UNIT 1: INDUSTRIAL MARKETING

SYSTEM
1

Contents
 Aims & Objectives
 Introduction
 Definition of Industrial Marketing
 Who are Industrial Customers
 Classification of Industrial Products
 The Industrial Marketing System
 Basic Difference Between Industrial &
Consumer Marketing
 1.1 INTRODUCTION
2

 In its simplest term a market is composed

of buyers and sellers, exchanging goods
and services and money.
 It is usually helpful, however, to also think

of markets in terms of the channels

through which buyers and sellers contact
as well as of the relationship such
contacts can establish.
 A market system, therefore, includes at

least three elements-participants (buyers

 1.2 DEFINITION OF
3
INDUSTRIAL MARKETING
 Industrial marketing is a human activity
directed towards satisfying need and wants of
professional buyers and other individuals
influencing purchases in commercial,
institutional and governmental organizations
through the process of exchange.
 Further, industrial marketing consists of all

activities involved in the marketing of products

and services to organizations that use products
and services in the production of consumer or
industrial goods and services, and to
facilitate the operation of their enterprises.
 Industrial marketing…
4
 The word Industrial Marketing
is also treated as Business-to-
Business Marketing, or Business
Marketing, or Organizational
Marketing.
 Industrial marketing/business

marketing is to market the

products and services to
business organizations:
manufacturing companies,
 Industrial marketing…
5

 Here the basis for defining industrial

marketing appears in line with the
understanding of the industrial customer
rather than the products involved.
 This is because products and/or services

are want satisfier in consumer or

industrial market.
 However, some big differences exist in

the rationale behind buying motivations

 Industrial marketing …
6

 In a general sense, industrial

marketing describes all marketing
activities not directed towards the
household or the ultimate
consumer.
 Now in order to formulate and

implement a realistic and practical

marketing decision in the industrial
market the industrial manager has
  Industrial marketing management
7

 The basics of marketing management:

deciding the target markets; finding out
the needs and wants of the target
markets, developing products and
services to meet the requirements of
those markets, and evolving marketing
programmes or strategies to reach and
satisfy target customers in a better and
faster way than competitors apply to
both consumer and industrial marketing.
8

 Industrial marketing
management can be defined as
the analysis, planning,
implementation and control of
programs designed to create,
build and maintain mutual
beneficial exchange relationship
with target market (in the
 1.3 WHO ARE INDUSTRIAL
CUSTOMERS?
9

 Based on the previous definition of industrial

marketing, industrial customers are all
customers other than the Ultimate Consumer.
 Industrial customers are normally classified

into four groups:

(i) Commercial Enterprises,
(ii) Governmental Agencies,
(iii) Institutions, and
(iv) Co-operative Societies.
These are as shown as follows in the Figure
2.1
10
 1.3.1 Commercial Enterprises
11

 This group includes commercial business

enterprises purchasing industrial good
and/or service for use other than selling
directly to ultimate customers.
 Commercial enterprises are private

sector, profit-seeking organizations such

as IBM, General Motors, Computer Land,
and Raven Company, purchase
industrial goods and/or services for
purposes other than selling directly to
12
 However, since they purchase products for
different uses, it is more useful from a
marketing point of view to define them in
such a way as to understand their
purchasing needs at the time of examination
of the varieties of products they purchase
and how marketing strategy can be
developed to meet their needs.
 Thus, it is more logical to look at
commercial enterprises based on the
following categories:
 1.3.1.1 Original Equipment
Manufacturers
13

 The original equipment manufacturers (OEM)

are commercial customers who buy products
and sometimes service to incorporate into
the products, which can be sold either in the
industrial market or consumer market.
 In short, OEMs' buy products, which

becomes an integral part of the final

customers' product.
 Example: An electronics company selling
components to a manufacturer of television set
would consider the television firm as OEMs'
customer.
 1.3.1.2 User Customer
14

 this refer to those commercial enterprises

purchasing goods and/or services, for use in
producing other goods and/or services, which
are then sold into the industrial or consumer
market or both.
Example: Manufacturing companies
purchasing lathes, driving, bending and
forming machines that they use in their
production. In a purely economic sense the
user customers are purchasers of capital
goods.
 In contrast to OEM, the industrial products
 1.3.1.3 Industrial Distributors
15

