.200 Crore PC components manufacturing unit in West Bengal in collaboration with Unitek Computers Co. of China. This will manufacture computer cases, SMPS (Switch mode power Supply) units, media chips, computer peripherals like keyboards, CD-ROM and CD-DVD drives, speakers and home theaters at this facility. This will enable the company to expand its capacity from 2.4 lakh PCs to 4.2 lakh units annually. Its product range includes higher range PCs, servers and media centers. It is already exporting to countries such as Africa, Dubai, Bangladesh and Nepal. Xenitis Group represents just one of the many thousands of modern Indian entrepreneurs have national and international growth ambitions.

& > A ctivity H :Two types of actions taken by KOEL to respond to the new marketing environment who challenges are:

m.1.12 MAJOR DIFFERENCES IN SUPPLIER-CUSTOMER INTERACTIONP

One of the major differences between consumer products and services and industrial products and services is the level of supplier-customer interaction. The nature of industrial products necessitates a high level of interaction between suppliers and customers. In fact, the future growth of industrial firms is highly dependent on the strength of its relationship with customers.

21


Table 1.3 : Levels of Supplier-customer interactions Level of Suppliercustomer Interaction

Low1) 2) 3) 4) 5) Mass consumer products (e.g. personal products, packaged food) Mass consumer services (e.g. retail banking, life insurance) Mass industrial products (e.g. standards small engines or electric power drills.) Customized industrial products (e.g. airconditioning plants) Customized industrial products and services (e.g. large air-conditioning plants and installation and maintenance services) 1.13 SUMMARY

Medium

H igh

V

V VV V

Industrial marketing represents an important branch of the Marketing discipline. It has special characteristics as can be seen from the comparison table with consumer product marketing. This unit attempts to highlight the special characteristics and features of industrial marketing in relation to the current Indian scenario of liberalisation and globalisation. It also focuses on two important aspects of this subject, i.e. cross-functional relationships and relationship marketing. These aspects will be elaborated in further units. This unit has also highlighted the importance of demand forces that give industrial marketing its special character.

1.14 KEYWORDS

22

Derived Demand: This term refers to the dependence of one product on the demand of another product. Demand for industrial products is generally derived from the demand for consumer products. Industrial Marketing: It consists of all the activities involved in the marketing of products and services to the organisation that uses these products and services for the

prod uctio n of other

consumer or industrial products and services. The other terms commonly used for

I


2.1 INTRODUCTION Today, all organisations function in environments that affect their operations and position in various countries. The economic and business environment in India is quite different from of Malaysia and Thailand. This business environment is usually segregated and better understood as macro environment and micro environment. The macro environment includes the overall conditions under which all industrial and other companies operate. The micro environment is the immediate environment that is defined primarily by the firm's suppliers, customers and competitors. Both categories are important in assessing the firm's position and provide vital inputs to the strengths/weaknesses analysis. Overcoming competitive forces leads to competitive advantage. Industrial companies are constantly seeking a strong competitive advantage in order to protect their market position. The tools that are very helpful in analysing the competitive forces are, Porter's five-forces model and SWOT analysis. The environment in which the business functions can be divided in terms of the semi-controllable and uncontrollable environment. The semi-controllable environment, also known as the microenvironment, can be managed by the organisation. One of the tools used here by the organisation is its marketing mix (4 P's). The uncontrollable environment, also known as the external or macro environment, exists outside the organisation's purview and is not controllable by managers (though it can be influenced to a certain extent). We will discuss macro environment in the context of environmental dynamics. The external or uncontrollable components comprise political, legal, economic, technological, social, cultural and natural environment factors. In addition to the above, government influence on business is also an uncontrollable factor that needs to be understood by an industrial marketing manager. However, this will be discussed as a separate issue in industrial marketing, as the government is both a regulator of business and, in certain cases, a customer. We will also analyse the international modern trends in industrial marketing to get comprehensive understanding of environmental dynamics. 2.2 BUSINESS ENVIRONMENT______________________________________ Marketing does not occur in a vacuum. While preparing and implementing strategic plans, the marketing manager has to work with many variables in the broad marketing environment. As has been mentioned already, the marketing environment in industrial marketing falls into two basic categories26\

u)

Unit 2

Industrial Marketing Environment

i)

M icr o -E n v ir o n m e n tPublics: General public, employees, Media and press, financial investors, competitors Buyer-seller interface: facilitators such as suppliers, intermediaries and distributors, bank and insurance companies.

ii) M a c ro -E n v ir o n m en tEconomic, natural, cultural, social, technological and political trends and factors. General External Environment in which all companies operate

Fig. 2.1: The Company's Business Environment

2.3 M IC R O -E N V IR O N M E N TThis type of environment refers to the factors related to the immediate industry and competitive environment. The company's suppliers, customers, competitors, substitute products, distributors, financial investors, etc decide the factors pertaining to this environment. These factors are usually controllable by the company or the industry in which it operates.

