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Instructor’s Manual Chapter 1 Business Marketing Management CHAPTER 1 THE BUSINESS MARKETING ENVIRONMENT LEARNING OBJECTIVES After reading this chapter, the student should be able to: Explain why we study business marketing. Discuss the differences between business and consumer marketing. Describe the characteristics of business demand. Understand the nature of business buying behavior. Distinguish among the basic types of business goods and services. Differentiate among the various kinds of business customers. Explain the pivotal importance of planning and strategy formulation to the business marketing effort. CHAPTER OVERVIEW Business marketing can be defined as those activities that facilitate exchanges involving business products and customers in business marketing. A business marketing transaction takes place whenever a good or service is sold for any use other than personal consumption. Differences between business and consumer marketing are many and varied. Business marketing, as opposed to consumer marketing, is characterized by greater total sales volume, larger volume purchases, fewer buyers, larger buyers, geographically concentrated buyers, a close supplier-customer relationship, more direct channels of distribution, professional buying, multiple buying influence, complex negotiation, reciprocity, leasing, and an emphasis on personal selling. The demand for business goods is derived from the demand for consumer goods and services. Business demand is relatively inelastic, because demand is not likely to change significantly in the short run but tends to be more volatile than the demand for consumer goods and services. There is a joint demand for some business products when two or more items are used in combination to produce a product. It is generally thought that business buyers tend to be more cautious than are final consumers. However, they are not totally rational in their buying behavior. Selling to business buyers is frequently a personality-oriented sales situation, as it true in consumer transactions. Business goods can be classified in a number of ways. One major classification system uses the categories of major equipment, accessory equipment, fabricated and component parts, process materials, MRO supplies, raw materials, and business services. Business customers are usually classified into three broad categories: commercial enterprises that include indirect channel members, original equipment manufacturers, and user customers; governmental organizations; and nonbusiness and not-for-profit organizations. 1 Instructor’s Manual Chapter 1 Business Marketing Management LECTURE OUTLINE BUSINESS MARKETING: AN OVERVIEW The Business Market WHY STUDY BUSINESS MARKETING? HOW THE BUSINESS MARKET DIFFERS FROM THE CONSUMER MARKET Greater Total Sales Volume Larger-Volume Purchases Fewer Buyers Larger Buyers Geographically Concentrated Buyers Close Supplier-Customer Relationships More Direct Channels of Distribution Professional Buying Multiple Buying Influences Complex Negotiations Reciprocity Leasing Emphasis on Professional Selling CHARACTERISTICS OF BUSINESS DEMAND Derived Demand Inelastic Demand Fluctuating Demand Joint Demand THE NATURE OF BUSINESS BUYING BEHAVIOR A CLASSIFICATION OF BUSINESS GOODS AND SERVICES BUSINESS CUSTOMERS Commercial Enterprises Indirect Channel Members Original Equipment Manufacturers (OEMs) User-Customers Overlap of Categories Governmental Organizations Institutions BUSINESS MARKETING PLANNING AND STRATEGY FORMULATION FORMAT OF THIS TEXT` 2 Instructor’s Manual Chapter 1 Business Marketing Management TEACHING SUGGESTIONS The major importance of this chapter is in distinguishing between business and consumer markets and in identifying major types of business goods, services, and customers. It would be very helpful to provide an example of both a business customer and a final consumer to help the student see these differences. The use of PowerPoint, transparencies or simply the chalkboard to chart such differences would also be useful. Business Marketing in Action - Damage Resistant Plastic Bumpers supports Chapter 1 by having students explore an engineered polymers company web site. The exposure to an actual business site also serves as an example while covering Chapter 1 topics (e.g., classification of products, classification of customers, derived demand, etc.). Business Marketing in Action Automotive Megamergers Mean Changes for Suppliers can be used to expose students to the idea that business markets are dynamic. What Would You Do? - Basic Ethical Considerations for Business Marketing Professionals can be used to get students to ponder the concept of professional ethics. Case 1-1 The Relationship of Mission and Marketing can be used to give students a review of the concept of mission and its relationship to the marketing function. Case 1-2 Researching the Duties of Actual Marketing Professionals can be used to encourage student to be more aware of what marketing professional do in their day-to-day work. ANSWERS TO REVIEW QUESTIONS 1. How is business marketing defined? What constitutes a business marketing transaction? Business marketing can be defined as those activities that facilitate exchanges involving business products and customers in business markets. A business market transaction takes place whenever a good or service is sold for any use other than personal consumption. 2. What are the reasons for studying business marketing? Prepare a profile of the contemporary U.S. business sector. Numerous employment opportunities, the growing importance of high technology business products, the success of foreign competition, and the increasing size of the business market are important reasons for studying business marketing. The business market has been described as growing, diverse in scope and nature, technologically complex, internationally involved, and ripe with career opportunities. 