 Strictly speaking, these are not customers in the

industrial market but rather middle men who
purchase products from the manufacturers or other
distributors and then, in turn, sell these same
products to the OEM's, to other distributors or to user
customers.
 In a loose sense, distributors are very similar to
industrial wholesaler but because of the fact that
they will take title to the products they purchase,
many practicing industrial managers treat them as
customers.
 N.B. Throughout this text, distributors shall be considered
as middlemen rather than as industrial customer.
 1.3.2 Government Organizations
16
 These are the federal, state or local agencies
that buy goods and services for the constitutions
they serve. Governmental agencies are the
largest purchasers of goods and services in any
country.
 There are great variations amongst
governmental customers in their buying pattern,
purchasing procedure and volume of purchasing.
 Based on the above variations, governmental
customers are broadly classified into local
governments, state governments and federal
governments.
17

 State governments: if there are states within a

given nation, the states are also customers for many
industrial marketing firms. In our context there are
14 states whose major expenditures are made in
such areas as education, health, road and so forth.
 Federal governments: are also large buyer of
goods and services for civilian and military purpose.
 Effective marketing strategy for reaching
government customers involves the
marketer's thorough understanding of each
group and the complex purchasing
procedures.
18

 Government purchasing is also based on

contractual arrangements. These contracts
often contain provisions that have little to do
with the product under consideration. Rather,
they are more concerned with broader social
goals.
 These provisions include production inspection

requirements, payment methods, and actions

to be taken as a result of default and disputes
and other provision based on the suppliers
performance.
 1.3.3 Institutional Customers
19
 This market includes those customers not falling
into commercial or government classifications.
 Institutional buyers are a mixture of
government and private organizations and
industrial marketers must consider them on
individual basis to respond successfully according
to their unique characteristics, purchasing
practices and policies.
 Examples are schools, college and universities,
churches, hospitals, non-profit foundations etc.
Some of these institutions follow rigid rule and
purchasing procedures, while others follow, far
more causal procedures.
20

 Although all three types of industrial

customers are dissimilar in many
respects, they are generally considered to
comprise the industrial market because
they all purchase goods and/or services
to use either directly or indirectly in
providing good and/or services to their
own customers.
 They all differ from the ultimate

consumer in that they all purchase goods

 1.3.4. Cooperative Societies
21

 An association of persons forms a

cooperative society.
 It can be manufacturing units (e.g.

Cooperative Sugar Mills) or non-

manufacturing organizations (e.g.
Cooperative Banks, Cooperative
Housing Societies). They are also
the industrial customers.
1.4 CLASSIFICATION OF INDUSTRIAL
PRODUCTS
22

What is an Industrial Product?

Industrial products are the products,
which are used for processing or for
use in conducting a business.
Thus, the distinction between a
consumer product and an industrial
product is based on the purpose for
which the product is bought.
we will classify them into the
 1. Heavy Equipment Products
23

 Heavy equipment products are

basically capital items used in the
production process and wear out over
time.
 They can be purchased outright or

leased by user customers.

 It includes metal cutting machine tools,

metal forming machines, (hydraulic and

forging process), forklifts, blast furnace
24

 The marketing implication of these

products include:
 Time taking negotiation is involved
because of the heavy expenditure
associated with the equipment.
 The distribution system is usually direct
i.e., from the producer to customer
 Purchasing decision is influenced by:
cost, return on investment and desire for
industry leadership.
 2. Light Equipments
25

 The light equipment classification

industrial product includes portable
power tools like drills, saws,
grinders, polishers and so forth,
measuring instruments, type
writers, calculators and other
similar products.
 The market of light equipment is

also normally comprised of user

 3. Consumable Supplies
26

 Consumable supplies do not become part of

the finished product but most parts are
continuously worn out or used up in the
process of operating or facilitating the
operation of an enterprise.
 Such items as paints, soaps and detergents,

oils, cleaning materials and stationary

belongs to this category.
 The products are considered expense items

and cannot be depreciated for tax purpose.

