Chapter 02 - The Character of Business Marketing
CHAPTER 2
THE CHARACTER OF BUSINESS MARKETING
OUTLINE OF CHAPTER
I. The Magic of Markets
A.Buyers Gauge Value
B.Sellers Opt In or Out
II.Beyond Market Coordination
A.Supply Chain Management
1.Efficiency Gains
2.Effectiveness Payoffs
B.Relationship Management
1.A Map of Motives to Relate
2.Spotting Transactional Exchange
3.Unequal Interest in Relating
4.Joint Interest in a Relationship
5.Key Managerial Implications of Relationships
III.Developing Relationships
A.High Performance Criteria
1. Designing New Standards
a) Internal assessments
b)External measures
2.Higher Standards
B.A Model of Relationship Development
1.Exploration
a)Attraction
b)Communication and bargaining
c)Power and justice
d)Norms
e)Expectations
2.Expansion
3.Commitment
4.Dissolution
C.Model Assessment
IV.Safeguarding Relationships
A.House Calls
B.Trading Places
C.Managing Dependence
D.Supplier Pledges
E.Contracts
F.Ownership
V.Relationships in Larger Networks
VI.Summary
TEACHING SUGGESTIONS
Most students take markets for granted and have never considered their inadequacies or how they might be complemented with other coordination devices. An effective way to demonstrate the value and limitations of markets it to have a class auction. Tell the students in the class beforehand that they should bring a little extra cash to the next class in order to bid on "some simply fabulous products.” Meanwhile, prepare a one-page handout -- catalog -- of items to be offered for sale. You’ll want 2 or 3 common items, e.g., a 20 oz. bottle of Sprite or Pepsi, a Nature Valley Granola Bar, a small bag of M&Ms, a Pilot V ball pen. Intersperse these items with others that cannot be well described and that have an uncertain time component -- e.g., "fresh baked apple pie,” "a valuable 2-page study guide,” or "a caricature portrait.” On the catalog sheet or in an oral auction, invite students to bid on the items.
The simple, well-known items will have many bids. Ask the high bidders to explain their bids. They will describe acute hunger or urgent needs. These needs determine value. If there were five items available, the top bidder would now get the item at a price much lower than what he was willing to pay. The difference between the top and the fifth highest bid is the top bidder’s surplus value.
You will get few bids on the other items. Invite the class to explore why. They want to know more about the supplier. They want a taste or look first. They want to know about redress provisions. A student invited to a wedding in Australia -- and thereby missing class for two weeks -- might bid high for the study guide. How might he or she seek to insure the quality of the study guide?
Ask the students to identify the goals or rewards that motivate buyer and seller to relate. Help them to see that symmetry is not essential, and perhaps not even likely. From the Field 2.1 relates Palm’s reliance on suppliers to develop a PDA for under $100. From the Field 2.3 features the career development of a business marketer in the growing field of relationship marketing. Ask the students to speculate on the motives of Palm and suppliers and Brad Bishof and his customers to relate.
The text describes the relationship development process. Using courtship as an analog to business relationships, the model shows the importance of positive reinforcement of communicating, risking, and routinizing. The transition from the exploration phase to the expansion phase is most important and the students will find it interesting if each subprocess is briefly illustrated. The text tries to do this with Zenith and Alta, its eventual supply partner for vibration dampeners. As a preview to the concluding discussion on safeguarding, linger on the value of structural ties -- contracts, behavioral pledges, etc. -- that support joint investment in the relationship.
Students also should recognize that relationships can and do end. When things are go sour, typically a relationship custodian builds internal support for termination before actually taking the process to the other firm. Grounds for termination will be conveyed and some negotiation can transpire. With attributional biases inevitable and face saving motives at stake, it’s rare to find both parties telling the same tale about the reasons for dissolution after the fact.
Be sure to take a critical look at the relationship development model. It seems especially apt for situations when key individuals can gradually test and expand reliance...come to trust. But it ignores bureaucratic dimensions of the traders, the larger network, and situations when gradual testing is impossible.
The limitations motivate a brief discussion of other means to safeguard relationships: supplier verification, exchange of personnel, managing dependence, pledges, contracts, and vertical integration.
