The Opportunity for Industrial Branding

Recently a group of industrial sales and marketing professionals met to review the product offerings of their competitors' products. One competitor stood out from all the others: It charged up to 40% more than other companies and seldom discounted.

Detailed analysis showed that the competitor did nothing special in terms of manufacturing, and was saddled with an inefficient distribution channel. In spite of its pricing policy and lackluster production and distribution, the competitor held a strong #2 position in the market, compared to our distant #6 position (the top 3 companies hold 70% of the market).

This success was attributed to "marketing ploy." Oddly, nobody spelled out what the ploy was, or why it worked so well. The implication was that customers had no right to be so satisfied: Any industrial buyer that pays premium prices for undifferentiated products must be either stupid, or misled.

Actually, there was no trick, just good marketing practice. It's called branding.

Branding explains why some products command higher prices and intense loyalty from customers. How else could you explain Harley Davidson motorcycles? Harley employs engine technology and styling from the 1940s, yet it outsell bikes that are faster, more comfortable, more efficient, and less expensive. In fact, there is currently a waitig list to buy one.

Industrial marketers tend to ignore or underplay the benefits of branding. To many industrial marketers, branding is something for consumer products. They simply donÕt understand how branding works for industrial products.

Brands vs Products

Industrial organizations tend to be product focused. Look at your own organization and count how many "Product Manager," or purely product focused roles exist. "Brand Manager" roles generally do not exist in industrial companies, which may explain why there are so few brands and so many products.

But there is a world of difference between brands and products.

Products are defined by the physical properties of what they are and what they do. Products have prices, specifications, lead times, shipping containers and disposal requirements. Product attributes are communicated relatively easily in a variety of ways. Product marketing is all about understanding what people need, and aligning key attributes of products to meet these needs.

Brands are almost the opposite of products. Where a product has a physical presence, brands exist in the hearts and minds of people. Brands convey a character, a promise, and a vision that connects with consumers. Where product attributes can be communicated quickly, a brand's character requires takes time to mature.

Some industrial marketers believe that by creating a unique name and logo for a product that they are creating a brand. These symbols are virtually meaningless if they do not reach out to users with some kind of connecting force. At best, logos and trademarks make it easier for buyers to remember your product.

What Great Industrial Brands Do

Unlike consumer brands, industrial brands may be household names in some industries and unknown in others. Some great brands on my list, like Fluke, Hewlett-Packard,, Fisher-Rosemount, DuPont, 3M, Caterpillar, and Millipore, may not be on yours. Regardless of the industry, consumer and industrial brands must succeed on several levels.

1. Long-term perspective. Great brands are not trendy. They evoke unique values in users minds and remain there for decades. Companies that own great brands constantly work to build and maintain this sense of worth. Short-term decisions to cut cost or gain a few points of market share can hurt a brand if they conflict with the brandÕs character. Remaining relevant over the long term is based on a commitment to quality.
   
   For example, IBM's decisions to cut back on service in the 80s, to develop non-standard PCs in the late 80s, and its manufacturing problems with laptop computers in the 90s have diminished the faith that many industrial buyers invested in the IBM name. Still, there many corporate buyers who still pay a premium to do business with Big Blue, because the believe in IBM and trust its reputation. Harley Davidson nearly went bankrupt twice before a new group of managers changed course and committed the company to representing the biker lifestyle with high quality product.
2. Defined character. Great brands have a defined character, and the people who manage the brand are very aware of what it is. The process of defining brand character involves understanding what end-users like and dislike, and what values they associate with the core of the brand concept. Using this knowledge, smart managers decide what not to do. A well-known example is how McNeil Pharmaceutical handled the Tylenol scare several years ago. When the safety of Tylenol was suspect, the company recalled all the product at a huge cost. One of McNeil's managers described the decision to me as follows: The decision to recall was easy. There was nothing else we would have done. The hard part was figuring out how to get it done fast enough. More recently the company has stumbled becasue the current group of managers did not live up to the brand promise as well as their predecessors.
3. Invention. Great brands invent or reshape categories. Just as Procter and Gamble created the disposable diaper category with Pampers, DuPont created the man-made fibers category in the 1930s when it invented Nylon. As Apple reshaped the personal computer category, 3M created reshaped the engineered materials category and Cummins reshaped the OEM engine market.
4. Emotional wellspring. The common link between great industrial and consumer brands is the ability to tap into consumer emotions. Nike is a master at tapping into consumer emotions. Nike commercials are works of art, they inspire. The shoes are almost incidental. Industrial products sometimes achieve an emotional tie-in too. For instance, many professional truck drivers are passionate about Mack trucks. Many truckers also prefer Michelin tires, and will tell you they simply feel better riding on Michelins.
5. Never ending Story. One reason why logos and trade names fail to constitute a brand is because a brand is really a metaphor that is constantly evolving. Great brands employ metaphors that connect with people at very deep levels. The Harley Davidson example at the beginning of this article is an excellent example. People connect with Harley partly because the looks, feel and sound of the machine speaks of an earlier time. Harley owners feel part of a life style, and connected to an enduring philosophy.
   