Environment decided by the Company's Suppliers, Customers, Competitors,27


a)

Suppliers of Inputs

TJie inward flow of materials to the organisation is known as inputs. These materials are part of the factors of production. The factors of production, which include various inputs, raw material and parts, labour and capital, are supplied by the extractive and other industries to the companies for use in the production of industrial products and services. The success of any firm is highly dependent on its relationship with its suppliers. Interrelationships form the backbone of industrial growth of any nation. These relationships are very important as the work targets of one company are interlinked with those of other partners/associates, and also because the repercussions of production stoppage in one affects the overall industrial growth.

b)

Distributors

Distributors contact potential buyers and negotiate orders. In addition, they hold buffer stocks, provide credit to customers and offer technical assistance to buyers. They also bring together different products to meet joint demand. (The term joint demand is explained in detail in unit 1). The suppliers will also do business with distributors who complement the firm's product line with complementary products from other manufacturers, making a full product line at the distribution point. The distributors prefer to have a complete product line so as to maintain relationships with customers and serve the customer base of a company.

c)

Facilitators

The facilitators of the process of interactions between a buyer and a seller at the interface level are bankers, transport agencies, research and advertising firms. The advertising and public relation firms aid in the communication flow between the sellers and the buyers by t| formulating information and media strategies through promotional campaigns. Advertising is useful in reaching the multiple buying influencers present in industrial marketing. It is practically not possible for salespersons to contact all buying influencers. In this situation, advertising helps these salespeople to successfully close deals. kk Public relation firms help organisations in developing and enhancing their public image. P They develop and disseminate commercially significant news to boost the public image of their client's organisation. Trade journals are effectively used for this purpose. The other source of communication with the buyers is through publicity releases. Transportation agencies and warehouse companies facilitate the physical flow of industrial products. They aid in delivery of products in usable condition, to the industrial customers28

e)

of a

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W

as an d w h en th ey are req uired . If th e ab o v e fun ctio n is n o t p erfo rm ed p ro perly , th e b u yers m ay h av e to sto p th e ir p ro d u ctio n lin e s fo r lack o f tim e ly in p u ts. T h is m a k e s sa fe , tim e ly an d regular p hysical d istribu tion critical to ind ustrial m ark eting . T h ere is n eed for finan cing a n d in su ra n c e to m o v e p h y sic al re so u rce s fro m su p p lie r to b u y e rs. B a n k ers a n d fin a n c ia l institu tion s fa cilitate these finan cin g req uirem e n ts by p ro viding cre dit. In su ran ce ag enc ies p ro v id e in su ra n c e a g a in s t r is k r a n g in g fro m c o m p le te d a m a g e to th e p ro d u c t s to n o n d eliv ery an d un tim ely d elive ry o f prod uc ts to cu sto m ers. d) C om p etito rs A firm 's decisio n to o pe rate in a p articular m a rk et is in flu en ced b y th e co m pe tition p resen t i n t h a t m a r k e t . T h e c o m p e t i t o r s c a n b e d o m e s t i c a n d fo r e i g n . T h e y i n fl u e n c e t h e o rg an isa tio n 's d ecisio n reg ard in g ta rg et m a rk ets, p ro d u c t m ix , an d d istrib u to rs' ch an n els -in sh o rt, th e e n tire m a rk e tin g stra te g y . G a th e rin g in fo rm a tio n a b o u t th e c o m p e titio n h a s b e c o m e c ritic a l w ith th e in c re a sin g n u m b e r o f c o m p e tito rs, d e c lin in g m a rk e t sh a re s a n d g ro w in g m a tu rity o f cu sto m e rs. M o reo v er, c o m p e titio n is b e co m e in c re asin g ly g lo b al d u e to the liberalizatio n o f w orld 's econ om ies. T h e in c re a sin g m a tu rity lev el o f c u sto m e rs h a s m a d e b u y in g m o re te c h n ica l, lo g ic al an d e x p e rt o rie n te d . B u y in g in flu e n c e s th e b o tto m lin e o f a n o rg a n isa tio n th ro u g h in c re a se d costs and d ecreased produ ctivity. T h e in d u strial firm s are b o th sup pliers an d bu yers i.e . all th e firm s in in du strial m ark e ting are lin ked to one ano ther. T o effec tiv ely deal w ith these interrelation ship s and dep end ence,

in d u s trial firm s b u ild a lo n g term b u ye rselle r relati o n sh i p. T h ey

tak e part in in fo rm a tio n h a n g e b e tw e e n th e m a n u fa c tu re r a n d u se r o f th e p ro d u c ts in exc th e fie ld s o f re se a rc h , engineering and production. A sep arate sec tio n o n th e in flu e n c e o f co m p e titiv e fo rc e s o n c o m p an y stra te g y is g iv e n in section 2.6. e) P u b licPublic includes distinct groups that have an actual or potential interest or impact on each firm's ability to achieve its respective goals. The interface levels between the organisation and the types of different public is given below: i) Financial public ii) Press iii) Public interest groups