 4. Component Parts
27

 Component parts are those products that

are purchased for the purpose of
inclusion into the final products of an
industrial company.
 They can be installed directly in to the

products with no additional changes and

end up within the product of the
purchaser.
 Examples include switchers, transistors,

motors gears, screws and other such

 5. Raw Materials
28

 It includes all those products

generated by the extractive industry,
which is subject to some amount of
processing before becoming a final
product.
 Typical of these products include

coal, iron ore, gypsum, crude oil,

fish, lumber, field crop and other
similar products.
 6. Processed Materials
29

 Processed materials resemble

component parts in that they
usually enter in to and form an
indistinguishable part of the
finished product.
 Process materials differ from

component parts chiefly in that

most of them cannot be
 7. Industrial Services
30
 Many companies also operate in the
service market and organizations
require a wide range of services.
 Industrial services are of a great

variety and differ considerably in

terms of cost and sophistication.
 Common examples of service

include janitorial or cleaning

service, repair and maintenance,
31

 To sum up, it is extremely important that

the industrial marketing manager realize
the classification of his product as they
are purchased by his customers.
 This is because buying motivations differ

within product classifications –

processed materials are not purchased
for the same reason as are component
parts.
1.5 THE INDUSTRIAL MARKETING
SYSTEM
32

 The industrial marketing system can

be described by identifying its
components.
 The basic components are:

1. producers of industrial products

2. suppliers to these producers
3. customers for industrial products
4. channel components between
buyers and sellers
 The following parts provide a brief description of
the roles played by each of these components.
33

1. Producers of Industrial Goods

and Services
 Industrial product and/or services

are produced by such business

organizations as manufacturing
plants, mill industries, processing
plants, assembly plants and
fabricating plants.
 2. Resource Suppliers
34

 Inputs such as raw materials and

component parts, labor and capitals are
supplied by other organizations to
industrial firms for use in producing
outputs.
 Industrial customers and distributors

purchase from suppliers and they

themselves are suppliers to other firms.
 The survival of an industrial firm depends

on its good relationship with its input

 3. Customer for Industrial Goods & Services
35


Here the primary customers for industrial goods
and services are commercial organizations,
institutions and governmental agencies.

4. Channel Component in the Industrial

Market

Distributors link industrial producer and industrial
customers. They include the manufacturers sales
branch, the industrial distributor and the
manufacturer's representative.
 5. Environmental and Facilitating
Forces
36

 A number of environmental forces affect the behavior

of the industrial marketing system.
 External factors such as economic changes,
technological changes, changing political climate,
competition, international pressures all affect
producers, suppliers, customers and channel
component members.
 the industrial marketing system is also affected by
facilitating organizations who may not be directly
involved in the system but who become involved in
the various capacities such as advertising agencies,
warehouse, transportation firms, financial institutions
and consulting firms.
37
 These forces affected the behavior in the
industrial marketing system and must be
considered as parts of the total system.
 For example, advertising agencies provide the
necessary communication flow between sellers and
buyers through the formulation of meaningful
information.
 The use of advertising in reaching potential
buyers and a multitude of buying influences
is vital in the overall communication plan of
industrial marketers.
 In sum, industrial marketing system is open,
interactive and part of the larger system.
 1.6 BASIC DIFFERENCE BETWEEN
INDUSTRIAL AND CONSUMER
38
MARKETING
 In order to gain a better understanding of the
industrial marketing area, let us contrast it with
consumer marketing.
 The industrial markets are geographically
concentrated; the customers are relatively fewer;
the distribution channels are short; the buyers (or
customers) are well informed; the buying
organizations are highly organized and use
sophisticated purchasing techniques; the
purchasing decisions are based on observable
stages in industrial marketing.
 Industrial marketing is more a responsibility of
general management in comparison to consumer
39
40
 I. Differences Related to the
Characteristic of the Market
41
 A relatively small number of customers
comprise the market for a particular
industrial goods and services.
 Although there may be relatively few

