Industrial Marketing PDF

Harvard Business School 9-592-012 Rev. September 23, 1994 What Is Industrial Marketing?...

Harvard Business School 9-592-012 Rev. September 23, 1994 What Is Industrial Marketing? Customers in industrial markets buy products such as machinery, chemicals, and raw materials, but they also buy personal computers, furniture, and other products usually bought in consumer markets. Therefore, instead of distinguishing industrial markets from consumer markets based on the type of product sold, we find it useful to differentiate by the customer served and how the product is used. Industrial marketing is... the marketing of goods and services to commercial enterprises, governments, and other nonprofit institutions for use in the goods and services that they, in turn, produce for resale to other industrial customers. By contrast, consumer goods marketing is the marketing of goods and services to individuals and family units for personal consumption and to wholesalers and retailers in consumer goods distribution systems.1 The above definition focuses not only on the type of customer in industrial markets, but also on the use of the goods purchased. In industrial markets, goods are usually bought for processing and subsequent resale, whereas in consumer markets, goods are bought for their final consumption or use: What consumers buy, they use for themselves or for consumption by members of a family. Industrial customers buy to support the profit-making or nonprofit functions in which the organization is engaged.2 What Are Industrial Products? While it is difficult to separate the precise industrial proportions from the consumer proportions of the U.S. GNP by line item, it is clear that a large percentage of agricultural services, mining, construction, durable goods manufacturing (primary metal industries, fabricated metal products, machinery, electric equipment, and instruments), and nondurable goods manufacturing (chemicals, petroleum, and textiles) are sold in industrial markets. Table A shows the U.S. Gross National Product, broken out by industry. Other categories such as wholesale trade and services also comprise a significant amount of industrial business. Thus, the table shows that products and services manufactured for industrial use comprise a $1,500 billion business annually, at the least, and probably Prof. V. Kasturi Rangan and Bruce Isaacson prepared this note as the basis for class discussion. Copyright © 1991 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 592-012 What Is Industrial Marketing? more. Moreover, during the period 1986 to 1989, GDP growth rate was the highest for durable goods manufacturing, which almost entirely consists of industrial business. Table A 1989 Gross National Product by Industry (billions of dollars) 1989 (Current $) Gross National Product 5200.8 Gross Domestic Product 5163.2 Private Industries 4561.0 (a) Farms 88.6 (b) Agriculture services, forestry and fisheries 24.9 (c) Mining 80.3 (d) Construction 247.7 (e) Manufacturing (durable goods) 541.0 (f) Manufacturing (nondurable goods) 425.0 (g) Transportation and public utilities 460.0 (h) Wholesale trade 339.5 (i) Retail trade 486.0 (j) Finance, insurance, real estate 896.7 (k) Services 970.5 Source: Survey of Current Business, U.S. Dept. of Commerce, Bureau of Economics Analysis, April 1991, Vol. 91, No. 4. Products sold in industrial markets can be grouped into eight general categories:3 Heavy equipment, such as radiology equipment, diesel engines, and air compressors, tends to be technically complex and usually requires the buyer to make a substantial investment and become dependent on a specific machine, technology, or process. Often heavy equipment is "permanently affixed to the buyer's physical plant."4 The large investment means that the buyer's cost of machine failure or under-performance is quite high. Consequently, the sales process for heavy equipment is usually long and complex, requiring substantial efforts by the seller to convince the buyer that the investment is justified. Light equipment, such as portable air compressors, hand tools, and personal computers, involves a smaller investment than heavy equipment, and therefore is within the purchase range of a much larger customer base. Marketers of light equipment often choose mass-marketing techniques that focus on breadth of market coverage and attempt to reach as many potential buyers as possible. As a result, many manufacturers of light equipment use distributors to sell their products, whereas the complex sales process of heavy equipment often favors a sales force hired by the manufacturer to spend considerable time with each potential buyer. Systems are usually composed of a central piece of equipment and peripherals and accessories, which, as a whole, provide the necessary environment for the end user. The equipment by itself is of secondary importance to the "solution" that the system delivers. For example, when a customer buys a management information system, the application software and networking capabilities of the system are as important as the primary piece of hardware itself. 2 What Is Industrial Marketing? 