2 9

Ind ustrial M arketin g

iv) General public v) -Internal public or employees

i)

Financial Public

The financial institutions that invest in an organisation constitute the financial public. The investment is different from the flow of products and services. At the interface level, the investing financial houses have minimal impact on organisational considerations. Institutional investors are more concerned with the operational efficiency of the organisation than with individual shareholders. They extend their influence by voting for or against management teams. This influence is exerted to make sure that the management acts in the best interests of the shareholders. In this context, achieving the support of the financial public is important as they influence the capital structure of the firm.

ii) PressThe press is an independent moderator of the image of the organisation. Industrial firms are sensitive to the role played by the mass media in achieving its marketing objectives. The publicity given by the press can be positive or negative. Not long ago, Non-banking Financial Corporations (NBFCs) received negative publicity from down-grading by credit rating agencies and imposition of RBI restrictions for collecting deposits. This resulted in the availablity of low interest capital for these institutions. Shell also received negative publicity from the press when one of its oil tankers had an oil spill in the ocean. The company had to invest in a long-term public relations program to overcome the bad image generated by the oil spill. in) Public Interest Groups Public interest groups are increasingly influencing business decisions in the industrial marketing area. These groups support environmental and ecological causes, women's rights and even minority welfare. The various public interest groups limit the freedom of suppliers and buyers in the industrial markets. Some organisations oppose these groups whereas some prefer to coordinate their plans and advocate their causes. Whether the organisation supports the group's cause or not, public interest groups clearly constitute a factor in strategic planning and cannot be ignored.

Unit 2


iv) General PublicThe general public is not as coordinated and integrated as interest groups. But it will work towards a cause if it is sufficiently motivated. The general public is the target group for press and interest groups, as it comprises the end customers and the ultimate consumers in the business chain.

v) Internal PublicThe employees working in an organisation constitute the internal public. This includes people from the top management (like the member of the board of directors) to the factory workers. These employees have to be motivated. They should feel happy working for the organisation. If employee morale is low, the organisation will suffer. Since the employees spend more than 60% of their time on the job, their attitude influences the general public. For example, The Jamshedpurbased Tata Steel plant has not been nationalised due to opposition from the employees. Their objection to nationalisation of the plant shows the level of satisfaction they have towards the management. The ultimate goal of business is to serve by serving its customers. To satisfy the various * types of public, an organisation should project the importance of the product to the society. If the organisation is not serving the customers, then the financiers will not support its operations, and its employees will be demoralized. Ultimately, the productivity of the firm will decline, forcing the company to seek financial support. Therefore, organisations should bear in mind their mission and also the public that evaluates the mission against the actual performance. The company should go in for advertisement and public relations campaigns to project a positive image of itself. Âctivity A; If you were a senior marketing manager of a large, Indian-based automobilemanufacturing firm, what three micro environment factors would you consider the most important? Why?

31


2.4 MACRO-ENVIRONMENT The macro environment refers to the factors that influence the operations of businesses and companies. These factors include all influences that have an important bearing on the company's future direction outside the company's boundaries. These can include population demographics, governmental legislation jind policies^-economic policies, technological factors-SjeeiSTarid culturatfactors, etc. These factors are those on whichthecompany can exercise little or nocontrc The,macro environment includes six forces: 122. Political/Legal environment 123. Economic environment 124. Cultural environment 125. Technological environment 126. Natural environment 127. Demographic environment The participant at the interface level can mould his strategy in reaction to the environmental forces and meet the needs of others. But it is beyond the ability of a single firm to influence the macro environment. Some of the forces in the macro environmental are brought about by a combination of activities in the industrial arena, but others are purely beyond the control of organisation, and reactive mechanisms have to be developed to deal with them. The macro environment is dynamic and changes at a fast pace. Technologies influence industrial markets through its adoption, whereas economic changes influence the organisations, whether or not the industry adopts these economic changes. a) Political Environment Organisations across countries base their decisions on the government and the legal framework existing in a country. The political environment is distinct from governmental influences and comprises the personnel in charge of the government. Legal framework is related to the existing business and civil laws. The legal influences also include the regulatory environment of the country. Trade barriers, for example, form a part of the regulatory environment. Indigenous businesses are protected from foreign competition by the regulatory environment. Tariffs and quotas are used for this purpose by the government. The flip side of these protectionist measures is retaliatory steps from the organisations and from nations

