Download Chapter 14 – Marketing Industrial Products and Business Services

Chapter 13 – Products and Services for Businesses
Teaching Objectives
The overall objective of this chapter is to illustrate how the differences in the motives between buyers of
consumer products and industrial goods and services place different emphasis on the marketing of these
products. It is important to stress that much of what has been discussed in Chapter 13 is relevant for
industrial goods and services but that emphasis is affected by the inherent nature of industrial goods. The
teaching objectives are to:
1) Emphasize a fundamental difference in consumer demand vis-à-vis industrial demand—the
inherent volatility of the latter.
2) Explore the relationship between a country's stage of economic development and demand for
industrial goods.
3) Stress the growing importance of technology and quality in successful product development.
4) Illustrate the important role of relationship marketing in maintaining competitiveness in industrial
goods marketing.
5) Examine industrial trade shows as an important means of promotion.
6) Present the major issues in marketing business services globally and the affect of the fundamental
characteristics of business services on marketing.
Comments and Suggestions
1. Perhaps the most important point to make regarding the marketing and development of industrial
products is the inherent volatility of derived demand. Demand for capital equipment is particularly
susceptible to huge fluctuations in demand. This is the central issue of case 4–10 (Boeing).
2. The growing importance of technology and quality in successful industrial goods marketing cannot be
overstressed. The level of technology reflected in the product, compliance with standards that reflect
customer needs, support services and follow through, and the price relative to competitive products
are all part of a customer’s evaluation and perception of quality.
Lecture Outline
I.
The Volatility of Derived Demand
II.
The Industrial Product Market
A. Stages of Economic Development
B. Technology and Market Demand
C. Attributes of Product Quality
D. Quality is Defined by the Customer
E. Service and Replacement Parts
G. Universal Standards
H. ISO 9000 Certification—An International Standard of Quality
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III.
Relationship Marketing and Industrial Products
IV.
Promoting Industrial Products
A. Industrial Trade Shows
V.
Countertrade—A Pricing Tool
VI.
Marketing Services Globally
A. Services Opportunities in Global Markets
B. Entering Global Markets
1
Client Followers and Market Seekers
2. Entry Modes
C. Market Environment for Business Services
1. Protectionism
2. Transborder Data Flow
3. Competition
D. Cultural Barriers and Adaptation
Discussion Questions
1.
Define the following terms and show the significance to international marketing:
Derived demand
ISO 9000
Price-quality relationship
Relationship marketing
Client followers
2. What are the differences between consumer and industrial goods and what are the implications for
international marketing? Discuss.
The committee on definitions of the National Association of Marketing Teachers has broken down
the differences between consumer and industrial goods by four areas. They are:
a. Nature of the market or buyer – this typically means that consumer goods are used by the end
customer in a channel of distribution and are consumed by this customer in its finished stage.
The industrial goods are typically those goods which are used for the further production of
other goods and are not used for the personal benefit of the customer. There are, however,
many overlapping categories within this description.
b. Organization or operational setup.
c. Characteristics of the product – as was mentioned, industrial goods are typically used for the
production of other goods while consumer goods are consumed by the final customer.
d. Miscellaneous differences – including such points as the need for a sales force (highly skilled
or not), speed and dependability of delivery, and the like.
e. We must of course add the volatility of derived demand, which if noticed, has huge
implications for the marketing of industrial products.
These differences are the same in international marketing, and they are further complicated by the
foreign environment.
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3.
Discuss how the various stages of economic development affect the demand for industrial goods.
Perhaps the most significant environmental factor affecting the market for industrial products is the
degree of industrialization. Although generalizing about countries is a dangerous practice, the stage of
economic development of a country can be used as a rough gauge of market characteristics for
industrial goods. Regardless of the stage, demand for industrial goods exists, but different levels of
development typically result in changes in the demand and the kinds and quality of the industrial
goods sought. According to the text in the first stage, that is preindustrial or commercial stage, there
is little or no manufacturing, and the economy is almost wholly based upon the exploitation of raw
materials and agricultural products. There is, however, a demand for industrial products even though
it is limited to those items used in the simple production of the country's resources; that is, the
industrial machinery, equipment, and goods required in the production of the country's natural
resources. Also in this stage, a transportation system typically develops and this creates a market for
highly specialized and expensive construction equipment that must be imported from other countries.
The second stage generally reflects the development of primary manufacturing industry concerned
with the partial processing of raw materials and resources. At this level, there is a demand for the
machinery and other industrial goods necessary for the processing of the raw materials prior to
exportation.
The third stage of development is characterized by the growth of manufacturing facilities for
nondurable and semidurable consumer goods. Generally, industry consists of small local
manufacturers of consumer goods which have relatively large mass field. The demand for industrial
products extends to entire factories and the supplies necessary to support manufacturing. Such a
degree of industrialization requires machinery and equipment to build and supply the factories and the
supplies to keep them operating.