592-012 Because of this emphasis on the "solution" rather than on the equipment alone, many different constituencies may get involved in the customer's buying decision. As a result, the selling cycle is usually long and complex for these kinds of products. Raw materials, such as crude oil, iron ore, and cotton fiber, are usually sold as commodities where competing sellers offer materials of comparable quality and buyers primarily rely on price to choose among sellers. In such markets, many manufacturers focus on cost efficiencies in sales and production in order to sell goods at competitive prices. Thus marketing and sales systems are likely to have few intermediate layers. Buyers and sellers in such markets often operate through low-cost intermediaries like brokers and are likely to conduct their business on a straightforward transaction-by-transaction basis (as in spot markets). Processed materials, such as rolled steel, fabric, and plastic polymers, all undergo further processing from raw materials to serve as primary input for the next stage of manufacturing. Examples are fabric for making garments and plastic polymers for molding automobile bumpers. Because processed materials are one step removed from the raw material stage, it is possible to differentiate them by adding value for special applications. Processed materials are usually marketed through conventional sales and distribution channels rather than through spot markets. Consumable supplies, such as coolants, abrasives, and medical syringes, are used up or consumed by the end user in the course of regular business operations. Some consumables are central to the manufacturing operations, and key purchase criteria therefore include the ability to obtain regular reorders of supplies. The criteria for consumables used in maintenance, repair, and operations (MRO), on the other hand, may rest on ease of availability because of the difficulty in predicting breakdowns. Components, such as engines and motors, are purchased for incorporation in the buyer's end product. For example, gasoline engines are used in automobiles, and fractional horsepower motors in kitchen appliances. While materials, components, and supplies are all eventually used in making the end product, the key difference is that components are used in their purchased form as a part of the purchaser's products, whereas supplies and materials are altered, expended, or worn out during the production process. Some components, such as disk drives for computers, form the core of the finished product and therefore require a close technical and commercial relationship with the buyer. Other components such as keyboards for personal computers may not be that critical, requiring a low-cost, efficient sales approach. Industrial services, such as engineering services, management consulting, and contract maintenance, have grown as quickly in industrial markets, as the service sector has grown in the U.S. economy. Some services may involve overall comprehensive design, installation, and operation of a major system such as a power generation plant, whereas others may merely involve support services such as transportation. Much of the logistical support provided by the industrial distributors may also be viewed as a form of service. Key Aspects Distinguishing Industrial Marketing To understand some of the major differences between business-to-business and consumer marketing, it is useful to think of the industrial marketing system as consisting of two key linkages. The first is the external interface between the marketing/sales function of the producer and the 3 592-012 What Is Industrial Marketing? end user. The second is the internal interface between the producer's marketing/sales and production functions (see Figure 1). Figure 1 Key Linkages While each of these linkages has considerable complexity (for example, the role of R&D in the internal interface and the role of distribution channels in the external interface), the two sets of linkages serve as convenient handles to explore the major differences between business-to- business and consumer marketing. The External Linkages There are three important considerations with respect to the external linkages: Derived Demand The demand for industrial products is usually driven by the primary demand for consumer goods. For example, an automobile is built from hundreds of components including engines, wheels, the exterior body, and the dashboard. Each of these in turn is the end result of a supply chain consisting of many other components and raw materials. The dashboard is usually molded from a plastic called ABS. The ABS plastic is made from three chemicals, one of which is styrene. The styrene is made from ethylene, and the ethylene from petroleum. Thus the demand for each of these intermediate goods is influenced by the consumer demand for automobiles. When the demand for automobiles slumps, manufacturers of the ABS pellets are directly affected. Similarly, when the downstream demand picks up, ABS producers are the automatic beneficiaries. Industrial marketers can stimulate demand for their products by stimulating demand for their customers' or distributors' products. Many manufacturers have sales forces for "missionary selling" to locate potential customers for their intermediaries. Consumer preferences, economic cycles, and social trends affect industrial markets by influencing final consumer demand. Consumers can adjust their buying habits more quickly than industrial firms, which are often locked into a technology or machinery that cannot be easily adapted to meet the latest market trends. Consequently, industrial firms must purchase in 4 What Is Industrial Marketing? 