industrial customer, they are normally large

in size.
 The purchase orders of industrial customers

are often very large and they engage in large

volume of purchases.
 Industrial customers are not spread uniformly

but they are concentrated in some specific

areas.
42

 The industrial market is characterized by

derived demand, which means that the demand
for industrial product is derived from the
ultimate consumer demand.
 The industrial market is also characterized by

joint demand, which means that industrial

customers often buy products that they
combine with other purchased or manufactured
products to form their final products.
 Thus industrial goods and demanded jointly

with other goods, or they are not demanded at

all.
 There is a high degree of cross-elasticity
of demand in the industrial market.
43
 Cross-elasticity of demand is the

responsiveness of a sale of one product to

the price change of another product(s).
 It is the degree to which resources are

substitutable for one another.

 The demand for many industrial goods is

influenced by the price of other goods.

 For example, the quantity of steel demanded
is related to the price of its close substitute
aluminum.
 II. Differences Related to the
Characteristics of the Product
44

 The products in the industrial market are usually of a

more technical nature.
 Products in the industrial market are purchased on the
basis of specifications.
 Industrial buyers purchase products for production
inventory purpose as opposed to immediate use.
 There is tremendous emphasis on the importance of
after sale service in the industrial market.
 Packing in the industrial market is generally more
protective in nature than promotion, although it is not
always true.
 Industrial customers sometimes produce products with
their own facilities.
 III. Differences Related to the
Characteristics of Industrial Buyers
45

 The industrial market is normally

characterized by more technically qualified
and professional buyers.
 The buying decisions are on the basis of
such factors as specifications, supplier
analysis and cost effectiveness as opposed
to emotional purchasing motives of
customers in consumer market.
 Committee buying is often found in the
industrial market.
 Industrial customers often select two or
 V. Differences Related to the
Promotional Characteristics
46

 Promotion also differs in the two markets. Some of

the major promotional differences are:
 There is generally a much heavier emphasis on personal
selling.
 Sales people in the industrial market are more like
consultants and technical problem solvers to their
customers.
 Salespeople in the industrial market posses more
technical background and are more likely fall in to the
classification of sales engineers.
 In industrial market advertising plays the role of laying
down the foundation for the industrial salesperson's call.
 Advertising media in industrial market are trade journals
and direct mail.
 VI. Differences Related to Pricing
47
 Price is less important in industrial purchasing
compared to:
 the quality and uniformity of the products purchased
 certainty of delivery of the products purchased
 service and technical assistance
 Prices are often based on competitive bidding.
 Negotiation in setting price is quite common in
industrial market.
 Industrial marketing firms often provide financing
arrangements.
 Leasing is often used as a price alternative to the
marketing of capital goods.
 Prices are quiet stable in the industrial market and
 VII. Differences Related to the
Characteristics of the Channel
48
 Channels of distribution in the industrial market
generally tends to be shorter and much more
direct.
 The intermediaries in the industrial market are
few in number.
 Industrial distributors and manufacturers'
representatives are the primary middlemen to
facilitate the flow of goods in the industrial
market.
 There is greater expectation of sales effort from
industrial channel components than from those
in consumer market.
49
50

UNIT TWO
THE DEMAND FOR
INDUSTRIAL GOODS
 2.1 INTRODUCTION
51

 To market effectively into the

industrial market requires a
thorough understanding of
demand mechanisms in that
market.
 As it was pointed out in the

preceding unit, the industrial

market differs appreciably from
the consumer market and many of
 2.2 THE TOTAL DEMAND FOR
INDUSTRIAL GOODS
52