A country at stage four is really a fairly well-industrialized economy. This stage reflects the
production of capital goods as well as consumer goods including such products as automobiles,
refrigerators, and machinery. Even though industrial goods are in production, there is still the need for
the importation for other goods which the country does not produce. Demand is generally for more
specialized and heavy capital equipment to supply the domestic industry.
A country in stage five has reached the point of complete industrialization which generally denotes
world leadership in the production of a large variety of goods. Even though these countries have
achieved the highest level of industrialization, there is still a market for industrial products because a
country at this stage typically does not produce all of the goods it needs but specializes in the
production of certain goods and imports those highly specialized items which it cannot profitably
produce but still needs. Although each stage of economic development appears to be clear cut, most
countries are actually in a stage of economic and industrial flux, striving for greater and more rapid
economic growth. Thus, a country may be in more than one stage at any one time, which again has an
effect on the industrial demand within that country.
4. “Industrialization is typically a national issue, and industrial goods are the fodder for industrial
growth.” Comment.
The main points in the solution of this problem center around the desire of the underdeveloped
countries to industrialize. This industrialization is not a haphazard, natural growth, but a planned
growth, and as a consequence the sale or purchase of industrial goods both to help industrialize a
nation as well as the purchase of those industrial goods which a country cannot produce become
virtually a national issue rather than just a private venture between a buyer and a seller. The reason is
very obvious since industrial goods are part of industrialization in the sense that industrial goods must
be purchased to build plants and to supply raw materials for plants. In those cases when plants have
not been built, industrial goods are still in need in the country but are always subject to evaluation in
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terms of should the country build the plant; that is, further industrialize, and thereby not have to
import the goods, or should it continue to import the goods. Industrialization is a national issue which
adds another ingredient to the environment that the foreign marketer must face. There are political
overtones to the statement in that a country may have support for its industrialization from a second
country, and this support may take the form of industrial products at very low prices or extra-liberal
credit terms. All of this, of course, adds still another dimension to the competitive situation for
industrial goods in the industrializing country.
5. “. . . The adequacy of a product must be considered in relation to the general environment within
which it will be operated rather than solely on the basis of technical efficiency.” Discuss the
implications of this statement.
The statement really refers to a major problem faced by many U.S. marketers in that the industrial
goods they intend to sell abroad are the same ones which have a market in the United States. The
United States, being a highly industrialized nation, obviously has need for equipment of the highest
technical standards and technical efficiency. For example, highly technical automotive equipment that
can operate within extremely close tolerances. The demand for as fine a piece of equipment as is
produced in the United States and consumed in the United States may not exist in countries which are
less developed and have different labor cost structures, or it may not exist in the sense or in
relationship to the price that must be charged for the equipment. Besides the price, there is the
capability of the labor force to utilize the equipment in terms of maintenance and in terms of being
able to effectively make use of some of the refinements that may exist. Thus, a product should be
considered in relation to how it is going to be used, the purpose for which it is going to be used, the
environment within which it is going to operate in measuring its efficiency rather than on the basis of
it being technically sound from an engineering viewpoint or from the viewpoint of a highly
industrialized country as the United States.
6. Why hasn't the United States been more helpful in setting universal standards for industrial
equipment? Do you feel that the argument is economically sound? Discuss.
It seems that the main reason why the United States has not been more helpful in setting universal
standards is that a rather large demand still exists for products or replacement parts which are based
on the inch-pound system of measurement. This demand exists in the United States and foreign
countries as well. Another reason for the lack of help is that the expenses involved in such a change
are considerable, and no one particular firm is willing to incur such an expense when none of its
competitors or other companies are willing to either lead or follow the example. This argument may
be economically sound when one considers a short-run period but not sound over a longer period of
time. Over a short period of time, the domestic sales lost and the foreign sales gained would probably
not be enough to offset each other nor adequate enough to cover the expenses incurred in such a
change. However, when one considers the impact of such a change over a long-run period, the foreign
sales gained would probably be substantial enough to cover both the domestic sales lost and the
expenses incurred from such a change. What is presently being done is that companies are sitting
back and waiting for the “other fellow” to make the first move and seeing what effect this has on the
profitability of the company and its accompanying aspects.
7. What role do service, replacement parts, and standards play in competition in foreign marketing?
Illustrate.
Service, replacement parts, and standards are an important aspect of competition in foreign
marketing. These aspects all rate high with the foreign customer; and the company which can meet
these demands, and several others, is the company which will profit and will be more competitive. It
should also be noted that the lack of any one of these factors may mean the loss of business for a
foreign or a domestic based firm. Take, for example, the factor of delivery time on spare parts. If two
companies are equal in all other factors, the company which can deliver the goods the fastest and
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most economically will be the company which will get the business. This is true for many of the other
aspects as well as for those mentioned above.