592-012 anticipation of the economic and market conditions that the company expects to face. Industrial buying, therefore, has a longer-term orientation. Complex Buying/Selling Process In consumer markets, the decision-making unit purchasing any particular item is often an individual and is rarely larger than a household. In industrial markets, the decision-making unit is usually much more complex and may involve many departments within the organization. The purchase of one piece of industrial equipment might involve a host of departments, such as purchasing, engineering, finance, and manufacturing. The equipment might also require approval from top management. Generally, the complexity of the buying process is increased by the following factors: ! The influence of the formal organization. ! The strategic importance of the item being purchased. ! The cost of the item being purchased. ! The complexity of the need being serviced. The complexity of the buying decision increases the time, expense, and experience required of companies selling to industrial customers. Also, industrial customers, unlike consumers, often buy for multiple operations from multiple locations. Each individual unit may use the same basic product, but unique requirements may necessitate service at the buying headquarters as well as at the individual plant locations. Needless to say, the aggregation of the selling tasks at two or more levels only makes the selling task much more complex. While the selling and buying process is more complex in industrial markets, several aspects of the industrial sale make it easier to establish close vendor relationships in industrial markets. Industrial purchases tend to be relatively rational and based on specific performance characteristics or benefits sought by the customer: Industrial or business customers have economic requirements, not wants. Unlike consumer products, industrial products do not make anyone look or feel better, and they generally do not have any significant aesthetic value. Industrial products are bought only to help the user manufacture, distribute or sell more effectively.............. 5 With consumer goods, the consumer's interaction with the seller is short-term, intended simply to fulfill an immediate need without implying a long-term dependency. In most consumer purchases, from food to clothing to housing, the buyer-seller relationship usually ends with the sale.6 In contrast, industrial purchases often cause the buyer to become dependent on suppliers for consistent provision of subassemblies, parts, service, support, or product upgrades. Consequently, many industrial customers evaluate suppliers as candidates for long-term ongoing relationships. Concentrated Customer Base Consumer marketers often reach millions of consumers; any one individual consumer is insignificant in such a large customer base. In contrast, industrial marketers generally have a much smaller base of potential customers, and in many industrial markets, a small number of customers represent a large percentage of the industry's buying potential. Industrial marketers selling high-ticket items such as satellites or power generation equipment will literally be able to count their customers on their fingers. Also, because of the special infrastructural 5 592-012 What Is Industrial Marketing? support often required, many industrial product manufacturers may be concentrated in geographical areas, such as Silicon Valley in California for high-technology electronics. As a result, industrial marketers are more likely than consumer marketers to use a direct sales force. Moreover, the targeted and concentrated nature of the industrial customer base makes direct marketing and face- to-face selling an economically viable proposition. In contrast, many consumer marketers use mass- media communication techniques to reach a broad and dispersed consumer base. The Internal Linkages Three considerations are important with respect to the internal linkages: Emphasis on Technology Technology is a far more visible component in the sale of industrial products than consumer products. Technology and performance superiority can give the industrial product competitive advantages in its marketplace, and there is a heavy emphasis on product improvements in successive generations of industrial products. Manufacturers of semiconductors and disk drives, for instance, are constantly improving the performance-to-price ratio of their components over successive generation of products so that their end users are able to make better products for subsequent sale. While many consumer product manufacturers may also be constantly offering innovations in their markets, the emphasis is on "solutions" and not on technology per se. In industrial markets, performance, functions, and features are of primary importance in the design, manufacturing, and marketing of the product. In fact, in many consumer markets consumer tastes and loyalties work against change. The reintroduction of Classic Coke in response to consumer disappointment in the New Coke is a case in point. Consumers apparently preferred the taste of the "old" over the "new" Coca-Cola. While consumer product manufacturers may constantly innovate (e.g., fuel-injected ignition and lightweight, higher valved engines in automobiles), the selling proposition is usually based on nontechnical factors such as style, handling, and comfort. High Level of Customization Often a high level of customization is required for many industrial products. The customization of consumer products, on the other hand, is usually in the packaging, labeling, or promotion, with the basic product itself standardized over a broad range of customers and markets. Unlike consumer products, industrial products are used in the further manufacture or assembly of the next level of product, so it is quite important to meet the technical requirements of the user. Industrial technical requirements are often very inflexible; a consumer may accept a different flavor or color than what was initially required, but an industrial customer will not accept a welded pipe if the seamless pipe is out of stock. Many industrial product manufacturers will even tailor their operations facilities to meet the unique requirements of key