Sales and marketing under different business models Petri Parvinen Sales Management HSE+TKK,

2 Business Model Evolution Projects Products Services Economies of scale Resource building Economization Specialization Economies of scale Resource building Economization Specialization Commodization and price erosion Mass tailoring Product life cycles Commodization and price erosion Mass tailoring Product life cycles

3 Three Basic Business models Project business (Cash flow only when agreed) –Relationship management and marketing skills, Selecting the right customers, Setting limits to what is done, Understanding customer value creation processes, Reliability of sales and distribution Product business (Id like one in exchange for ) –Quality and completeneness of productization, Understanding buyer behaviors, Capacity of sales and distribution, Active, aggressive and driven sales people, Partnering and alliances to satisfy customer needs Service business (Cash flow unless otherwise agreed) –Process engineering and process management, Modularisation, Customer intimacy, Installed customer base

4 Why is productization such an issue? 1.Scale benefits R&D Production Sales Marketing Distribution 2.Concentrating on deep but narrow competences 3.Finnish (or other lousy) marketing culture 4.Lack of planning, systematic processes and analytical judgment in marketing

5 What are the key issues in project marketing? Project marketing success factors (Cova & Holstius 1993, Huerner 2004) Structural efficiency and ability to invest Ability to create local presence Entrepreneurial attitude towards risk Referencing Demand co-creation with customers

6 Project marketing vs. product marketing After the chasm, everything changes –Customers –Competition –Channels Tulovirta ja liikevoitto Early market The Chasm The Bowling Alley The Tornado Main Street End of Life PROJECT MARKETING PRODUCT MARKETING

7 PROJECT VS. PRODUCT BUSINESS PROJECT BUSINESS PRODUCT BUSINESS NUMEROUS IT START-UPS

8 Case: SAS Institute - ABC Tech Activity based costing systems and projects Both initally in project business SAS new strategy productization SAS buys ABC in 2001 Attempts to convert ABC into product business Separation of product and project based businesses as a result

9 Project Marketing vs. Product Marketing

10 Project Marketing vs. Product Marketing Critical success factors in project marketing –Competence in relationship marketing –Picking the right clients –Clearly demarcated concepts –Knowledge of clients business processes –Reliability of distribution channels Critical success factors in product marketing –Productization capability –Knowledge of buyer behavior –Distribution channel capacity –Active and aggressive marketing people –Partnerships and alliances

11 Project Marketing vs. Product Marketing Critical success factors in project marketing –Competence in relationship marketing –Picking the right clients –Clearly demarcated concepts –Knowledge of clients business processes –Reliability of distribution channels Critical success factors in product marketing –Productization capability –Knowledge of buyer behavior –Distribution channel capacity –Active and aggressive marketing people –Partnerships and alliances

12 Service business models Continuum: Special features of industrial services –Legal and contracting issues –Operative liability –Project financing Strategic outsourcing Strategic outsourcing O&M (operate and maintain) O&M (operate and maintain) Long-term exclusive contracting Long-term exclusive contracting OMRU Emergency & support contracts Emergency & support contracts Monthly fee contracts Monthly fee contracts Spot services

13 Ekokem Customer lenses determine business model in waste business –Politician Service –Corporation Service –Infrastructure department Product –Government Project

14 Case: ABB Corporation-wide transformation process since 1992 Aim to increase service content in all businesses Driving force behind business model transformation = lowering hardware prices schematically Aim to increase share of services surrounding own hardware from 20% 80%

15 Case: ABB ABB : Typical office building cost structure in 40 years: –Use 50 % –Renovation 25% –Financing 15 % –Building 10 % Services adhering to this: –Follow-ups and monitoring –Tech maintenance –Modernization and updating –Lighting and ventilation –Life cycle costing and assessment services

16 Case: Wärtsilä Industries: power plants, ship engines ja propulsion engines Service business area only profitable on a continuous basis Service offering: –Extensive O&M-contracts –Field services –Updates and modernizations –Tech support and professional expert services –Spare parts –Training services (Wärtsilä Land and Sea Academy)

17 Case: MyLab Service business is also an opportunity for smaller businesses, but requires: a)Letting go b)Investing c)Creativity d)Technological anchor

18 Profit and margins Operating margins in product business up to 90% Project business usually 30-50%, some modularized mature projects 70% Industrial services, e.g. after sales 40-50% of revenue, margin 50% –Service business is very good from an investment appraisal point of view (ROI, ROCE)

19 CHANGING BUSINESS MODELS

20 TWO INFLUENTIAL LIFECYCLES Commoditization of matured offerings needs business model innovation Winning over the majority of customers needs business model innovation

21 How does a business model change? Strategy Operations Network Accounting & Finance Accounting & Finance Material components Of biz mod = back yard Reputations Product meanings Product meanings Industry recipes Industry recipes Constraints Beliefs and cognitions Actions and outcomes Customer lenses = front yard Tikkanen, Lamberg, Parvinen & Kallunki (2005) Effort #1 Effort # 2 Effort # 3 Effort # 4

22 Crafting the offering = no. 1 priority 1.What is the competitive advantage / value added? 2. What does the offering include/not include? 3. Execution quality, particularly: Pricing Distribution Marketing channels

23 Case: Kone (& Partek) Central synergy motivation behind merger = moving service business understanding to Partek Partek mining, tractors, fertilizers nothing to do with service sold off Kone hardware business growth (excluding acquisitions) same as Partek Kone de facto growth fourfold, cumulative profitability tenfold

24 Case: GE-Instrumentarium Buyers lenses can be fundamental to business- making logic Instrumentarium ultimately sold to GE due to buyer GEs ability to understand and serve clients and its service business model Olli Riikkala has stated that the ability to present Datex Ohmeda equipment the way that customers worldwide want to is the primary reason for accepting the acquisition

Business models determine distribution channel Project marketing –Direct sales –VARs –(Representation) –Internet as support Product marketing –Bundling to OEM –Professional distributors –Retailers –Direct mail and giveaways –Internet both directly and as support

Marketing channels Project business –Personal sales –Trade fairs –Seminars –PR –Relationship marketing Product business –Advertising –Direct marketing –Articles and review in magazines and newspapares

Summary Buyers lenses determine business model Productization has economics reasons Service business models maximize value from customerships