   That's a lot to ask of any brand, let alone an industrial one. Lincoln Electric, the only American manufacturer of electric arc welders, has lived a story that includes beating back intense Japanese competition, a phenomenal workforce that understands customers, and standard of excellence that has not wavered for over two decades. Lincoln's customers are among the most intensely loyal in any industry.
6. Design consistency. Great consumer brands have a consistent look and feel. All Nike shoes, for example, have a distinctive look. Everything carrying the Tommy Hilfiger brand has a consistent design. Great industrial brands also maintain design consistency. For example, everything about Snap-On-Tools has a consistent design, including the trucks that call on customers. There is a consistency of design in General Electric's industrial products, even across divisions. For example, GE's industrial turbines carry design elements of its medical imaging magnets and aircraft engines.

"Even if I wanted to, I couldn't afford it"

Branding takes time and dedication, not money. Some of the most respected brands, whether consumer or industrial, have been built with little or no advertising, and without complex market research.

Lincoln Electric spends next to nothing on advertising, and when I last checked, had no marketing department. But all of its employees spend time with customers as a matter of policy. In the past, when bad economic conditions have slowed sales, the company send its plant workers into the field.

Here is a four step process for building a brand:

I. Build a community

Harley Davidson spends no money on advertising, and shut down its branding department in 1995. The company created the Harley Owners Group (HOG) to sponsor rallies, special promotions, and serve as an information clearing house for Harley owners. Today HOG has 365,000 members in 950 chapters around the world. Harley views HOG as so important that even the CEO attends rallies.

The key activity here is not the forming of a user group, but the Harley's focus on intimacy with its customers. The company could have done a half dozen other things that accomplished the same result.


II. Give them a reason to belong

Make membership in your community worthwhile by providing special benefits and greater access to your companyÕs leadership. For example, if you set up local user groups, always give your members something extra, like early releases of product improvements, access to prototype products, or access to your R&D facilities for work related to your products.

III. Extend the brand

Using Harley Davidson as an example, the company began merchandising and licensing the Harley name and logo in 1986. Today the company sells $210 million a year on clothing, parts and accessories. By carefully choosing products that support the Harley image, the company has extended the brand profitably.

In industrial markets, brand extension usually takes the form of alliances. For example, chemical companies are extending their brands by allying with chemical management companies. In another example, a manufacturer of fluorinated compounds allied with the leading recycling and recovery company for those compounds. Brand extension can also take the form of adding services to support the product. (See our workbook, "Value Added Services That Sell.")

IV. Extend the enterprise

Build up your distribution channel by supporting your distributors to the hilt, and adding new ways for customers to acquire your products that do not undermine your distributors' profits. (See our June 1997 issue for ideas about ways to improve your distributor network).

The basic approach to extending the enterprise is to pump more goods through your distribution channels. Give your sales force more products to sell, and lower your wholesale prices to your largest dealers.

V. Add Value

Marketing students are sometimes taught that industrial buyers don't buy for themselves. I remember being taught that industrial buyers generally employ a rational, systematic process to decision making, and that they only buy products that are needed.

Reality is different, as we all know. Personal choice does play a factor in industrial decisions, although the parameters are more narrowly defined. We also know that industrial decisions are influenced by many factors. There is no straight path in industrial buying choices.

That's why there are always opportunities to add value.

For industrial products, "value" has a different meaning. Price matters to industrial customers, especially in replacement and aftermarkets. Price alone could account for 50% or more of the value equation.

If your pricing is not competitive, you will have trouble with the value equatoin of branding. This is not to say you must have the lowest prices, but your perceived prices must be competitive. For industrial products, price premiums for leading brands average about 10%.

Other than price, should focus on building brand value in four specific areas. All of them may be fit into the structure of a brand's character.

Product related value stems from tangible factors such as the products' performance attributes. But intangibles count too, in areas such as good design, innovation and the overall fit of the products with their purpose.

Distribution related value stems from a function of tangibles such as product availability and intangibles such as delivery reliability. Short standard lead times (tangible) are important, but the ability to respond to emergency situations (intangible) is much more critical.

The availability of EDI is important, but intangibles such as the overall ease of ordering and the willingness to help the customer with inventory costs, are probably more important. Some companies will value a global supply network, depending on their sourcing policies.

Support related value includes tangibles such as technical support, design advice, and the amount of onsite support. What may matter more is the ability of your support staff to demonstrate empathetic knowledge of the customerÕs business and help out with troubleshooting. More companies are providing technical support earlier in the selling cycle.

Finally, the company itself contributes to brand value. Established companies with global presence and good regional coverage contribute to the support of all the products and brands offered. As with the other categories, however, it is the intangibles that offer special opportunity for branding. How well the company positions itself as a world class, leading organization makes a difference.