 Estimating the total demand for the producer

of industrial goods and services is relatively
difficult to accomplish.
 There is no single source that provides such
data on the total market for industrial products
as reflected by commercial enterprises,
government customers and institutions.
 Here for the practicing industrial marketing
manager, it is not important to know the total
industrial market, it is more of an academic
interest than it is a practical decision – making
factor.
 2.3 DEMAND CHARACTERISTICS
RELATED TO INDUSTRIAL
53
PRODUCTS
 The marketing manager has to understand a number
of demand characteristics, which are peculiar to the
industrial market.
 These characteristics may be classified as follows:
I. Those Characteristics Related to the
Concept of Derived Demand
 Derived demand may possibly be the single most
important force in the marketing of industrial goods
and services.
 The term, derived demand refers to the indirect way in
which the need for industrial good is generated i.e.,
from the demand for consumer goods and services
54
 In other words, industrial customers
do not purchase goods and services
because of their own personal need
or desires but rather to produce other
goods and/or service for their own
customers.
 This is where the use of the word

derived demand originates – the

demand of industrial good and
55

 In actual business world, there

are often many levels in the
derived demand concept.
 For example, the demand for cotton
is dependent upon the demand of
the textile industry, which, in turn is
dependent up on the demand of the
garment industry, which is
ultimately dependent up on the
 II. Characteristics Related to the
Concept of Joint Demand
56

 Joint demand occurs when the demand of one

product depends upon that product's being
used in conjunction with another product.
 In such a situation the products are demanded

jointly, or they may not be demanded at all.

 Joint demand is very common in the industrial

market, particularly with OEM customers.

 A fabricator purchasing 500 component parts for
assembly into a finished product has a joint demand
for all those components.
57
 For lack of a single component, no matter
how large or small, the final product cannot
be assembled.
 Joint demand may also occur in the case of

user customers.
 For example, if a manufacturer is

currently using a particular brand of

machine in its production process, other
pieces of peripheral equipments must be
compatible with that machine if the
production line is to function effectively.
 III. Characteristics Related to
the Types of Products
58

 Demand in the industrial market will also

vary depending up on the types of
products being marketed.
 To illustrate, the demand for processed

materials may differ considerably from

the demand for capital equipment
primarily because of the characteristics of
the products themselves.
 The following is a partial list of those

factors affecting demand for each of the

  Heavy Equipment
59

 When industrial customers purchase

heavy or major equipment, their ultimate
selection of suppliers may be influenced
by factors such as:
 Strict conformance of the equipment to

buyers specifications
 Service capabilities of the supplier in

case of breakdown or malfunction

 Technical assistance provided by the

supplier at the time of installation

60

 Price, price conditions and other financing

arrangements
 Timely delivery of equipments by the suppliers
 Past performance of the suppliers
 Effects on manpower requirements or labor
reduction of the new equipments
 Energy consumption requirements of the
equipment
 The difficulty or ease of operating the new
equipments by the existing employees
  Light Equipment
61

 The demand for light equipment in the

industrial market is often influenced by the
following factors.
 Price and price considerations such as
quality and trade discounts
 Speed and certainty of delivery
 Personal preference of those who use
the equipments – personal like and
dislikes of users
62

 Product warranties
 Service capabilities of the suppliers
 Past experience with the supplier and his
equipment
 Competitive alternatives open to the purchaser
 Provisions for returning defective equipments

 Since the light equipment is often standardized and

marketed into a wide spectrum of industries its demand is
influenced by factors different from heavy equipment,
which may be non-standardized and custom produced to
individual buyer preference.
  Component Parts
63

 The demand for component parts may be

influenced by factors quite different from
those affecting the demand for capital
equipment, heavy or light.
 One major difference is that heavy or

light equipment is sold to user customers,

whereas components are typically
marketed to OEM customers.
 The impact of this difference is on derived

demand nature of component parts.