customers. Engineers and design teams may often be assigned to learn the needs of key end users and customize products accordingly. Industrial firms in many cases may actually sell standard products, but the complexity of the machinery or system may cause the accompanying information and service support to be customized. For example, Digital Equipment Corporation sells a standard line of VAX minicomputers to several businesses for their computing needs, but the system's operating characteristics need adjustments from site to site. Universities and research institutions usually use a VAX for analytical modeling involving a variety of nonrepetitive computing tasks, while businesses often use the same system for huge amounts of repetitive data processing. Consequently, the package of hardware, software, and peripherals needs customization even though each individual component may be from a standard offering. 6 What Is Industrial Marketing? 592-012 Made to Order A large variety of industrial products are made to order. Even if produced to standard specifications, the actual manufacturing may commence only after the customer order is received. Thus, a high proportion of industrial goods manufacturing is essentially job-shop oriented, whereas production for consumer items such as packaged foods, tends to be based on large scale, batch or continuous flow operations. While the raw material and work-in-process inventory levels may vary with the type of industrial product and market being served, the finished- goods inventory levels are likely to be quite low for many industrial goods manufacturers. As a result, when an industrial customer initiates an order, the order fulfillment chain often triggers a manufacturing operation directly linked to the order somewhere on the factory floor. Consumer goods manufacturing, on the other hand, is often linked to finished-goods inventory because the product specifications are usually standardized. Manufacturing of consumer products is usually geared to meeting a sales forecast, rather than an individual customer order. When a customer initiates an order, the order fulfillment warehouse or customer-service department is the trigger point for fulfillment. Finished-goods inventory is used by manufacturers of consumer products to insulate manufacturing from the day-to-day changes in the customer demand. Manufacturing of consumer products is usually geared to meeting a sales forecast, rather than an individual customer order. Differences in the Marketing Mix Given the distinguishing characteristics of both the internal and the external linkages, the formulation and execution of the marketing mix poses different challenges in industrial markets than in consumer markets (see Table B). Market Selection and Development Since technology plays such an important role, a key function in industrial markets is customer education and market development. As with consumers, industrial customers might not, a priori, express appreciation or enthusiasm for an untested new product, and it is the marketer's responsibility to demonstrate a product's use and value to the customer. Because industrial products are often technically complex and may require a change in the buyer's operations, this usually comes only after intense application trials and productivity analysis. Many industrial marketers actually create and build a market for their products, rather than merely serving existing needs. Market Segmentation Consumer markets can be segmented by psychological or sociological factors such as lifestyle or attitudes, but industrial markets are more likely to be segmented by industry characteristics, purchase quantities, or technical requirements. More recently, industrial marketers have realized the need for benefits-based or, better still, buying behavior-based market segments. Unfortunately, such a segmentation scheme is often very difficult to implement in industrial markets. That is because industrial customers, unlike consumers, will not self-select themselves into a segment and shop accordingly, but rather have to be approached with the appropriate marketing mix at the outset. Consider, for example, a consumer who needs a dress for a special occasion. She is likely to visit a specialty retailer rather than a discount store to buy the dress. It is the opposite in the industrial situation, where the sales force rather than the customer has to make the visit and offer the appropriate product. Advertising Consumer marketers often use advertising to establish a brand image, but industrial marketers use advertising more often to communicate specific price and performance information. Brand image in industrial markets is achieved by a combination of product quality and service that accompanies the delivery and installation of the product. 7 592-012 What Is Industrial Marketing? Industrial marketers often rely on trade shows to communicate new product information. Trade shows are also used to establish personal contact with buyers, maintain visibility for the company and its products, recruit distributors, obtain feedback on market needs, evaluate the competition, and locate suppliers.7 It can be expensive to bring personnel, equipment, and promotional materials to trade shows, so careful evaluation is necessary to ensure that the trade show attracts the audience sought by the manufacturer. Pricing With most consumer goods, retail prices are easily communicated and assumed to be set on a "take it or leave it" basis, with no haggling over price. However, industrial marketers set prices primarily by three methods.8 In cost-plus pricing, the buyer pays the seller's full cost of providing the product or service, plus an agreed-on profit margin. This