Marketing is carefully meshed with production, finance, research and development (R&D), purchasing, and other functions of the business so as to make the maximum contribution to company objectives. The marketing activities of industrial products are an integral part of the company’s total operating system. Therefore, it is useful to identify the major types of plans by which operations of an enterprise are directed. These may be designated as strategic, operational, logistical, and organizational.
A plan is a goal-directed system of action. A strategic plan is one which describes the allocation of a firm’s resources which the management believes will achieve the corporate mission with the greatest efficiency over the long run. Supporting the strategy and contributing to its implementation are plans for the operations, logistics and organization called for by the strategy. Together, these constitute a hierarchy of objectives, and plans to achieve them, which make up the guidance system of an enterprise.
Meaning of Strategy
The word strategy carries the connotation of a skillful plan. Some have more precisely defined a strategy as a complete plan. It is a set of directions which specifies which choices a firm will make in every situation. The term strategy is derived from strategic, a word which the Greeks used to describe what the commanding officer did in a military campaign. The military commander is charged with a mission and must allocate and position of forces under him in a way which offers the greatest probability of achieving it. Since the enemy is not likely to accommodate him by revealing what they plan to do, the commander must base his strategic decisions or assembled intelligence about the enemy, the terrain over which military operations will be conducted, and any other factors which have a bearing on the ability of his forces to function as well as those of the enemy.
But business is not warfare. The mission of a military commander is decided by his government. The mission of a military operation is generally to defeat the enemy. The mission of a business enterprise might be to move materials, or to supply mobile power, or to transmit, process, store, and retrieve information. However, these aims have to be refined and qualified in order to match between the capabilities of an enterprise and opportunities it seeks to exploit.
In a business sense, strategy defines products. It identifies the markets and market segments for which products are or will be designed, the means by which operations will be financed, and the emphasis which will be placed on the safety of capital against income. These are decisions which would change over time as environmental conditions of an enterprise change.
Marketing Strategy
Marketing strategy is that part of the company’s strategic plan which deals with the development of its products and services, the stimulation’s of demand for them, the determination of their prices, and the makeup of channels through which they reach customers. Its major elements are product and service definition, promotion, pricing, and distribution.
- Product definition: Since a product is simply a bundle of properties. It should possess those properties which fit the needs of target markets. Due to the diversity of needs to penetrate and hold their markets, many industrial firms find it necessary to produce a number of product lines, i.e., a product mix. It must also be decided whether the company should be a leader or a follower. Another strategic consideration is whether the principal source of new products should be internal or external. Without a substantial commitment to research and development effort, few new products can be generated internally. For this reason many companies elect such alternatives as copying the unpatented products of other firms, negotiating royalty arrangements with them, purchasing outright the manufacturing and sales rights to products, or acquiring the companies which make them.
- Service definition: Service can be defined as any activity undertaken for the purpose of helping customers. Customer service is a core element in the strategic plan. What does fit into this concept are such activities as pre-scale engineering studies, technical consultation, and performance testing, as well as such conventional post-sale activities as financing, operator training, installation and maintenance.
- Promotion: Promotion is the function of inducing customers and prospective customers to buy the company’s products in quantities and at prices which yield satisfactory profits. Promotion involves decisions on at least three key issues: how to use advertising, to what extent personal selling should be employed, and the most effective way to supplement both with such supporting efforts as displays, trade shows, exhibitions and demonstrations.
- Pricing: Since price may seldom be the dominant factor in making a sale, long-range decisions regarding it need to be carefully integrated with decisions concerning the other four elements of strategic planning for marketing.
- Channels: The marketing channel is an extension of the manufacturing enterprise itself; channel strategy should embrace both the internal marketing units of a firm and the external intermediaries. It is particularly important that channel strategy recognize the emergence of new customer groups, impending changes in existing groups, and the impact of these on customer needs; although these factors are an issue in all elements of the strategic plan.
Formulating Marketing Strategy
The planning process is divided into several steps or stages. The divisions are not necessarily universal. Other writers and practitioners may prefer other breakdowns perhaps as good as or better than this one. It should also be recognized that the chronological implications of this sequence of steps found there is largely false. While carrying out the current plan, management must be preparing others for the future.
- Preliminary Analysis: The technical nature of most industrial goods complicates market planning For example, the demand for a material, component, supply item, or price of equipment may be changed profoundly and abruptly by changes in technology. The uncertainty of total demand for the individual firm is aggravated by the small number of large users which characteristics many industries. A shift in patronage by any one buyer can subtract heavily from the sales volume of one supplier and add substantially to that of another. The analysis which precedes the formulation of marketing strategy includes both the situation analysis and the analysis of potential markets.
- Choice of Strategy Components: The central problem in choosing the components of a marketing strategy is to find the combination of components which will produce the maximum net revenue. It involves the application of marginal analysis. But it is very difficult to forecast the results of any marketing action unless they can be measured. This is possible with direct mail advertising or promotional material designed to bring in orders. In spite of the lack of adequate means to forecast the results of marketing action, the marketing manager cannot avoid trying to do so. Recently, much has been devoted to improve both measurement and forecasting in this area.
Once management has accumulated some experience with estimates, it is often possible to predict outcomes with sufficient confidence to formulate strategies effectively.
Formulating Channel Strategy
Formulating the channel strategy involves an analysis of conditions which have a bearing on the best choice among structural alternatives and on the relationship between them and the manufacturer which will be most productive.
In general, the industrial marketer has a choice of three types of structural arrangements.
- Direct to users – through the manufacturers own sales force, with or without a network of branch warehouses.