 The selected process by OEM customers among
possible suppliers is often made on the basis of factors
such as the following
64
 Strict conformance to buyer specifications
 The quality and uniformity of the purchased

components.
 Certainty of delivery

 Price and price considerations

 Capability of the suppliers to provide the required

quality of parts
 The price of the purchased components compared to

the cost of the purchaser producing the parts in their

own plant
 Return provision of defective parts

 Past experience with the supplier and component

parts
  Processed Materials
65
 The demand for process materials is also
influenced by the OEM market, but this
differs in two major ways from the
demand for component parts.
 First, there is usually no replacement market
for processed materials.
 Second, processed materials are usually not
used in the same form by the purchasing OEM
as are components parts.
 In choosing among suppliers of processed
materials, industrial buyers are influenced
66

 Strict conformance to buyer specifications

 Price and price considerations
 Quality and uniformity of the materials
 Certainty of delivery
 Capability of the supplier to provide the
quantity required
 Return provision for defective materials
 Freight difference among suppliers
 Past experience with the suppliers materials
 Competitive alternatives open to the buyer
  Consumable Supplies
67

 Consumable supplies have probably the simplest demand

mechanism of all industrial goods.
 Normally, they are standardized products that can be sold to all
different types of industrial consumers.
 In choosing among possible suppliers of consumable supplies,
industrial customers base their decision to purchase on such factors
as:
 Price and price consideration such as quantity and trade
discount
 Certainty of delivery
 Brand name of the supplier
 Capability of the supplier to provide the required quantity
 Past experience with the supplier
 Competitive alternatives open to the purchaser
  Raw Materials
68

 In choosing among suppliers of raw materials, industrial

customers base their decisions on factors as the following:
 Standard and grades of the material
 Certainty of delivery
 Capability of the supplier to provide the quantity
required overtime
 Price and price considerations
 Freight rates and charges involved in buying from
different suppliers
 Past experience with the supplier
 Competitive advantage open to the buyer

69
In sum, the industrial marketing
manager must understand fully
those characteristics of demand
peculiar to the particular products or
product lines of the company.
 It should be apparent that an

industrial marketing company selling

capital equipment via custom sales
to user customers face a completely
different demand mechanism from
that of the firm selling standardized
 IV. Characteristics Related to
the Nature of the Market
70

 In addition to the demand characteristics

discussed thus far, another factor that
must be considered by the industrial
marketing manager is whether he is selling
goods and/or services into a horizontal or
a vertical market and the degree of
concentration in that market.
 A vertical market exists when a company

sells its product and/or service to one

specific industry, whereas a horizontal
 To illustrate, the market for the
71
manufacturers of blast furnaces is quite
vertical where as the market for
manufacturers of machines tool might be
horizontal. Vertical or horizontal markets
may exist for all types of products and
services in the industrial market.
 Concentration refers to the total number of
companies in the market and the percentage of
purchase made by the larger more dominant
firms (members).
 The individual industrial marketing manager
must look at each of his company's markets to
 V. Characteristics Related to the
Nature of Industrial Buyers
72

 Because industrial goods and services are

purchased by people, it is difficult to
generalize about the nature of industrial
buyers.
 Nevertheless, some generalizations will help

us to understand what influences industrial

purchasers in their buying as follows.
 Price is often not the major determinant of
demand as buyers would be willing to pay more
if certainty of delivery, quality, service, technical
assistance, and so forth were assured.
  Buyers will often split purchases of product
rather than buy from a single source of supply
73
to assure themselves of having at least one
source of reliable supply.
 Many buyers prefer to purchase from those
firms they perceive to hold positions of
technical leadership with the logic that this
allows the buying firm to keep up to date with
new technological innovations.
 Reverse elasticity of demand often occur in
the short run owing to buyer expectation. A
price increase by a supplier brings about an
increase quantity demanded as buyers expect
even further price increase and thus purchase
and keep them in their store to protect
 VI. Characteristics Related to the
Geographic Concentration of Customers
74

 The demand for industrial goods and services is

not spread evenly in any country, but is often
concentrated in some specific areas.
 It is important that the industrial marketing

manager recognize the important location

demand characteristics for individual goods
and/or services.
 The rationale behind this is to save or

economically use our effort in areas where no

demand exists and invest our maximum
potential in other areas where the demand is
largest.
75