8. Discuss the part industrial trade fairs and trade centers play in international marketing of industrial
goods. What is the difference between industrial trade fairs and trade centers?
A trade center is a permanent, year round display location in which the products of a particular
country are displayed, demonstrated, and sold. These centers are located in countries other than the
“guest” countries which display the products. Thus, an American-based company may be able to
utilize the display facilities in such centers as London, Frankfurt, Milan, Bangkok, or other such
cities. These centers provide a place where foreign-based companies can exhibit their goods and
stimulate sales for these goods.
A trade fair is a government-sponsored attempt to facilitate foreign trade with the “host” country.
Foreign-based companies are invited to exhibit their goods within the “host” country at a particular
location. Trade fairs are scheduled periodically and any interested manufacturer can reserve space to
exhibit his goods.
9. Describe the reasons an MNC might seek an ISO 9000 certification.
One research report examining the purchase decision variables of importer managers found that
product quality, including dependability of suppliers and timely delivery, were the most important
variables influencing purchase decisions.
With quality becoming the cornerstone of global competition, companies are requiring assurance of
standard conformance from suppliers just as their customers are requiring the same from them.
Outside of regulated product areas, the importance of ISO 9000 registration as a competitive market
tool in the EC varies from sector to sector. In some sectors, European companies may require
suppliers to attest that they have an approved quality system in place as a condition for purchase. ISO
9000 may be used to serve as a means of differentiating different “classes” of suppliers (particularly
in high-tech areas) where high product reliability is crucial. In other words, if two suppliers are
competing for the same contract, the one with ISO 9000 registration may have a competitive edge.
If a company practices Total Quality Management (TQM), the system probably meets ISO 9000
standards but it would have to be audited and certified as such.
10. What ISO 9000 legal requirements are imposed on products sold in the EC? Discuss.
ISO 9000 is not a legal requirement for access to the EC market but ISO 9000 certification is required
under EC law for product certification on a few highly regulated, high-risk products such as medical
devices, telecommunications terminal equipment, gas appliances, and personal protective equipment.
Although ISO 9000 is voluntary, except for regulated products, the EC Product Liability Directive
puts pressure on all companies to become certified. The directive holds that a manufacturer, including
an exporter, will be liable, regardless of fault or negligence, if a person is harmed on an object that
has been damaged by a faulty product. Thus, customers in the EC need to be assured that the
components of their products are free of defects or deficiencies. A manufacturer with a
well-documented quality system will be better able to prove that products are defect-free and thus
minimize liability claims.
11. Discuss the competitive consequences of being ISO 9000 certified.
A strong level of interest in ISO 9000 is being driven more by “marketplace” requirements than by
government regulations and ISO 9000 is becoming an important competitive marketing tool in
Europe. As the market demands quality and more and more companies adopt some form of TQM
(total quality management), manufacturers are increasingly requiring ISO 9000 registration of their
suppliers. Although a legal requirement in only a small number of directives, ISO 9000 is becoming
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increasingly important commercially for gaining access to EC markets. As of 1991, 42 countries had
adopted the ISO 9000 standards as national standards.
12. Discuss how the characteristics that define the uniqueness of industrial products lead naturally to
relationship marketing. Give some examples.
Two basic factors account for greater market similarities among industrial goods customers than
consumer goods customers. First is the inherent nature of the product: industrial goods are goods and
services used in the process of creating other goods and services. Consumer goods are in their final
form and are consumed by individuals. And second, the motive or intent of the user differs: industrial
consumers are seeking profit whereas the ultimate consumer is seeking satisfaction. These factors are
manifest in specific buying patterns, demand characteristics, and a special emphasis on relationship
marketing as a competitive tool.
The characteristics that define the uniqueness of industrial products discussed above lead naturally to
relationship marketing. The long-term relationship with customers which is at the core of relationship
marketing fits the characteristics inherent in industrial products and is a viable strategy for industrial
goods marketing. The first and foremost characteristic of industrial goods markets is the motive of the
buyer—to make a profit. Industrial products fit into a business or manufacturing process and its
contributions will be judged on how well it contributes to that process. In order for an industrial
marketer to fulfill the needs of its customer, the marketer must understand those needs as they exist
today and how they will change as the buyer strives to compete in global markets that call for longterm relationships.
Relationship marketing ranges all the way from gathering information on customer needs to designing
products and services, channeling products to customers in a timely and convenient manner, and
following up to make sure the customer is satisfied.
The industrial customer's needs in global markets are continuously changing and suppliers' offerings
must also continue to change. The need for the latest technology means that it is not a matter of
selling the right product the first time but one of continuously changing the product to keep it right
over time. The objective of relationship marketing is to make the relationship an important attribute
of the transaction thus differentiating oneself from competitors. It shifts the focus away from price to
service and long-term benefits. The reward is loyal customers that translate into substantial profits.