32

Unit 2


5CS

the ion cal

affected by these measures. The latest economic framework under WTO calls for liberalised trade policies and also for non-interference from politicians on economic issues. Industrial markets are firmly regulated by government agencies and industries. These agencies have specific responsibilities to protect the participants at the interface level and the public. In the case of products like medical drugs, approval by a competent agency like the FDA in the USA is necessary before releasing them for public consumption. Regulatory influences exist for ensuring product safety and protection of the environment from pollution. Certification from pollution control boards is necessary to set up start and continue operations. These legislations and social pressures have placed the responsibility of pollution control on the companies. Firms should also carefully keep a watch on pending legislation that can change the macro environment drastically. They should work as pressure groups to interact with legislators and parliamentarians. Various trade associations like CT (confederation of Indian industries) can influence pending legislations and forthcoming budgets on behalf of the businesses.

lental icnce about id the them, aence : e the

b ) E conom ic InfluencesSince the worldwide economic conditions influence the ability of organisations to buy and sell, emerging trends have to be closely monitored to take appropriate measures. The demand for industrial products is derived in nature, and the presence of derived demand forces industrial marketers to monitor the changes in consumer purchasing power and saving. If consumption by ultimate customers increases, the demand for raw materials and machinery required increases, and if consumption power declines, the demand for industrial products also declines. The effect of the economic environment is not uniform across industries and across nations. This calls for close monitoring by industrial groups having more than one industry. They should carefully monitor the influences of the economic environment on both the suppliers and buyers. Interest rate on capital is a good example of the influences of the economic environment on industry. If interest rates are high, capital expenditure is deferred and if the interest rates are low, optimum investment is made into building capital assets by the organisation.

5 legal mental vorkis alatory ilatory ulatory lip side nations

c ) C ultural InfluencesThe customs and traditions of organisations influence organisational structure and functioning. They also influence the interpersonal relationships between employees. Though culture3 3


hardly has any influence on product specifications, joint ventures with organisations from different cultures run the risk of cultural incompatibility. Since substantial cultural differences ..exist between Japanese and American organisations, any joint venture between these two countries has to frame clear human resources policies. The companies formed by joint venture should not be based on the whims and fancies of the top management. The corporate objectives of these companies have to be clearly defined. d) Technological Influences

Changes in technology affect both manufacturers and customers in the industrial marketing scenario. The manufacturers worry about the customers following up the technological advancement and maintaining derived demand for products; the customers worry about the impact of product design and the manufacturing process of the manufacturer on quality and costs. For example, CAD (computer aided design) and CAM (computer aided manufacturing) influence manufacturing systems. The Internet is influencing industrial marketing much more strongly than consumer product marketing. Industrial marketers should monitor the technological environment closely in order to adapt to it. e) Natural Environment

Environmental pollution is making the earth unsuitable for living quality life. To make natural resources pollution free, the major contributors to pollution, i.e., industrial firms, have to spruce up their production systems. Industries involved in the production of chemicals and pesticides have to devise safety measures to protect the environment. Disposal of waste material is also considered a basic responsibility of these firms as they are the culprits for the high levels of mercury and other poisonous substances in the oceans. Many industries throwing their waste into rivers posed a lot of problems to citizens. For example, Pune-based Pudumjee Paper Mills used to throw industry-waste into the Pawana river, which spread diseases in the town. The PCMC (local Government) threatened to close down the unit. Only then did the company undertake measures to treat the waste. The ability of firms to produce and market products and services for profit requires a favorable combination of inputs. Natural endowments such as raw materials, power, water and combination of inputs like skill management, labor and transportation confer advantages on an industrial firm to achieve the above objective. An industrial firm with a cost- effective combination has a competitive advantage over its rivals. In the era of liberalisation and globalisation, countries with political stability have greater chance of attracting investments from multinational companies. Location and transportation34

I

Unit 2


5 from rences setwo y joint rporate

considerations influence the sourcing decisions of the organisation, as buyers prefer supplies from nearby vendors to control the transportation costs.*

f) D em ographic InfluencesThough demographics does not have a direct impact on industrial marketing, it has to be monitored closely, as the demand for industrial products is derived. Changing demographics influence consumer markets and the demand for raw materials for making them is also affected. The uneven growth of population across the world influences not only the markets, but also the availability of labor. Sufficient secondary data is available to monitor demographic trends and a strategy can be prepared to take advantage of these changes. One can see the dramatic influence of demographics in the heavy engineering, light engineering and IT industries. The huge availability of technical and engineering manpower in India is forcing foreign major companies to shift or relocate their units/departments that are primarily knowledge based. A company like FORD Motors is setting up an R & D center in India based on the easy availability technological manpower. Microsoft, Google and CISCO systems are also utilising the vast manpower resources of India by having their own development centers. J8$ Activity B: As the senior marketing manager of a large, Indian-based automobile-manufacturer, write down three macro environment factors likely to affect your growth in the next five years. 1.__________________________________________________________________

arketing ological ry about n quality ter aided ndustrial narketers

ake natural ns, have to jmicals and ;al of waste culprits for

Citizens. For >thePawana hreatenedto it the waste. fit requires a power, water fer advantages cost-effective ty have greater i transportation

3.