Students grasp the general notion of networks easily because they rely on networks for access to concert tickets, home work help, car rides, and more. To reinforce the notion in business markets invite a guest speaker to class. An executive from a manufacturing company can well illustrate the role of dealers and customers, first and second tier suppliers in product development. Another good guest speaker is a principal from an advertising or Web site agency specializing in business markets. They serve not only to verify the nature of business marketing relationships, but with their own firm illustrate the criticality of a web of enterprises -- printers, copy writers, telephone service bureaus, sales promotion companies, etc.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. Evaluate the ability of spot markets to provide adequate resources for an organization seeking to purchase:
O-rings / storage racksdata entry services / project management software
marketing research services / office furniture
applications engineering / roofing
O-rings, data entry services, storage racks, office furniture, and roofing work are commonly available in spot markets. They can be obtained from cash-n-carry suppliers or competitive bid in almost any locale in the developed world. Why? Many suppliers produce these products to widely accepted standards -- 2-inch o-rings, key strokes per minute, 4-drawer files, 30 year shingles -- for myriads of users. Their performance is easily measured.
Marketing research, pplications engineering and project management software will require parties from buying and selling firms to communicate extensively. Buyers must carefully articulate complex needs in terms of functions, performance standards, deadlines, and connections to other facets of the business. Suppliers must get to know their clients well. Both parties need long-term cooperation to obtain the sought benefits. Students may well note the technical difficulty of switching. Still, some students will note the tendency of these inputs to be relegated to purchasing departments seeking competitive bids, thus evolving towards commodity status and spot market purchasing.
2. Would a company marketing these products be interested in developing long-run relationships with any customer? Why?
Astute students should recognize that any of the products assigned to the spot market category could -- under certain circumstances -- require relational elements. For example, o-rings used in the space program may need to perform under unique conditions of extreme heat or cold; a unique supply relationship may be required for their development. Similarly, storage racks that precisely fit into the design of a bullet train or an automated warehouse are not apt to be available in spot markets. They require buyer-seller collaboration in design, information sharing on anticipated costs and volume, and some means of resolving problems -- other than switching.
Also, suppliers of what #1 called spot-market products should be motivated to capture repeat business. Follow-up calls to assess satisfaction, tune operations to provide superior service, respond to complaints, and gain penetration into other needs areas of the buying firm reflect seller activities to forge a relationship.
3. Write a series of events which might well typify a developing relationship between an office furniture dealer and a growing investment company.
Students will come up with a number of telling scenarios. Many will point to the likely role of personal relationships in initial search and evaluation. That furniture will need to fit with company operations and changing staff needs means that a supplier must develop a keen understanding of the buyer’s operation. The buyer has many other aspects of its business to run, so it will likely rely extensively on the expertise, supply connections, and resources of the supplier. The up-front collaboration and the need to harmonize additional purchases with the furniture "systems” adopted in the initial buy motivate relationships.
Typical scenario: Addison Parker, founder of ABC investments, calls upon Stangey Furniture for help in furnishing his offices in the renovated old Main Street Post Office. Hank Stangey worked with Addison in Centerberg’s centennial celebration two years ago. Over breakfast Addison told Hank of his plans for the business and his investment priorities in promotion, people, and technology. As a long-time workaholic, Addison regards furniture as just sticks and rags. Fortunately, Stangey was able to show Parker that the tasteful and professional appointment of his office was as critical to the promotion mix as any advertising or seminar he could stage. It would impact the productivity and retention of top people too. Stangey assured Addison of various financing options, then with Parker’s okay, Stangey set up a meeting with Lan Houser of LifeWorks, an interior design team that works closely with Stangey. Parker, Houser and Stangey visit two offices in Blueville, 70 miles north of Centerberg, to see work flow and atmosphere in a newly appointed research company and a new regional office of an international consulting firm.
Four years later: Parker, Stangey, and Houser emerge from a trailer meeting at the construction site for Parker’s new headquarters for ABC Global. The modularity in design for the Old Post Office locale work beautifully for the expansion of staff and the requirements of new technology. Parker, Stangey and Houser hoped they could appoint the new building with the same success.
4. Is it possible to develop a corresponding series of events reflecting relationship between this investment company and its phone system vendor?
This supply relationship can develop similarly to the furniture situation, but students should recognize a key distinction on the dimension of technology. More uncertainty regarding equipment performance and future needs may incline the purchaser to favor well-known, long-established vendors.
5The chapter mentioned that Samsung sells memory chips to Apple for its iPod Nano. At the same time Samsung sells its own MP3 players in competition with the Nano. On another front, Samsung sells flash memory used at Nokia, a Samsung competitor in telephones. Is it inevitable in B2B that some competitors will be customers? How does competition in certain markets between the parties affect their business relationships?