UNIT THREE
THE INDUSTRIAL
CUSTOMER
 3.1 INTRODUCTION
76

 As it was developed in the opening unit, customers in

the industrial market fall into three basic classification:
(1) Commercial enterprises,
(2) Government, and
(3) Institutions.
 Within this classification the purchasing decision vary
with the type of industrial good and services under
consideration.
 So the industrial marketing must know his/her
customers explicitly and perform detailed research and
analysis into market segmentation, organizational
behavior, purchasing policies and procedures, and
formal & informal buying influences appropriately.
 3.2 HOW TO DEFINE INDUSTRIAL
CUSTOMERS TO BE REACHED
77

The first and most important issue that should be

addressed by the industrial marketing manager is
to define the customer groups to be reached.
1. The Standard Industrial Classification (SIC):
It is the tool used to obtain data about industrial
customers to be reached by classifying them into
various groups.
SIC is a uniform numbering system by classifying
the establishments according to their economic
activity.
It divides the economy into sub-classification as:
78

 Agriculture, forestry and fishing, cattle breading 01

- 03
 Mining 04 – 06
 Construction 07 – 10
 Manufacturing 11 – 13
 Transportation, Communication, gas & sanitary 14
– 16
 Trade (Wholesale & Retail trade) 17 – 19
 Finance & Insurance, real estate service 20 – 22
 Public administration 23 – 27
 Non classifiable establishments 28
 Within each major industry group, detailed sub
groups and industries can be defined.
79
 Then, each group will be assigned two digit

numbers.
 Each major two-digit SIC industry groups are then

defined by a third digit and detailed industries are

defined by a fourth.
 Thus, the longer the number, the more detailed the

industry being defined. Eg.

 Here the standard industrial classification is a tool

for classifying those customers to be reached.

 By itself, SIC will not necessary tell the industrial

marketing manager who the industrial customers

are or who they should be or where they are or how
big they are, and so forth.
 2. Input-output Analysis:
80

 this method is based on the simple concept that the

sales or output of one industry are the purchases or
inputs of another industry or an industry's inputs are a
function of a supplier's output.
 Input-output analysis is a useful tool for the industrial
marketing managers.
 It provides an objective and practical way to determine
prospective customers by the quantity of purchases.
 It helps to know which industries are major customers
and enables the marketer to compare company
market segments with industry market segments in
terms of sales percentages.
 Once major customers segments are found
through input-output analysis, the industrial
81
marketing manager must now locate specific
industrial customers, find specific information
on such customers and direct marketing
effort towards them.
 The information may include:

 firm name, address and phone number

 corporate officers by name, title and positions
 directors by name
 annual sales volume
 number of employees
 appropriate SIC number
 product and service produced
 3.3 UNDERSTANDING
ORGANIZATIONAL
82 CHARACTERISTICS
 Once industrial customers have been
defined and located, each must be
further analyzed in terms of
characteristics that will have an effect
on its purchasing.
 Typically, this involves researching each

of the customers located in the

preceding section with regard initially
to the purchasing functions of the
particular firm in question.
 Thus, it is important that the
83marketing manager gain insight in to
the purchasing behavior of each and
every present and prospective
customer firm.
 It is generally conceded(agreed) that

the first step in understanding the

very complex area of corporate
industrial purchasing behavior is to
understand the organization of the
particular firm involved.
 1. Size of the Customer Firm and
Specialization of Purchasing
84
 Although there is no hard-and-fast rules, the size of the
company generally has an effect on the way in which it
purchases goods and services, and thus size has an
effect on the marketing approach to be used.
 For example, in smaller firms, purchasing is often a
part time responsibility held by someone such as office
manager or owner/manager. This implies that the
purchaser is normally not a specialist, and educational
selling on the part of the marketing manager is
required. However, in large industrial firms, it is very
common to find a great deal of purchasing
specialization in very formalized departments. There
are definite lines of authority and responsibility and
highly specialized buyers are the rule.
 2. Purchasing Positions in the
Customer Organizations
85

