LESSON NO. 2: INDUSTRIAL MARKET

STRUCTURE
2.1 Introduction 2.2 Types of Industrial Customers 2.3 Industrial Products and Services 2.4 Marketing Implications for different Customer and Product Types 2.5 Purchasing Practices of Industrial Customers 2.6 Summary 2.7 Questions for Discussion OBJECTIVES
The objectives of this lesson are to: describe the diversity of industrial customers and the types of products and services they purchase; know the influencing factors to marketing strategy in terms of type of customer being served and the product or service being marketed; and to learn the characteristics of organizational purchasing.
2.1 INTRODUCTION To develop an effective marketing plan, an industrial marketer needs to understand industrial markets. The industrial market is composed of commercial enterprises, governmental organisations, and institutions whose purchasing decisions vary with the type of industrial good or service under consideration. Effective marketing programs thus depend upon a thorough understanding of how marketing strategy should differ with the type of organisation being targeted and the products being sold. The industrial market is characterised by wonderful diversity both in customers served and products sold. Component parts, spare parts, accessory equipment, and services are example of the types of products purchased by the variety of customers in the industrial market. Industrial distributors or dealers who in turn sell to other industrial customers, commercial businesses, government, and institutions buy a variety of products that, in one way or another, are important to the functioning of their business
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endeavours. Knowing how this immense array of industrial customers’ purchase and use products and what criteria are important in their purchasing decision is an important aspect of industrial marketing strategy. For the purpose, industrial sellers understand the types of industrial buyers.
2.2 TYPES OF INDUSTRIAL CUSTOMERS 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.
2.2.1 Commercial Enterprises Commercial enterprises are private sector, profit-seeking organisations such as IBM, General Motors, Computer Land, and Raven Company, purchase industrial goods and/or services for purposes other than selling directly to ultimate consumers. 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.
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Figure 2.1: Industrial Customers
Industri al Cooperative Customers Institutional Costomers Government Customers Commercial Enterprises Industrial Distributor Original Equipment Manufacturer Users Public Sector Units Government Undertaking Public Institutions Private Institutions Manufacturing Units Non-manufacturing Units Cooperative banks, Housing cooperative societies School, Colleges Government Hospital Indian Railways, State Electricity Board, defense units TVS-Suzuki is user for HMT machine tools Maruti Udyog Limited Exide for battery products Maharashtra Sugar Cooperative Society Intermediaries Thus, it is more logical to look at commercial enterprises: (i) industrial distributors or dealers, (ii) original equipment manufacturers (OEMs), and (iii) users. As and when, these categories tend to overlap; are useful to the industrial marketer because they point out the ways of uses of products and services in buying firms.
2 Industrial Distributors and Dealers
Industrial distributors and dealers take title to goods; thus, they are the industrial marketer’s intermediaries; acting in a similar capacity to wholesalers or even
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retailers. the intermediaries not only serve the consumer market but also they serve other business enterprises, government agencies, or private and public institutions. They purchase industrial goods and resell them in the same form to other industrial customers.
2.2.3 Original Equipment Manufacturers (OEMs) These industrial customers purchase industrial goods to incorporate OEMs into the products they produce. For instance, a tyre manufacturer (say, MRF), who sells tyres to a truck manufacturer (say, TELCO), would consider the truck manufacturer as an OEM. Thus, the product of the industrial marketer (MRF) becomes a part of the customer’s (TELCO’S) product.
2.2.4 Users An industrial customer, who purchases industrial products or services, to support its manufacturing process or to facilitate the business operations is referred as a user. For example, drilling machines, press, winding machines, and so on are the products which support manufacturing process, whereas the products which facilitate the operations of business like computers, fax machines, telephones, and others. In addition to above, sometimes there may be overlapping of categories means a manufacturer can be a user or an OEM. For example, a car manufacturer buys a drilling machine to support the manufacturing operation and is referred to as a user. The same car manufacturer also buys batteries which is incorporated into cars and hence, it can be also referred to as an OEM.