method of pricing is often used for large contracts of uncertain length, including military weapons systems or R&D projects. In competitive bidding, potential sellers submit bids to the buyer, explaining their prices and product offering. Competitive bidding is often used for large projects or for those projects where the buyer seeks a product customized to a very explicit set of specifications. Competitive bidding is a matter of policy even for smaller purchases in many companies and in most government agencies. In published-list pricing, the manufacturer uses a printed price list to communicate its prices. Published lists are often most appropriate for standard, low-priced items that are sold to a wide variety of buyers. Often, large customers will negotiate discounts from list prices. In addition, the long-term nature of industrial relationships sometimes means that customers are willing to pay a higher price to ensure delivery, product quality, and service. Product Policy Industrial products are often sold on the basis of technology, product features, or other functional properties. This, as we explained earlier, is the result of a more rational buying approach on the part of industrial buyers. However, when core product advantages wear out over time (e.g., the patent expires), there's little to differentiate the various suppliers in the marketplace. In mature industrial markets, competitive price pressures are common. The marketing effort to arrest such a commoditization is a key aspect of industrial product policy for many suppliers. Product differentiation in industrial markets comes either through physical product improvements or through the service that accompanies the product. In consumer markets by contrast, careful product positioning, niche marketing and brand pull advertising can maintain the value of the franchise even without any major improvements in product or service. Industrial products are loosely categorized as either specialties or commodities. Price is the dominant buying criterion for commodities because all suppliers' products appear essentially the same to the buyer, whereas buying criteria for specialties often transcend price. Vendor relationship, technical characteristics, or service may provide the necessary differentiation. Channels of Distribution Industrial markets usually have narrower customer bases than consumer markets, making it economically viable to reach at least a segment of the end users, especially the large ones, directly. Moreover, given the technical nature of the product and the complex buying process, it is often a sales team rather than a lone salesperson who closes the sale to an industrial customer. Thus, key account (or customer) sales teams consisting of technical as well as commercial people are frequently used by industrial marketers. There are many options available to the industrial marketer looking for a channel to distribute a product. Selecting the right method of distribution is a difficult task. In general, an industrial marketer will prefer a direct sales force to external channels when, 8 What Is Industrial Marketing? 592-012 ! there is a manageable (small) number of customers, ! customers are concentrated geographically, ! the sales process is long and complex, and ! customers require a lot of information and training in product use. When using its own sales force to sell directly, manufacturers are likely to receive better feedback about market needs and will have better control over the marketing mix in the channel. The cost of running such a sales force, however, has been estimated to vary between $150 to $250 per sales call, restricting its deployment in situations requiring extensive market coverage. In selecting external channels, a company has to decide whether to use merchants, who take possession of the product and its title, or agents, who do not take possession.9 An electrical supply house inventories electrical items and is thus a merchant. A manufacturer's representative, however, is classified as an agent because the rep does not take possession of the product but rather receives a commission on orders generated for the manufacturer. Because merchants take possession of the product, they relieve the manufacturer of the risk associated with any inventory or credit in the channel. Distributors of industrial products (both merchants and agents) tend to be well trained, and the technical nature of the products they carry forces them to be well informed about product technology. Value-added computer dealers, for instance, will have a highly trained team of technicians to tailor software to solve specific customer problems. Distributors of chemicals must be well trained about safety considerations. In short, industrial distributors often provide channel functions that go beyond the usual assortment, inventory, and convenience that accompanies consumer products distribution. In selecting a channel of distribution, companies must also consider whether to have company-owned distribution (also known as captive distribution) or independent distribution. While both act like merchants with respect to the channel functions they perform, company-owned distributors give the company control over channel policies (such as pricing), but they could complicate the management task by expanding a firm's business from manufacturing into distribution. Marketing Research Because of the heavy R&D and up-front engineering expenditures involved in developing and launching new industrial products, they are often tested sequentially at various critical development stages at selected customer sites. This is feasible because of the separability of the product's functions and features. This type of intensive testing at the customer site, called beta site testing, requires very close cooperation between the manufacturer and the customer. Consumer products, on the other hand, have to be in near-finished form before testing because of the difficulty in obtaining consumer response to partial subsets of the product's final attributes and features. Beta site testing gives the manufacturer feedback on product design and features, generated from actual product use. Customers who agree to let their facilities become beta test sites get a headstart on obtaining new technology, while accepting the technical risk of potential failure. 