2.5 GO VERNM ENTAL INFLUENCESGovernment performs various roles and responsibilities while discharging its duties. In the process of performing various activities, governments may hamper or facilitate the industries' marketing efforts. The laws and regulations framed by the government influence all participants at the interface level. The government performs various activities that influence industrial marketing such as framing regulations, protecting business from outside competition when necessary, and protecting the natural environment from industrial pollution.

3 5


Businesses have to anticipate the Government's action and also influence them, if possible. TJiey should act in a united manner and as far as possible keep government out of the business environment, to prevent costly and premature legislation and rules from being thrust on them. The industrial firms should react, before the government, to any potential issue that may lead to regulations. This is achieved by framing serf-regulation and control bodies among trade associations. The advertising community in India has one such body that is proving useful in preventing the government from interfering. A company should try to influence the government as the government can influence or be influenced by the environment. However, the influences are two- way between the government and inner members of the environment. As the economic environment heralds an era of liberalisation and globalisation, the need for industrial firms to influence government action is also ever increasing. 2.6 COMPETITIVE FORCES The characteristics of competitive forces vary from one industry to another. A widely used tool for systematically diagnosing the main competitive forces in a market and assessing the strength and importance of each is Porter's five forces Model of competitive analysis. This method developed by Michael Porter, is depicted in Fig. 2.6. It holds that the competition in any industry is a combination of competitive pressures operating in five areas of the overall market: 1. Competition among the industry players 128.. Competition associated with the threat of new entrants entering the market

129. . Competition from companies of other industries entering with substitute products 130. . Competition arising from the bargaining power and supplier-seller relationship from suppliers 5. Competition arising from the bargaining power and supplier relationship from buyers The five forces model helps to: 131. Identify the specific competitive pressures associated with each of the five forces 132.Evaluate the strength of each of the forces c) Determine whether the combination of the pressures from the forces can weaken the | industry player

Unit 2


.

.

'

The challenge of industrial marketing managers and of the top management is to devise a competitive strategy that/ .

i) a llo w s th e ir c o m p a n y to w ith s ta n d th e c o m p e titio n i) stren g th en s th e ir stan d in g w ith b u y e r firm s iii) d eliv ers g o o d p ro fitab ility iv) p ro d u c e s a c o m p e titiv e a d v a n ta g eThreat of new entrants MP3 Music CDs becoming a threat to conventional K audio CDsPower of buyer

P urchase of P a ssen g er j a ir cr a fts 1

I Competition among industry , players

Power of Supplier I/ Crude oil.^ Suppliers to i, oil refinery

Threat of Substitutes Camera Phones becoming a threat fi Large volume purchase by buyer is important to seller firms. w Identity of buyer adds prestige to the seller's list of customers. Comprehensive information is available. Buyers have the power to postpone purchases forcing seller to revise existing prices. (This is a common occurrence in large Indian public sector projects where the delays can run into months and years). Some buyers can integrate backward and become a competitor to the selling firm in the short term. There are only few buyers.

i n d u s tr y a n d c o m p e ti ti v e c o n d it i o n s. S o m e d r i v i n g f o r c e s o

All the above competitive pressures bring home the point that the buyerseller relationship is the "crux of the matter" in industrial marketing- infinitely more important than in consumer product marketing. Industry conditions change because important forces are driving industry participants (competitors, customers or suppliers) to alter their actions. The driving forces in an industry are the major underlying causes of shifting

riginate from the macro environment and some originate from within a company's industry and competitive environment. A company's strategy becomes effective when it can analyze the above conditions and develop the resources to become a "Driver" in the industry.

41

Industrial Marketing *

& Activity C;.Briefly enumerate the five competitive forces that a company of your choice will have to face in its survival and growth strategies.

6. SWOT AnalysisThe key outputs of the macro environment analysis and the competitive environment can be summarized in the form of an analysis of strengths, weaknesses, opportunities and threat (SWOT). SWOT analysis summarises the key issues that are most likely to have an impact on strategy development. A SWOT analysis can focus discussion on future choices and the extent to which a I firm is capable of supporting these strategies. It is possible that the exercise may generate long lists of strength, weaknesses, opportunities and threats. The need is to j be clear about what is really important and what is less important in the present and future business scenario. A few examples of the SWOT factors are summarsed in Table 2.1. Table 2.1 : SWOT Factors

Strengths Superior product features Strong brand image/company reputation Attractive and loyal customers base Superior technological and manufacturing skills Cost advantage over competitors

Weaknesses Weak brand image or company reputation Weak customer services compared to competitors Weak dealer/Distribution Network Obsolete manufacturing facilities Too much under-utilized capacity

7.