2.2.5 Government Customers In India, the largest purchasers of industrial products are Central and State Government departments, undertakings, and agencies, such as railways, department of telecommunication, defense, Director General of Supplies and Disposal (DGS&D), state transport undertakings, state electricity boards, and so on. These Government units purchase almost all kind of industrial products and
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services and they represent a huge market.
2.2.6 Institutions Public and private institutions such as hospitals, schools, colleges, and universities are termed as institutional customers. Some of these institutions have rigid purchasing rules and others have more flexible rules. An industrial marketing person needs to understand the purchasing practice of each institute so as to be effective in marketing the products or services.
2.2.7 Cooperative Societies An association of persons forms a cooperative society. It can be manufacturing units (e.g. Cooperative Sugar Mills) or non-manufacturing organisations (e.g. Cooperative Banks, Cooperative Housing Societies). They are also the industrial customers.
2.3 INDUSTRIAL PRODUCTS AND SERVICES The industrial products and services are classified into three broad groups: (i) materials and parts, (ii) Capital items, (iii) Supplies and services; discussed as follows:
2.3.1 Materials and Parts Goods that enter the product directly consist of raw materials, manufactured materials, and component parts. The purchasing company, as part of manufacturing cost treats the cost of these items. Raw Materials: These are the basic products that enter in the production process with little or no alternations. They may be marketed as either OEMs or user customer. For instance, when a large bakery purchases natural gas to fire the ovens that are used to produce cakes, it is a user customer. When the same firm purchases sugar for processing the cakes, it is an OEM. Manufactured Materials: Manufactured materials include those raw materials that are subjected to some amount of processing before entering the manufacturing process e.g., Acids, fuel oil, and steel that are the basic
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ingredients of many manufacturing activities. For example, an aluminum extrusion unit buys aluminum billets to manufacture aluminum-extruded products such as door and window frames, by using an extrusion press. Thus, aluminum billets are called manufactured materials. Component Parts: Component parts such as electric motors, batteries and instruments can be installed directly into products with little or no additional changes. When these products be sold to customers who use them in their production processes, they are marketed as OEM goods. The component parts are also sold to the dealers or distributors, who resell them to the replacement market. For example, MICO spark plugs are sold to a truck or car manufacturer, as well as to automotive dealers/distributors throughout India.
Capital items
Capital items are used in the production processes and they wear out over certain time frame. Generally they are treated as a depreciation expense by the buying firm or user customers. These are classified as follows: Installations/Heavy Equipment: Installations are major and long-term investment items such as factories, office buildings and fixed equipments like machines, turbines, generators, furnaces, and earth moving equipment. These items are shown in the balance sheet as plant and equipment, and are fixed assets to be depreciated over a period of years if they are absolutely purchased. However, if these are leased, the purchaser treats the cost for tax purpose as an expense. As the unit purchase price of capital items is high, borrowing money for a period of time, which is roughly equivalent to the expected life of the fixed assets, finances these items. Accessories/Light Equipment: Light equipment and tools which have lower purchase prices and are not considered as part of fixed plant, are power operated hand tools, small electric motors, dies; jigs, typewriters and computer terminals. Purchases of accessories are either considered as current expenses with purchase
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prices taken as operating expenses in the year purchased, or they may be considered as fixed assets and therefore, depreciated over a period of few years. Plant and Buildings: These are the real estate property of a business/ organisation. It includes the firm’s offices, plants (factories), warehouses, housing, parking lots, and so on.
2.3.3 Supplies and Services Supplies and services sustain the operation of the purchasing organisation. They do not become a part of the finished product. They are treated as operating expenses for the periods in which they are consumed. Supplies: Items such as paints, soaps, oils and greases, pencils, typewriter ribbons, stationery and paper clips come under this category. Generally, these items are standardized and marketed to a broad section of industrial users. Services: Companies need a broad range of services like building maintenance services, auditing services, legal services, courier services, marketing research services and others.