- Indirect to users – through agents or wholesale distributors. The choice of an indirect channel system involves the choice of a selective (only one or a few outlets in each market area) or intensive (a number of outlets in each market area) relationship.
- Mixed structure – the nature of the structural network differs with the segmentation of the market. One segment may buy the manufacturer’s product in standard grades, while another may want special quality variations. While indirect distribution may be suitable for the former, direct distribution may be required for the latter.
Conditions Influencing Channel Structure
Some conditions which influence the choice of channel structure arise from the nature of the market; others are related to the peculiarities of the product; still others are linked to the character and situation of the firm itself.
- Is the market horizontal or vertical? If a product can be sold only to the members of one or a few industries, and the number of firms in each industry is small, direct distribution is the most profitable method. A few salesmen will be needed to make direct contact with all probable users. Closer contact can be maintained with customers and prospective customers, and the sales are usually improved by this method. If, on the other hand, the market is horizontal and the product must be sold to buyers in many industries, the number of buyers is large, and the chances of economically reaching all or a large portion of them usually are enhanced by selling through distributors.
- Is the market potential large or small? If the nature of the product is such that a substantial volume of sales is available in the average area served by a single salesman or branch warehouse, direct marketing may prove profitable. If, on the contrary, the probable volume of sales in a market area is small, the direct method may be too expensive.
- To what extent are the possible purchasers concentrated geographically? The tendency toward localization of industry makes it possible to market direct to the user many industrial products whose small sales volume would preclude the possibility of selling direct, even to retailers, if they were consumer goods. If 70 or 80 percent of the total possible sales volume of a product is concentrated in one or two limited market areas direct marketing is viable.
In the past, it was common for purchasing officers in large firms to insist on buying direct in order to avoid paying the distributor’s margin, and in the hope of getting quantity discounts. Many firms have streamlined purchasing by setting up continuing relations with selected suppliers with whom orders are placed by telephone, unpriced simplified purchase order, or even a tub-file inventory punched card. For this system to work, the purchasing officer must select one or two distributors and place all his orders with them. This increases the importance of the distributor as an outlet for the makers of many supplies, materials, and component parts. It also may be expected to decrease the effectiveness of the limited franchise arrangement, whereby the manufacturer markets through only one or two distributors in a market area. How far it will go and how long this method of buying will last are unanswered questions. To streamline the expensive order procedures the following points are to be considered.
➢ What is the gross profit margin?
➢ How volatile is the price?
➢ Must the product he installed?
➢ How much technical service does the product require in use?
➢ How important is quality?
➢ How bulky is the item?
➢ What kind of repair and maintenance service does the user need and how much?
➢ What is the firm’s size and financial position?
➢ What arc the seller’s marketing objectives?
Relationships in the Indirect Channel
The manufacturer’s choice of indirect channel relationships may be separated into those of a strategic nature and those which are matters of policy. In the former instance there are two basic alternatives: selective distribution is one in which the firm sells through one or a limited number of outlets in each market area or segment, or intensive, is one in which all outlets in a given market segment will be utilized. The decision to pursue a selective rather than an intensive strategy, or vice versa, based on a number of circumstances.
Intensive distribution – If the manufacturer elects to market through all outlets of the chosen type or types that will buy his products, he may be able to gain complete coverage of his total market rather quickly. Merely by the laws of chance at least one outlet in each market area should be willing to handle his product. Moreover, there is apt to be fairly uniform quality of distributor performance throughout a manufacturer’s market, since one could expect to find both good and poor distributors in every market area, many of whom would be handling his product. However, the degree of cooperation the manufacturer receives from his several outlets covering the same territory is likely to be small because none receives preferential treatment and each is competing with the others in the sale of the manufacturer’s product.
Selective distribution – If the manufacturer pursues a selective strategy, he must fit the chosen outlets into mosaics of areas in which they operate to be sure that all parts of the market are covered. He also has the problem of adjusting claims to territories where the trading areas of two or more selected outlets overlap. Perhaps the most serious drawback is that the manufacturer puts all his marketing eggs in one basket. The manufacturer who follows a selective strategy constantly faces the risk of losing an outlet in at least one of his marketing areas, and in the meantime being without good representation there.
The manufacturer can designate one distributor as his sole outlet in a given area and make a valid contract to this effect; he cannot legally make a contract that requires the distributor to refrain from handling the products of a competitor. The selective strategy when carried to the extent of the exclusive franchise can be exclusive on only one side, that of the
manufacturer. On the other hand, a selective strategy tends to generate a much close working relationship with the manufacturer. The spirit of cooperation between manufacturer and middleman tends to produce a higher quality of marketing effort by selected distributors and agents than under an intensive strategy. This manifests itself in more aggressive and active cooperation in promotional programs, and greater willingness to equip him to render the kind of service called for by the manufacturers.
The Manufacturer whose pursues a selective strategy can expect some savings in marketing cost. The savings will probably not be commensurate with the reduction in number of accounts. Salesmen can usually spend more of their calling time in constructive effort to move the product into the hands of users and less of it in the struggle to get an order. Since the outlets would be fewer, the average order is likely to be larger, with resulting reductions in order-handling costs. The selective strategy also is likely to provide the manufacturer with a better distributor sales force to sell his product than would be possible with any other indirect alternative. If a distributor knows that the business he develops for a product in his territory belongs to him and can be served by no one else, it is clearly to his benefit to have his salesmen properly trained by sending them to the producer’s factory and by cooperating in other training programs the manufacturer may develop. This is especially important to the maker of highly technical products or those that require technical service.