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

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

Course objectives To learn how general marketing concepts apply to (differ in) the industrial business context some new concepts To experience a realistic industrial marketing environment complex daily decisions but need for long-term strategic thinking typical B2B setting interacting teams time pressure

Assignments Simulation related (group work): Class participation After third decision, write-up a strategic plan corporate goals (mission statement) how to achieve these goals Final presentation (more details later) in view of the planed strategy... Industry / Firm analyses ~15 minutes Class participation

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

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

Some distinctions fewer customers fewer transactions with higher $ value marketing is more a general management function high degree of functional interdependence higher degree of product complexity derived demand (!)

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

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

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

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

Prototypical DMP steps for an industrial good Need recognition Product definition and specification Development of procurement strategy make or buy? formation of buying center! design sourcing system Search/qualification of potential sources simultaneous vs. sequential evaluation RFPs: open/closed bids, existing vendors Selection of suppliers - final negotiations Design of an order routine (contract) Order Performance feedback and evaluation

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

Example: OAG OAG – Official Airline Guide Publishing public flight information ~100k customers Monthly subscription: $20 80% gross contribution Family business In 1982 AMEX decides to enter the corporate travel business and becomes interested in OAG. What should OAG do? Should it sell? What negotiation power does it have against AMEX?

The O.A.G. Funnel Problem: Mgr. stuck in Chicago at 2:00 am. He is pissed !! Mgr. complains to Secretary  Sec. complains to Travel Agent  Travel Agent recommends OAG Sec. orders OAG Sec. receives OAG + invoice Mgr. uses the Guide ☺ Map? Inv. goes to finance Mgr. thanks Sec. ☺☺ Inv. to accts payables Bob pays !! Sec. gets renewal invoice

Funnel Analysis The DMP often has important strategic implications in B2B markets. Never use/accept the ‘standard’ DMP. Use Funnel Analysis, a simple qualitative method to uncover the DMU/DMP in an organization. Method: interviews, focus groups Main uses: Diagnose bottle necks Forecast sales Targeting: optimize sales strategy

Implication: Communication strategy Personnel selling is rated by industrial marketers more than twice as effective as other communications media 90% of sales budget is personnel selling But… Bain and Co.

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

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

INDUSTRAT Features Long term perspective Marketing as a profit center Strategic Marketing Long term perspective Marketing as a profit center Marketing strategy based on segmentation, positioning and portfolio approach Marketing mix decisions secondary to strategic decisions Competitive environment

The Pedagogical Approach A Simulated Environment

The Economic Environment Population: 250 million

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

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

The “Competition”

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

The Economic Environment WEST CENTRAL EAST

Account Size Small Medium Large

End-Product Applications Communication Instrumentation Consumer Goods

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

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

Purchasing Process Dynamics

Korex Market Micro-segmentation General Manager Production Engineering Purchasing

Dynamics of the Purchasing Process Awareness Testing Supplementary Major General 100% Production Purchasing Engineering 0%

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

Direct Selling and Distribution

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

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

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

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

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

Decisions for your First Period No market research available No R&D allowed No licensing allowed Avoid radical changes Familiarization Gather information Organize your team