2.4 MARKETING IMPLICATIONS FOR DIFFERENT CUSTOMER AND PRODUCT TYPES For large OEMs or users selling is done directly from a seller to a buyer organisation for materials and parts products. Though, for smaller volume OEMs and users, the standard raw materials or components are sold through industrial dealers or distributors, as it is cost effective. In case the components are custom-made, considerable interaction takes place between technical and commercial persons from both buyer and seller organisations, and obviously selling is done directly. It is therefore, important for an industrial salesman to remains in close touch with purchase or materials department persons as well as with quality, production, R&D, marketing, and accounts/finance persons of buyer organisations as they influence buying or payment releasing decisions. Apart from personal contacts, product leaflets/brochures help to industrial AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.
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marketer in communicating product and other information. In case of standard products, the factors, which influence buying decisions, with differing share of business for various suppliers, are product quality and performance, delivery dependability, price, payment terms, customer service, and customer rapport. When component parts such as batteries and tyres are sold in the consumer replacement market, marketers either create a product differentiation through consumer advertising or sell on a competitive price basis. For this, advertising and distribution through multiple channels all over the country becomes an important part of marketing strategy. For example, Crompton Greaves Ltd manufactures and markets a wide range of electrical motors ranging from fractional horse power (FHP) to large high tension (HT) motors. The company adopted a marketing strategy to sell its standard motors through a network of industrial dealers to small-scale manufacturers, all over India. However, the special purpose motors to the original equipment manufacturers (OEMs) such as pump manufacturers and compressor manufacturers, are sold directly through its sales persons located at various branches. The field sales persons are trained in both technical and commercial aspects of selling and are required to establish a close rapport with various departments such as purchase/materials, quality, R&D, marketing, and finance/accounts in the customers’ organizations. The company could, therefore, maintain a leadership position in the competitive market due to its strategy of customer satisfaction through superior product quality and performance, delivery dependability, competitive prices and excellent customer service. For capital items like heavy machinery and construction of factories and office buildings, direct selling with extensive interactions, involving top executives in both buying and selling organisations are very common. Negotiations take considerable time on key factors such as price; return on investment, credit facilities, delivery period, installation time, third party certificate for previous
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jobs done, and so on. Personal selling is the primary promotional method used which is used in industrial marketing. For example, the marketing strategy for a large furnace manufacturer was to directly sell its furnaces to the industrial buyers. As the value of each furnace was running into millions of rupees, the buyers treated it as a capital item. Senior executives from marketing, engineering, and finance from the selling organization not only decided the technical and commercial aspects at the time of submission of quotations/offers, but also visited as a team, for negotiations, with the senior technical and commercial persons from the buyers’ organizations. Apart from price, payment terms, delivery and installation time, meeting the technical parameters required by the customers and the performance of similar furnaces supplied earlier to other industrial customers played important role in securing high value orders. Direct selling, is used for marketing supplies for large-volume buying firms. And distributors or dealers are used to market to diverse markets consisting of small and medium size companies. The purchase or materials department persons generally make buying decisions based on dependable delivery, price, and locational convenience. Advertising in magazines, trade journals, local newspapers, and yellow pages are used to generate awareness of the company and its products to the latent users and distributors/dealers. In the strategy of marketing of service, buying firms contact the selling firms to know their reputation by way of word of mouth. The selling firm’s efforts are on consultative or advisory nature, and continuation of the service depends upon the quality, price, and timeliness of service to meet the customer’s needs.
2.5 PURCHASING PRACTICES OF INDUSTRIAL CUSTOMERS The industrial marketers market industrial goods or services at different types of customers such as commercial enterprises, governmental customers, and institutional customers. For effective marketing of industrial products, it is significant to know the purchasing practices generally customized by the various
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types of industrial customers.