3 Instructor’s Manual Chapter 1 Business Marketing Management 3. Detail the major differences between business and consumer marketing. Create examples to show your understanding of derived demand, fluctuating demand, inelastic demand, and joint demand. Distinguishing between business and consumer markets: Characteristics Business Market Consumer Market Sales volume Greater Smaller Purchase volume Larger Smaller Number of buyers Fewer Many Size of individual buyers Larger Smaller Location of buyers Geographically concentrated Diffuse Buyer-seller relationship Closer Not close Nature of channel More direct More indirect Nature of buying influence More professional More personal Type of negotiations Multiple Single Use of reciprocity More complex Simpler Use of leasing Yes No Primary promotional Greater Smaller material Personal selling Advertising . An example of derived demand would be a steel distributor that forecasts demand partially based on projected consumer demand for automobiles during a particular period. The production of some pieces of contemporary machinery requires the use of transistors, and regardless of whether the price of transistors is high, moderate, or low, they must nevertheless be utilized. This is an example of inelastic demand. Fluctuating demand is exemplified by the following: if there is a five percent increase in consumer demand for automobiles, there typically will be a much greater increase in business demand for component parts that go into those automobiles. An example of joint demand would be that if there were an increase in the consumer demand for flashlights, there would be an accompanying increase in the demand for both batteries and aluminum. This would be true because both of these must be used in the production of flashlights. 4. Why is business buying behavior not purely rational in nature? Give an example of a situation in which a business buyer might be more influenced by a marketer’s use of emotional appeals. Business buyers are not totally rational in their buying behavior because of the simple fact that business buyers are human beings. In fact, according to many marketing practitioners, selling to business buyers is very frequently a personality-oriented sales situation, as is true in final consumer transactions. For example, salespeople will frequently appeal to business buyers’ desire for personal status or image in selling them innovative and expensive products. 5. Identify and define five major categories of business goods and services. Is there an alternate classification system that can be used? If so, what are the major categories included in such a classification system? Major categories of business goods and services are as follows: a. Major equipment – includes machinery, computers, machine tools, stamping machines, and robots. Characterized by an inelastic demand and changed to a capital account. 4 Instructor’s Manual Chapter 1 Business Marketing Management b. Accessory equipment – used to facilitate production, administrative, clerical, or marketing activities. Includes calculators, office equipment, and fire extinguishers. Tends to be standardized and less costly than major equipment. Lower in price than major equipment, distribution channels are usually much longer, require less technical service, and are often considered routine purchases. Characterized by an elastic demand curve. c. Process materials – most of these cannot be identified or regrouped in the finished product. Include chemicals, plastics, cement, asphalt, and steel bar stock. Considerable emphasis on price and service and bought by predetermined specifications or common industry standards. d. Maintenance, repair, and operating (MRO) supplies – part of the finished product but do not get used up in the production process. Facilitate the production process, have a relatively short life, and are generally less expensive than most business goods. Usually standardized, involve longer channels of distribution, expose the seller to fewer buying influences, and exhibit a more elastic demand curve than even accessory equipment. Include nails, paint, gears, filters, pencils, and lubricating oils. e. Business services – expense items having a multiple buying influence. Support the operations of the firm. Include CPAs, advertising agencies, and management consulting firms. f. Fabricated and component parts – purchased for inclusion into the final product. Include spark plugs, timing devices, and switches. Purchased by predetermined specifications or standards commonly accepted in an industry. Should have consistent quality and be delivered on time. g. Raw materials – basic lifeblood of industry and supplied primarily by the agriculture, limber, mining, and fishing industries. Generally bought in large quantities and by grade designations or sets of specifications, exhibit an inelastic demand curve, and have long or short channels of distribution. Characterized by multiple buying influences in the initial stages of the procurement cycle. 6. What are the three fundamental types of business customers? Identify three types of commercial enterprises. How can these categories overlap? Three types of business customers include commercial enterprises, governmental organizations, and institutions. Commercial enterprises include indirect channel members, original equipment manufacturers (OEMs), and user-customers. These categories can overlap. For example, a manufacturer of machinery can be a user purchasing raw materials to support a production process, or an OEM purchasing gear assemblies to incorporate into the machinery being manufactured, 7. Why is it important for the business marketer to know and utilize an organization’s strengths and weaknesses in marketing planning and strategy formulation? Marketing planning and strategy begin with the analysis of the changing environment. Central to this first step is an assessment of an organization’s strengths and weaknesses in relation to the competition, along with a matching of the strengths with unsatisfied customer needs in the marketplace. Effective business marketing strategy must continually monitor the elements of the marketing mix, making sure that all are consistent with one another, and that there is “synergy,” wherein the impact of the whole is different than the sum of the parts. 5