Relationship marketing can often give a company the competitive edge when a customer's ultimate
success depends on more than technical expertise.
13. Discuss some of the more pertinent problems in pricing industrial goods.
Pricing industrial goods in a foreign market is a problem which domestic manufacturers find to be
shaded oftentimes with political overtones. That is, political rather than economic reasons may often
be the backbone of a country's pricing policy with respect to certain goods. Such is the case in many
of the underdeveloped, yet industrializing, nations. Russia is able to undercut American prices by as
much as 50 percent because of the degree of government control over industry and the desire to build
goodwill in these countries.
Another area where pricing policies led to a problem is that many American manufacturers insist on
payment in cash. Credit terms are often lacking for other countries, especially the underdeveloped
ones. Thus, those manufacturers in competition with American manufacturers oftentimes have a
competitive advantage when they extend more liberal credit terms to various countries.
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14. What is the price-quality relationship? How does this affect a U.S. firm's comparative position in
world markets?
The price-quality relationship is a factor related to standards of various products a country will
produce. Typically, the higher the quality of a product, the higher the ensuing price. This relationship
oftentimes has an adverse effect on the marketability of American products in their competitive stand
against products of another country. That is, the standards for American products are too often
domestic standards and are not commensurate with the needs of a foreign country whose standards
are not as high as ours. Hence, our high-quality products are more costly and less needed than lowerquality, lower-priced products.
15. Select several countries each at a different stage of economic development and illustrate how the
stage affects demand for industrial goods.
Library project.
16. England has started the process of shifting from the inch-pound system to the metric system. What
effect do you think this will have on the traditional U.S. reluctance to such a change? Discuss the
economic implications of such a move.
With England's recent indication of changing from the inch-pound system to the metric system, the
American reluctance to such a change will probably be softened to a certain extent. That is, with
pressures from competing countries and the search for new markets for U.S. products, the inch-pound
system is slowly but surely being pushed out of competition with the metric system. England realized
that the demands for products measured by the metric system in foreign countries is greater than
demands for inch-pound measured products. America, to a large extent, is not following the basic
marketing concept; we insist on making a product and then looking for the market instead of the
reverse. Even though such a change is one of a large scale, American industry will probably have to
make it eventually if it expects to grow by marketing industrial products to foreign countries,
especially since England's move will leave the United States virtually alone with the inch-pound
system. This should put added force behind those in the United States who have advocated that the
United States shift to the metric system. If the decision is made to adopt a metric system, the period of
changeover will be at least a decade, and the cost will be very high. In the long run, the United States
cannot afford not to convert.
17. Discuss the importance of international business services to total U.S. export trade. How do most U.S.
service companies become international?
International trade in services is becoming more important in the economies of both the United States
and other countries. It is the fastest growing sector of international trade. It is estimated that services
account for about 1/4 of the value of all international trade. Currently international trade and services
are estimated to be 650 billion dollars compared to $1,870 billion in global merchandise exports. The
United States portion of services and merchandise export is 35–40 percent of overall trade. These
figures, however, may be underestimated since such services as advertising, accounting, management,
consulting, legal services, most insurance, and most of the new computer and communications
services are omitted from the balance of payments figures from which the service portion of trade is
determined.
Most U.S. service companies' initial entry into the international market is to follow their American
customers to overseas markets. However, as they became established in these countries, they began to
expand their services to local companies. Many firms established branches and acquired local
affiliations to serve both U.S. as well as local clients.
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18. Discuss the international market environment for international business services.
Service firms face most of the same environmental constraints and problems confronting merchandise
traders. Protectionism, controls on transborder data flows, competition, and the protection trademarks
processes and patents are probably the most important problems confronting multinationals in today's
international service market. Protectionism looms because U.S. business service firms are threatening
local companies. Many local companies have developed as a result of foreign service companies
operating in their countries and are now seeking direct and indirect trade barriers to restrict foreign
companies from domestic business service markets. A study of U.S. service firms reported that
ownership restrictions or prepaid royalties, discriminatory tax policies, and barriers to transborder
data flow were the most frequently encountered barriers to trade.
Restrictions, however, are not generated only by foreign firms. The U.S. government also creates
problems for service firms. The biggest domestic headache is U.S. export controls. Getting a U.S.
export license is the greatest domestic barrier foreign selling services abroad face. Not only is it time
consuming but it is frequently not clear which of the many U.S. agencies are involved in approving
the request. A last issue of importance facing the business services is protection of property rights.
Since most business services can be duplicated with ease, there is a major problem in protecting
services from piracy. In many cases, laws are not clear and as a result, it is difficult to enforce laws to
protect processes, trademarks, etc.
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