Opportunities Sharply rising buyer demand Availability of new and upgraded products to meet new customer needs42

Threats Increasing strength of competition Slow down in market growth Loss of sales to substitute products

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/ill have to

Integrating forward or backward Falling tr^de barriers in foreign markets

Growing bargaining power of suppliers or buyers Trade restrictions by state/central government

environment opportunities re most likely enttowhicha exercise may The need is to he present and

It should be recognised that the SWOT exercise is a matching process. Ideally, the firm would like to match its strengths to the opportunities in the market place. This is not always possible because of the circumstances pertaining to the organisation and the state of the market environment. The case can arise when the weaknesses of the company are such that it cannot take advantage of the external opportunities. In such instances, it might have to seek some form of financial investments so that it can take such opportunities. The main strategic options that emerge from the SWOT analysis are summarised in the Table 2.2.

Table 2.2 : Strategic Options Option D o m in a n t P o sitio n s i) S tren g th s an d o p p o rtu n itie s Match strengths to opportunities

ii) W e a k n e ss a n d o p p o rtu n itie s iii) S tren g th s an d th re ats iv) W e a k n e s s e s a n d th re a ts

Seek help to eliminate weaknesses and take advantage of opportunities Move to new markets Divest or liquidate

company ces compared ition Network jig faculties ized capacity

jf competition et growth stitute products

7. Sources of Competitive Advantage The five forces model and SWOT analysis are just two techniques

that help the industrial product company give strategic direction. The firm can gain competitive advantage in many different ways by taking advantage of its superior skills, resources and competencies. Superior skills are distinct capabilities of staff and labor that make them different from those employed competitors. 3M Corp.(USA) has been able to attract creative persons over the years by building a culture and climate where innovation is encouraged, respected and rewarded. Other firms like Microsoft, Google and Infosys have been able to attract the brightest and the best IT-Driven individuals to remain in the forefront of computer and internet technologies. Superior resources or competencies remain a prime source of competitive advantage provided they are used and managed in the most productive manner.4 3


Some of the broad sources of competitive advantage are: i) i) Lower costs and higher production efficiencies A strong and well spread customer base

iii) Leading edge R & D capabilities iv) A culture of innovation, learning and service to customer v) Access to new technology vi) Superior pre-sales and customer service vii) Strong distribution network and enthusiastic channel partners viii) Partnership at many levels (e.g. with the defense sector) k) Differentiated product/service offering with clear segmentation x) Product portfolio matching customer's needs Competitive advantages, however, cannot be taken for granted as circumstances are constantly changing and product/services that are valuable today may not be considered so tomorrow.

2.7 THE INTERNATIONAL ENVIRONMENT

44

Though the international environment has many risks, there are attractive returns for industrial firms entering foreign markets. Since these markets are big and attractive, returns on capital investments are quick. The recovery of investment on technology and research and development is easy as many markets are served by

I

the same technol ogy. The invest ment on

technology will not yield sufficient result if the technology, that is, the product, is sold in only a few countries. For instance, investment in research for new pharmaceutical drugs is heavy, and it cannot be recouped if the company restricts the scope of marketing to a single country or a group.

Significant Macro-environmental FactorsAlthough there are many macro-environmental factors that affect international marketim of industrial products, a few important factors need to be reviewed:

Unit 2


5tances are considered

a) Economic Grow th RateThis is the rate at which the overall wealth of the Economy is increasing (or if negative, decreasing). It is quoted as Gross Domestic Product (GDP) and Gross National Product (GNP). Typically, economic growth increases demand for industrial goods ! and an economic decline (also called a recession) reduces demand. Presently, India's GDP rate is projected at 6 to 8 percent p.a. over a five year period.

for industrial us on capital esearch and e investment luctjssoldin utical drugs is larketing to a

b ) Inflation RateInflation is the rate at which money is falling in value or, under exceptional circumstances (if inflation is actually negative), increasing. Inflation usually has a negative impact on growth. For this reason, the national monetary authorities such as the Reserve Bank of India (RBI) in India have a Policy of keeping inflation under check by using the instrument ofJHterest rates. c)

^The Interest rate is the fundamental cost of money in an economy and is the base rate at which^Central bahTr^ll offer capital. The base - lending rate is actually the cost of mFreelcapitaJTJrr^ractice, financial investors will ask a premium over the base for industrial companies and projects; this will depend on the investor's assessment of the risks involve. The higher the risk, the higher the rate of return demanded.

d) E x ch a n g e R atesAn exchan ge rate is the value of one rnal marketing

nation'scurrenry i" relation th that nf annjjigr country. It represents the rate at which one unit of currency can be converted to anothefTExchange rates are determine by a number of factors. A currency is said to be strong if it has a high value in relation to another. It is said to be weak if it has a relatively low value. Typically, the comparison is in relation to the US dollar, the world's reference currency. A number of factors have an impact on the value of a currency, and one of the more important is interest rate. The effect of interest on industrial firms will depend on the extent to which it imports raw materials (or Service) and exports its outputs.