2.5.1 Purchasing in Commercial Enterprises The purchasing practices depend upon the nature of business and the size of the commercial enterprise as well as the volume, variety, and technical complexity of the products purchased. In large and medium size organizations, the purchase decision makers involve from different departments viz. production, materials, quality, finance/cost accounting, engineering, and also senior management executives. Thus, there are many persons who influence the purchase decisions in such organizations. Industrial buyers use the techniques viz. material planning, supplier rating system, economic order quantity, value analysis and so on. Materials/purchase managers are professionals they must be well informed about price trends, commercial matters, and negotiating skills. They make use of in-house technical expertise when required. Further, an industrial marketer must understand a set of formal purchasing procedure and documentation motioned in a commercial enterprise. An industrial marketer must understand a set of formal purchasing procedure and documentation motioned in a commercial enterprise. These are shown in Table 2.1, as follows:
Step Activity Responsible Unit 1. User department initiates the process by issuing purchase requisition (P.R.) or indent to the purchase (materials) department User department 2. Check if the material required is in stock. If yes, the material (against the P.A.) is issued to the user department and the P.A. is filed, indicating action taken Purchase department 3. If the material (required as per P. R.) is not in stock, then identify potential suppliers, get quotations, negotiate, select supplier(s), and issue purchase order (P.O.) Purchase department 4. The supplier (or vendor) acknowledges the P.O. Supplier 5. Follow-up with the supplier (if required) on delivery Purchase
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department 6. The supplier dispatches the material and informs the dispatch details (such as invoice and lorry receipt number and date, invoice value, transporter name) to purchase department Supplier 7. On receipt of material, stores (or receiving department) checks the material against delivery challan and P.O. and issues material receipt report (M.R.R.) Stores 8. Quality control (or inspection) department inspects the material and issues Inspection report (I.R.) Quality or Inspection department 9. Purchase department issues supplier invoice along with M.R.A. and I.A. to accounts department for payment and closes the order if it is executed fully Purchase department 10 Accounts department checks all the above documents with P.O. and issues payments to supplier. Accounts or Finance department
Table 2.1, shows that a typical purchasing process in a large or medium size commercial organisation involves various departments, like technical (R&D, production, quality, industrial engineering), finance or accounts, purchase, stores, and sometimes, for high value purchases and policy matters, senior level executives are also involved. The major tasks in the purchasing process are identifying potential suppliers, negotiating and selecting suppliers, ensuring right quality and quantity of material at the right time, and a long-term business relationship with the suppliers. Many commercial organisations have established a separate purchasing department to enhance the status of purchasing in manufacturing organisations; because, on an average fifty to seventy per cent of sales revenue is spent on purchase in these organisations. Therefore, purchasing can enhance operational efficiency by saving in material cost, by making available good quality material at the right time, and thus contributing to the company’s competitive advantage in the market.
2.5.2 Purchasing in Government Units AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.
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The Government units are the largest purchasers of industrial goods and services. To compete successfully and to get more business, an industrial marketer must understand the complexities involved in selling to Government units. There are many centers where State and Central Government units buy a variety of products required by railways, department of telecommunications, state electricity boards, state transport undertakings, defense units, and so on. DGS&D is an agency, which finalises running contracts for various standard products on behalf of the Central Government. Though, other large Central and State Government units have their own procurement departments with a set of standard from and conditions to be fulfilled by suppliers. In general, the first step is to get the name of the company and the products registered with the Government units. Generally, the procedure of registration involves the submission of duly filled standard forms, product leaflets, and company details properly certified by a chartered accountant. Some Government units depute their inspectors to inspect the company’s manufacturing facilities, and based on the favourable report from the Government inspector, the company is registered as approved supplier for those products consequently. For standard products and services, tender notices are advertised in national newspapers, based on which suppliers procure tender papers from the specified Government authority after paying a small amount of tender fees. The suppliers are then required to submit tender offers in sealed envelopes, duly signed by the signatory authority, as per the instructions given in the tender papers, by certain specified time and date. After the tender offers are received in the “tender box”, the sealed covers are opened at the specified date and time in the presence of the representatives of the suppliers and then the prices, delivery, and other relevant terms are read out for the benefit of those attending the “tender opening”. For closed tenders or limited tenders, the tender opening procedure of reading out the prices and other terms are not followed. In closed or limited tenders, tender enquiry is sent to
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only limited (a few) suppliers who are registered with the Government unit for certain category of non-standard products. The purchase orders are issued based on the evaluation of tender offers, with or without negotiations with the suppliers. The tender offers of various suppliers are kept secret and not made known to suppliers. Based on the lowest prices or the lowest landed costs i.e. adding all charges with basic price, the orders are released on the lowest bidder who has quoted the lowest price or has the lowest landed cost, if other factors such as technical specifications, delivery period, and payment terms are the same as per tender enquiry. If the value of tender enquiry is small, the orders are placed to one or two suppliers. If the tender value is large then the maximum share of the total value is decided on the lowest bidder and the balance orders are distributed to more than one bidder after other bidders agree to match the lowest price. There may be small variations in the purchase procedures described above in different Government or public sector units, but whatever are the procedures or terms and conditions, the same are indicated in the tender papers.