 Another extremely important

characteristics that must be
determined for each and every
customer is the position of the
purchasing department in the formal
organization of each customer firm.
 In attempting to determine the

position of purchasing in the

customer organization, the following
 A) Is the purchasing department
line or staff?
86
 In some companies, purchasing is a line position,
whereas in other it may be a staff position.
 The importance of this to the industrial marketing
manager is vital.
 Line purchasing departments possess the authority
to decide, what will be purchased and from who it
will be bought.
 Staff purchasing departments, on the other hand,
usually operate in an advisory capacity, advising
such other departments as production, engineering
and so on, on what they might buy and from whom;
but the authority is vested in the other
 B) Where is the level of the
purchasing department in the
87
organization?
 In addition to determining whether purchasing
is a line or staff position, the industrial
marketing manager must also discover how
high or low the purchasing department is in
each buyer firms organization.
 This is the kind of information that shows on

formal organizational chart, and it can be

found with some effort.
 It determines the authority and decision-

making power of the purchasing department

although it still holds a line position.
 C) Are purchasing responsibilities split between
head quarters and operating divisions?
88

 In many industrial companies where multi-plants and/or

division are found, there are split purchasing
responsibilities.
 The division or plants have the authority to purchase
operationally, but overall purchasing policy may be
determined at the corporate level at the home office or
head quarters.
 The marketing implication of this may be:
 there are different operational units that make actual
and specific decisions
 purchasing may not follow uniform procedures to buy
the same products
 in order to purchase heavy equipment, the plants may
need to obtain authorization from home offices etc.
 D) What purchasing policies are
involved by each customer firm?
89

 Different companies have different polices

governing their purchases. Yet, it might be difficult
to recognize each customer purchasing policies
unless it is made known to all possible suppliers.
 Such policies include:
 buying from local suppliers whenever possible
 request for bid when the requirement exceed certain
amount
 reciprocal agreements with customers
 buying from at least two suppliers on every purchase
 All of these determine the customer's purchase decisions. It
makes a difference in formulating marketing strategies and
requires first to know the changes in policies and adopting
them.
 3.4 VALUE ANALYSIS IN
INDUSTRIAL MARKETING
90

 Value analysis is a management

technique, which involves in-depth
investigation of an item in terms of the
function and cost (price) to determine the
most effective specifications and achieve
the lowest possible cost.
 The logic behind this analysis is cost

saving by identifying unnecessary cost

elements in the item and eliminating them
without negatively affecting the items
functions.
91

 Value analysis, as developed by most

companies, is a step-by-step procedure
that involves:
1. Selection of a product that need's
improvement or chosen for value
analysis
2. Gathering information by the team
coordinator before the team first meets.
3. The team then meets and defines
essential functions of the product
92
 The value of the basic and secondary
functions are analyzed in terms of four
definitions of value.
 use value of an item which refers to its
ability to perform
 esteem value which is the ability of the item
to inspire people
 cost value which describe the money or
labor cost of the product; &
 exchange value of the product

4. Generating alternative using

  The following are some of the most important
general questions in the value analysis checklist.
93
 Can the item be eliminated?

 If the item is not standard, can a standard item be

used?
 Does the item have greater capacity than required?

Can the weight be reduced?

 Is unnecessary machining performed on the item?

 Is commercial quality specified?

 Can you make the item less expensive in your

plant?
 Can cost of packing be reduced?

 How might the item be modified?

 How might the item be rearranged?

 How might the item be combined with other items?

94

5. Evaluation of alternatives: Alternatives will be

evaluated based on different factors, including
 cost elements (labor, material)
 incremental costs
 cost per unit of dimension (length, area, weight)
 The evaluation process further reduces the list to one or
two good ideas.
6. Presentation: the final alternatives are refined
and presented to a management committee as
value analysis change proposal.
7. Implementation: The approved value analysis is
translated into an analysis change order and
implemented.
95

TEST ONE
OUT OF 10