45


Table 2.3 : Effects of Exchange RatesWhen Currency is 4 Strong

W eakCompany with High Imports Content & Low Exports Company with Low Imports Content & High Exports Cost of inputs Benefits in overall costs 1 Cost of inputs 1

Adverse impact on Overall costs

Cost of goods Adverse impact on Export sales

t

Cost of goods Benefits in overall costs

I

From Table 2.3 it may be argued that a country with a strong export base, having a weak currency would deliberately keep their currency weak in order to help companies to boost their exports. However, a weak currency will tend to push up import costs, so driving inflation. In the long run, inflation makes the business environment unpredictable and this makes management planning a difficult exercise.

b)

e) Employment LegislationPeople are a critical resource in the success of a firm and governments often feel the need to legislate on the conditions under which people may be employed. There are rules and laws that govern minimum wages and benefits in most countries. The 11 of particular countries may also impact the way in which trade unions may organia and operate. Businesses operate in an increasingly globalized economy. Economic conditions ii one part of the world can have a rapid impact on those in another. A full assessn of the macro-environment factors which might affect the performance of the comp in the short term and long term must be considered before a strategy is developed jc)

Forms of International M arket EntryFor successful penetration into foreign markets, a suitable strategy has to be keeping in view the various environmental factors. The various forms of entry available i as follows:

46

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a) Indirect exporting D irect ex p o rtin g |c) Foreign licensing Joint ventures |e) Foreign productionIndirect Exporting It is the least risky of all options available and calls for export through intermediaries. This strategy is resorted to if the company lacks sufficient knowledge of the foreign markets and/or market is not sufficient for direct operations. The flipside is that organisations do not have control over marketing strategies and product image. Direct Exporting Though the investment and risks are higher than in the case of indirect exporting, it gives the organisation control over the activities. The company has to establish foreign distribution channels and increase production. The information available on foreign markets is minimum through the above two strategies, and an effective marketing mix cannot be planned. But direct exporting is more useful than indirect exporting as control on the functioning of the organisation is greater.

?

L icensingLicensing involves agreement between a firm in one country with a firm in another country. The firm selling the product /technology is called the licensor. The firm purchasing the product/technology is called the licensee. Foreign licensing occurs when the government does not allow foreign firms to come and invest in the country. The licensees can be for technology or product. Maruti Udyog's plan in India has been to set up a manufacturing unit in Gurgaon under a licensing agreement from Suzuki Motors of Japan.

| Joint V enturesJoint ventures are the operations in which two or more firms share ownership and have control over operations. Joint ventures provide better knowledge of the host market and also share the risk. Joint ventures may be conditional due to the legal and political environment.

47


e) Foreign Production This option refers to the setting up of manufacturing facilities in the foreign country either directly or through a subsidiary. Ford, Mitsubishi, General Motors, Toyota. Hyundai, Mercedes Benz are some of the automobile giants who have set up separate production bases in India. Komatsu and Hitachi, Japan (for hydraulic excavator and John Deere, USA (for tractors) have also set up units in India (initially through the joint venture route). Indian companies too have manufacturing units in foreign countries although a majority I of them are through joint ventures with local companies or through acquisitions of I local companies. Reliance Industries, ONGC, Tata Motors, and Mahindra & Mahindra 1 are some of the Indian companies that have established a strong presence in overseas! markets through their facilities. Large IT companies like Satyam, WIPRO and Infosys I have major development centers in multiple countries all over the world for software development and services.

$ ActivitvD;Bharat Forge is expanding into foreign markets by collaborating with existing companies in Germany, USA and other countries. This form of entry into foreign markets would be called__________________. What else would you suggest to them to gain market sharei in exports?

a)

b)

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2.8 MODERN TRENDS IN INDUSTRIAL MARKETING a. Business to Business MarketingBusiness-to-business in marketing (B2B) is the comprehensive term used

I

f o r b e

t w e e n t w o

legal entries with no physical form of transactions. B2B denotes a part of the activities performed under industrial marketing. The term industrial is more comprehensive and can be used also for the individuals who perform servii or modify products on order. In India, many businesses are family concerns large number of them are private companies not listed on the stock exchani Industrial marketing encompasses this segment also and is thus more comprehe* than B2B marketing.