2.5.3 Institutional Purchasing Institutional buyers are either the Government or the private organisations. If it is a Government hospital or college then it normally follows the Government purchase procedures. However, in cases of privately owned educational or other type of institutions, the purchase procedures are similar to those followed by commercial enterprises. An industrial marketer should study the purchasing practices of each institutional buyer so as to be effective in marketing the company’s goods or services.
2.5.4 Purchasing in the Reseller’s Market Reseller market or replacement market consists of industrial dealers or distributors whose main goals are profits and sales volume. Therefore, the intermediaries select a supplier based on product, quality and also based on the
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policies of the supplier’s product. An industrial dealer/distributor could deal either exclusively with a supplier or manufacturer’s product or may deal with many competing firms of a product. Yet, the supplier related policies which affect competitiveness of traders in the market are: sharing of local advertising cost by the supplier, providing product leaflets or display materials, competitive prices and trade discounts, flexible payment terms with credit facility, and so on. Acceptance of some of these terms by a dealer would depend upon the relative strengths of the dealer and the supplier and also on the consumer’s acceptance level of the supplier’s products. The reseller or the dealer/distributor has to ultimately abide by the policies of the supplier/manufacturer. In a competitive market, both the reseller and the supplier have to work harmoniously as a team so as to face the competition, increase the market share, and make sound profits. If a reseller or a trader does not make a profit over a period of time from the products or services of a manufacturer/supplier, he would most probably change the supplier because he does not achieve the main goal of profitability.
2.5.5 Purchasing in Cooperative Societies Industrial marketers should study the purchasing practices of each cooperative society in order to become effective in marketing their goods and services. For example, the cooperative sugar factories in Maharashtra and U.P. may adopt different buying practices while purchasing sugar machinery, pumpsets, compressors, etc. While making purchase decisions, their emphasis on the factors viz. quality, delivery, price, payment terms, service and long-term relationship with suppliers, also affect the purchase decision under consideration.
2.6 SUMMARY Selling in the industrial market is complicated by a broad spectrum of customers. Commercial enterprises, governmental organizations, and institutions give buying responsibility to individuals who are quite knowledgeable in their
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particular markets. These individuals are often more realistic in assessing the
competitive value of a vendor’s product than the vendor. Thus, they normally
identify, evaluate, and select suppliers, domestic or foreign, who provide the
greatest value. To formulate a successful industrial marketing strategy, it is
essential to know the administration of buying function in a diversity of markets
and situations; and also to know the bases viz. nature of the business, the size of
the firm, and the volume, variety, and technical complexity of the products
purchased by the industrial buyers.
2.7 QUESTIONS FOR DISCUSSION 1. Explain the different participants in industrial buying. 2. Discuss the types of industrial customers and their purchase practices in India. 3. What the types of industrial products and services? 4. What are the marketing implications for different customer and product types in industrial marketing? 5. How does the government purchasing differ from the commercial enterprises purchasing? References:
1. Hawaldar, K. Krishna (2002), “Industrial Marketing”(1st ed.), TATA McGraw-Hill Publishing Company Limited, New Delhi. 2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), “Industrial Marketing”(4th ed.), All India Traveller Book Seller Publishers And Distributors, Delhi. 3. Robert R.Reeder, Edward G.Brierty & Betty H.Reeder (2001), “Industrial Marketing” (2nd ed.) , Prentice-Hall of India Private Limited, New Delhi 4. Peter M. Chisnall (1985), “Strategic Industrial Marketing”, Prentice-Hall International, 1985. 5. Woodruffe, Helen (2000), “Service Marketing: Operation, Management and Strategy”, Macmillan India Limited, New Delhi. AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.