It’s not at all unusual in business markets that two firms will be both competitors and exchange partners. Vigorous competition in one or more product markets should not interfere with collaboration in the buyer-seller relationship, especially between large, multi-division firms. Buyers of installations, equipment or component parts would be remiss if they passed up the opportunity to buy “the best” because that supplier competed with them in another market. Still, among smaller organizations, we have seen some firms foreclose associations with competitors out of principle or fear that strengthening the rival by purchasing its products or services.
6. Marketing authors Robert Morgan and Shelby Hunt argue that trust and commitment are the central variables for understanding relationship marketing. Other scholars have suggested that power is the key variable. Explain which variable you believe is key.
Trust is the belief that another will fulfill obligations and act benevolently. Commitment is a pledge or bond of sustained association. Both of these elements seem critical to a good business relationship. Without trust, coordination is possible only by monitoring every facet of behavior. And that’s impossible. (A colleague swore he’d never return to a certain oil change shop, saying, "If they don’t do the stuff I can see -- vacuum the interior and wash the windows -- how can I trust them to do the stuff right that I can’t see?). Similarly, with out assurances that the other party will stay in the relationship, how can one plan and make investments for the future? When things go wrong in a relationship, trust and commitment enable the parties to resolve their differences.
The logic for the centrality of trust and commitment is compelling, but the case for power can be well made too. Power is a potential for influence that one firm, X, has over another, Y, because of Y’s dependence on X for scarce resources. In exchanges between parties of roughly equal power, a developing relationship typically entails greater and greater mutual dependence--power. Thus, each is able to influence the other -- perhaps in formal weekly meetings or in annual planning processes when goals and new constraints are discussed. In essence, this balanced dependence is a structural aspect of commitment.
But students will note that a great number of seemingly unbalanced power relationships can be witnessed in business markets. A small manufacturer supplying Chevy, Buick, etc. insignia to affix to the exterior of General Motors cars is delighted by the volume from and the affiliation with GM, but can expect little response from its complaints about shrinking margins when GM’s competitive position is threatened by Ford and Toyota cost advantages. Certainly, any large purchaser applies its purchasing power to obtain favorable terms. Judicious use of power in a business relationship means coordinating interfirm behaviors and providing leadership to compete successfully against other interfirm. Although the weaker’s position in an unbalanced power relationship is vulnerable -- because commitment in asymmetrical, the stronger can more easily terminate -- the weaker is attracted to the rewards. A strong member in the relationship has the capacity to lead and thereby make the interfirm system more nimble.
7. A small group of parents in Kentucky formed a private, independent school and opened recently in classrooms rented from an urban church with an oversized physical plant and a shrinking congregation. School officials forecast enrollment growing from about 40 in year one to about 120 over the next four years. Ample space for over 100 was available at the church, low-cost terms were agreed upon, and an option to renew up to four years at the same terms was signed. The pastor answered to the church council and recently wrote the school board president that because the school opened with 80 students instead of 40, the consistory wanted to double the rent. How do you respond? Could this relationship have been set up better?
The church is governed by committee; the pastor takes direction from the consistory. Somehow, following the pastor’s initial presentation of the opportunity to lease church facilities, the expectation of 40 students in perpetuity has crystallized in the consistory. This group has no concept of a lease as a legally binding document. The school should respond through its attorney in a manner that sustains dialogue but clearly establishes the lease as a relationship governance tool. Experienced business people have recommended the school’s attorney send what they called a "Maybe I’m missing something” letter. This would say: The client believes the lessor claims a breach, but they don’t know what it is. Would the lessor please tell me? If there’s not been a breach, let’s find out what’s the matter here and try to resolve.
This episode is commonplace among organizations with little relationship experience. First notice that both organizations in the problem are new to the business. Uncertainty pervades the school enterprise in terms of funding, day-to-day operations, and enrollment management. This sleepy little church has no experience as a lessor and only vague recollections of the days when scores of smiling children filled the Sunday school.
Both parties should have recognized the uncertainty and novelty of the arrangement and formalized periodic review procedures. Weekly meetings at the start to identify problems and coordinate intersecting activities might be tapered to a monthly basis by the second semester. Because families select the school in part on the basis of its location, the school really needs a long term site arrangement. And it must be secure from "hold up” after making specific investments in a particular location.
8. Describe a situation in which an important business relationship developed because of other loosely connected business relationships involving the parties.
Paul and Kathy had sons that played on the same soccer team. When Kathy’s marketing research firm needed someone to fill in for their regular videographer, Kathy remembered Paul’s company, V-Productions. Paul’s firm did such a nice job shooting focus groups that week, it’s become the number one videographer for Kathy’s research firm.