9  592-012 What Is Industrial Marketing? Table B Differing Emphasis Between Industrial and Consumer Marketing Practice* Industrial Markets Consumer Markets 1. Market Selection and The emphasis in the early part of the life Market selection and segmentation are Development cycle is clearly on market development. often more important than market development. 2. Market Segmentation Tends to be along demographic variables, Usually along personality or lifestyle such as size or industry. variables. 3. Advertising Rarely used to create demand. Some Extensively used to create demand and manufacturers use it to convey product brand differentiation. information. 4. Pricing Pricing is usually geared to customer needs Pricing is usually a standard from and competitive situation. which promotional discounts and quantity allowances may be made. 5. Product Policy Product positioning is usually based on Product positioning is often based on functions/features. psychological attributes. 6. Channels of Fairly extensive use of direct sales force to Wholesalers and retailers are dominant Distribution reach customers. modes of reaching consumers. 7. Marketing Research Tends to emphasize technical development Extensive feedback from consumers more than customer research. sought in design of new products as well as repositioning of mature products. Please note that these differences pertain to practice. Fern and Brown (Journal of Marketing, Spring, 1984) argue (quite rightly, * we think) that industrial and consumer marketing are conceptually based on the same underlying principles. Differences in the Organization of Marketing Functions Not only does industrial marketing pose key challenges in the formulation and execution of the marketing-mix elements, there are also unique distinctions in the organization of the industrial marketing function itself: Coordination Because of the emphasis on technology, higher product customization, and the nature of the order fulfillment cycle, the selling and operations functions of an industrial marketing firm usually need much closer integration. This may be achieved by a supporting field organization of technical people who assist sales representatives in developing customer applications and solving customer engineering problems. As mentioned earlier, large customers may be served by a joint team of sales as well as technical people. Depending on the nature of the industrial product and complexity of the buying process, such a team approach may be appropriate for some smaller customers too. Thus there is a heavy emphasis on teamwork in industrial marketing. General Management The need for closer marketing and operations integration often means that industrial marketers have to make or assist in decisions that cut across functional lines in a "general management" fashion. Product development, applications engineering, capacity planning, and quality assurance are only a few among the many non-marketing functions that an industrial marketing manager has to participate in. By contrast, the consumer marketing function tends to be more specialized. Setting the promotion plan or advertising schedule for a brand of soap or 10 What Is Industrial Marketing? 592-012 toothpaste could often be a full-time job in itself, but industrial marketers tend to be involved in a wider range of activities. International Aspects In taking a product to many different markets around the world, consumer marketers must be careful to accommodate differences in culture, lifestyle, and product use in each market. However, industrial marketers usually sell products based on technical and operational characteristics, so cultural or language differences do not have as much importance. Thus a car bumper or an engine supplied to a Japanese manufacturer in Tokyo is also likely to be used when the auto manufacturer sets up a U.S. facility. And even if the product requirements necessitate some modifications, the supplier relationship with the parent company in the home country is likely to spill over to its U.S. subsidiary. Correspondingly, when the relationship sours at one location, it is likely to affect the worldwide network. Thus industrial marketing is necessarily more global. Challenges of Industrial Marketing for the 1990s Given the unique characteristics of the industrial marketing task, the following areas are likely to be especially challenging to industrial marketers in the coming decade: Managing Strategic Alliances The rate of product obsolescence and development of new technology has accelerated considerably. In a recent Harvard Business Review article, Regis McKenna, a leading high-tech marketing consultant, pointed out that it took more than 75 years for the fractional horsepower motor to appear in nearly a dozen household gadgets, but that the semiconductor chip had already appeared in as many gadgets in less than 20 years.10 There is no doubt that PLCs (product life cycles) have shortened for a number of industrial products. To stay abreast of this technology trend, industrial firms have to invest vast amounts