2.9

I

Unit 2


b. E-Commerce Industrial marketing can also be performed over the net. E-Commerce is an electronic form of processing transactions. The personal contact between buyer and supplier is low and the confidence generated is also less than usual. This concept can work for routine purchases where the impact of faulty decisions is negligible so far as the bottom line and profits are concerned. The purchase of machinery and other capital products is made only after personal contact and negotiation between the buyer and the seller has taken place. E-Commerce can help bring about contact as a promotional tool. The concept of E-Commerce is only to replace the conventional mode of information exchange and order processing. Physical delivery and installation of machinery are two strategic tools that cannot be performed over the Internet or any other electronic medium. f Activity E; Go to the website of the leading PC company, Dell Computers (www.dell.com). Write down the details that are required by the company for the placement of an order as: a) an individual customer:

a small enterprise:

for business otesamajor lal marketing orm services ncernsanda c exchanges. mpreriensive

IS THE INTERNET AGE Almost every industrial company has been affected or influenced by the Internet. It has brought into being a business revolution opening up all kinds of opportunities and threats. Ithas also forced sweeping changes in business practice including industrial marketing. Forexample, it has altered the ways industrial companies do business in the form of E4 9


Unit 2

Commerce. The role and impact of Internet technologies has become critical in forming new business relationships across the world. > The application of the Internet and its associated technologies in E-Commerce for industrial companies is manifold. Some of these in the industrial marketing area are: Customer ordering (and dealer ordering) capabilities on the websites of companies Online product catalogs containing extensive products information and produci characteristics Online instruction manuals for application of industrial products Real time access to customer data for the industrial manufacturer Online price quotations and sales offerings Online marketing tailored to customer profiles and buying preferences of customers Online announcements of special cells, promotion and for new product information Online sales transactions E-Procurement software packages streamline the industrial product purchasing process by eliminating manual handling of data and substituting electronic communication for paper documents, such as requests for quotations, purchase orders. order acknowledgments and shipping details It can be customised in delivering customer service

Eurof such a in go\ teleco] entry o Signific reason \ supply i Compai them to MNCsd on world This give domestic marketinj Globalise economies in driving < Globalisat telecommi products ar Mahindra & with foreign

The Internet makes it possible for industrial firms to reach beyond their borders to find the best suppliers and further, to collaborate closely with them to achieve efficiency gains and cost savings.

2.10 TREND TOWARDS INCREASED GLOBALISATION Business across borders is increasingly becoming commonplace. The business economies. of many nations are witnessing upturn and downturn cycles. This is forcing most local! companies to look for business outside their national borders. This aspect is also being facilitated by the growth of the Internet and its associated worldwide usage.Quite a few countries have decided to reduce trade barriers or opened up markets thai were once prohibited to private commercial enterprises. This is evident in many partsfl

f

I

This unit revi of industrial f types have be thegovernme tows and regu The five force industrial firm For internation

50

Unit 2


Europe, Latin America and Asia including India. The ongoing economic reforms in India such as tariffreductions, dejegulation of industries and allowing private sector participation in government-owned companies e.g. VSNL now partnering with TATA Group in telecommunications, Reliance group's involvement in oil exploration) are attracting the entry of global companies and multinational companies (MNCs). I Significant differences in labour in developing countries like India and China create a strong I reason for MNCs to locate or shift their manufacturing bases there and use the facilities to I supply market demand across the world. Both Hyundai Motors Company and Ford Motor JCompany are making automobiles in their plants in Chennai (in South India) and marketing em to countries in Europe and Asia. tfCs drive considerable cost advantages through economies of scale by concentrating i world-scale volumes as opposed to national-scale volumes. his gives them substantial advantages over local competitors who concentrate only on Omestic markets. In certain industries, MNCs have the ability to transfer their production, larketing and management know-how from country to country at a very low cost. ilobalised operations are therefore considered essential now for companies to gain #nomies of scale and market their products in many countries to get maximum advantage CT driving down costs. Debasing * lectron âlisation can be seen making deep inroads into industries such as motor vehicles, jse oroe 'icornmunjcatjons (Mobile and long-distance services), Internet services, petroleum ducts and energy. Indian firms are also in the forefront with leading companies like lindra & Mahindra, Bharat Forge, Bajaj Auto setting up units or having joint ventures i foreign companies in markets outside India. :y *""

SUMMARY

unit reviews the role of en vironments and their impact on operations and performance lustrial firms and large business houses having domestic sales and exports. The major 'have been discussed under macro-environment and micro environment. Li addition, ,s gcono^vernment performs various activities that influence industrial marketing like framing ig most iQnd regulations. is also be re forces model and the SWOT analysis are just two techniques that are used by ial firms to give direction to their growth strategies. many pacrnational marketing of industrial products, conventional marketing strategies lik


market segmentation, target marketing and marketing mix strategies may have to be adapted after consideration of the country's individual characteristics. Two significant trends that have direct and indirect implications on the firms marketing industrial products are globalisation and the Internet. Both these trends will influence industrial product companies in India and their performance in international markets in trem

Industrial Marketing (Book No.120)

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