of resources in R&D. Many firms have realized that this is beyond the scope of any one firm. There is an increasing trend to seek strategic alliances to pool investments and share risks. For example, MIPS, a California-based manufacturer of computer chips, has sought alliances with manufacturers of workstations, such as Digital Equipment Corporation, so that it may concentrate on chip development, allowing its partners to focus on developing the computers. Such alliances are becoming increasingly popular even in tasks such as basic research. Alliances are a sensible way to buffer the risks, share the investments, and stay at the leading edge of the dynamic market environment of the 1990s. However, managing such horizontal alliances is not easy because of the lack of task clarity and clear division of responsibilities among the alliance partners. Managing Hybrid Channels Traditionally, channels were viewed as a collection of intermediaries to take the product to market efficiently, that is, at the lowest cost. The emphasis has now shifted from low cost to "effective fulfillment" of customer's needs. Now, instead of viewing channels as a collection of intermediaries, managers view channels as a collection of tasks, such as providing information, fulfilling a service warranty, or breaking up bulk. This has had two effects. First, companies now manage a wide variety of channel members. For example, instead of using either independent or company-owned distributors, companies now manage hybrid channels composed of many diverse intermediaries, each of which may specialize in fulfilling specific channel tasks. Second, companies no longer look at their distributors as adversaries to be controlled but rather as partners. For example, the apparel industry has used "quick response" to link fabric manufacturers, apparel manufacturers, and retailers. Management of the hybrid channel is a key management challenge of the 1990s because such a transformation requires the manufacturers to view channel systems in their entirety, rather than viewing them piecemeal. 11 592-012 What Is Industrial Marketing? Managing the Commodity Trend The intense competitive environment of the 1990s, coupled with the increasing sophistication of customers, is likely to make product differentiation very hard to achieve in many mature industrial businesses. From chemicals to banking, customers expect more service, more support, and more convenience. The level of service, support, and convenience provided to the customer via channels of distribution is likely to provide the differentiation point. Competition will be on the "augmented" rather than the "core" product. But the challenge is to offer product augmentation that has value to customers and does not significantly raise costs; mere add-on services at a higher cost are not likely to be received very positively. Managing Across National Boundaries Markets and management increasingly work across national boundaries, and the technical and universal nature of industrial products increases the trend towards globalization. This trend is likely to intensify as manufacturers open up manufacturing facilities and enter markets in more parts of the world. Supporting this movement are: ! opening of the European Common Market in 1992; ! the collapse of the command economies, in favor of private enterprise, in the Eastern Bloc countries; and ! the increasing trend of the developing economies in Asia and Latin America to open their markets to allow foreign investments. All this indicates a globalization trend that many industrial marketers will be pulled into, whether they welcome it or not. Even if a particular firm wishes to be a niche regional player, its competitors are likely to be global, forcing it to address customers' worldwide needs. Managing Social Responsibility Consumers in industrialized economies such as the United States, Canada, Europe, and Japan are showing increasing concern for environmental issues like pollution, waste, and global warming. Both consumer groups and their elected government representatives are likely to demand higher standards of social responsibility from businesses. Thus manufacturers of products such as chlorofluorocarbons (CFCs), which are known to deteriorate the earth's protective ozone layer, must find alternative and environmentally safe substitutes. Similarly, plastics manufacturers must find an answer to the solid waste problem (many forms of plastics are currently not biodegradable). Perhaps the design of recycling systems and backward channels from consumers to convenient recycling points could be an answer. Industrial markets in the 1990s must clearly go beyond narrow profit-maximizing objectives and demonstrate how their business mission, in addition to serving their stockholders, addresses society's needs. 12 What Is Industrial Marketing? 592-012 References 1. Corey, E. Raymond, Industrial Marketing Cases and Concepts, 4th ed. (Englewood Cliffs, N.J.: Prentice Hall, 1991), p.xi. 2. Ibid, p.xii. 3. This classification scheme is similar to the one offered by Robert W. Haas, Industrial Marketing Management, (Boston, Massachusetts: Kent Publishing Company, 1982), Chapter 1. 4. Ibid, p.14. 5. Ames, B. Charles, and James D. Hlavacek, Managerial Marketing for Industrial Firms, New York: Random House Inc., 1984) pp.22. 6. Webster, Fred E., Industrial Marketing Management, 2nd ed., (New York: John Wiley and Sons, 1984), Chapter 1, pp.5-19. 7. Ibid, pp. 273-275. 8. Corey, pp. 259-261. 9. Stern, Louis W., and Adel I. Ansary, Marketing Channels, 3rd ed., (New Jersey, Prentice- Hall, 1988), pp. 104-110. 10. McKenna, Regis, "Marketing is Everything," Harvard Business Review, Jan.-Feb. 1991, pp. 65-79. 13