5 Branding Home Runs you can do for Low or No cost

1. Create company sponsored user groups. Hold regional meetings where customers can meet manufacturing, R&D and customer service people. Allow enough unstructured time to allow customers to share their concerns at their own pace. After the meeting, spend at least two hours with your team debriefing what was learned and formulating action plans.
2. Start a "university" for users of your products. For example, suppose your company manufactures industrial cleaning compounds. You could sponsor a "cleaning college" where your customers can send employees for training in the proper way to use the chemicals.
3. Find out interesting ways your product is used and sponsor activities that support them. For example, if you manufacture flow meters, you could survey your customers to determine the most common types of systems, materials, and situations that involve your products. Contact the top suppliers of the other components and jointly sponsor an event that combines education, idea exchange, and fun.
4. If you know how your customers are using your products, you should be able to determine what types and brands of equipment are most often used with your products. Work with the market leaders of these companies to design-in features that will add value to both products.
5. Visit your customers. Put on small demonstrations of your products right on their premises. People will share information with you face to face that you will never learn otherwise. Over time, you will develop personal relationships with users. Many will take you into their workplace and show you how they use your products, and gradually reveal the information you need for branding.

- Prentis Hall

　

A Repositioning Case Study

This article was adapted from a series of posts made in our online discussion group by Matt Haley—PWH

I joined a company selling internet, and CD-ROM e-commerce solutions that used a common engine and had a service component to take paper and some electronic product data and create a customized solution that acted like a sales person — it would lead a customer to the right solution without the customer having to know squat about the internal naming conventions of product lines and the like.

What was clear was that the technology was excellent: no large downloads! The problems included selling to the building product markets at $12K to $18K. It was profitable, but not as profitable as possible.

After looking at what we were doing, I did the standard review of needs and technology fit and we targeted raising the price to the current market while evaluating new markets.

To raise the price, we stopped calling on the web or sales support people charged with getting a “web catalog” going. We started talking to the VP of Sales first, then the President about using the Web as a channel, and how the Web needs to support your other channels issues.

In companies with an indirect channel primarily, we talked to whoever owned the channel and the president.

The VP of Sales, the partner manager, and the presidents all care about top line revenue. Mid-level marketers, anyone in Information Services, Marcom people, Web designers and the like care about cost containment. If you save $100K, the price has to be less than $100K.

If you increase top line revenue and bottom line profit, then the price can be anything less than the risk rated increase in profit.

After doing this research, we found a price point of approximately $90K to $120K for the same product we had been selling at $12K to $18K. And our customers were happier. And the sales cycle dropped dramatically!

After doing a lot of competitive analysis and some secondary research, I changed the product description to be a software license at 50% of the price and Consulting for 50%. This served to help people understand why we had a standard maintenance contract and increased the acceptance of the 20% maintenance on both the service (consulting) and the license.

We then changed to Computer and Instrumentation as the target markets, and raised the price to $175K per channel used plus the Consulting Service at $70K per product line.

We sell this model to the business owners, the VP’s of Sales, the VP of sales operations and the president or as close as we can. Each channel can be bought separately, and therefore the total is less than most companies that are large need to take to the Board of Directors. VPs and Presidents make decisions quickly, so the sales cycle is shrinking.

By packaging what was a service into products that match the needs of the person best able to increase their income, we bypass the techno-squirrels until they are boxed in.

By doing fixed-price whole solution pricing, we remove the biggest risk factor to the IS manager. When IS (not if but when) the IS department and we get down to a couple of acceptance test quibbles, we let the funding party make the decision, and we give alternatives based on time, not cost. An extra $10K won’t sway the decision as effectively as two months on the schedule will.

We know the current price point is too high for many potential prospects. So we are packaging the tools we use in house and a set of standard templates and will be offering a lower cost solution that has less Consulting Service, removes some product features we find only large international companies care about and will be available at a much lower price.

The person who will increase their earnings or decrease their risk is always a good place to start. They have almost always delegated the problem to someone who does NOT see the business problem driving the request.

In our case they think they were charged with getting a configurator online, not increasing top line revenue.

Matthew Haley is VP of fast-growing software technology company.

Three Problems With Industrial Advertising That Hurt Sales

This Weeks Contribution is by Philip Sawyer

Philip Sawyer is a senior vice president at Harris Interactive, an international marketing, public opinion and advertising research firm. This article originally appeared in the monthly newsletter of Roper Starch, Worldwide, where Sawyer served as vice president and director of communciations. You can contact Mr. Sawyer on Twitter @pwsawyer.

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Most marketing people who have thoughtfully looked at industrial advertising agree: Advertising targeted to business needs a lot of work. Industrial advertising need not be substantially different from consumer advertising in its makeup. Readership studies confirm that the same principles that govern effective advertising for consumers apply fully to industrial advertising.

Here are three common problems with business-to-business advertisements.

1. They Are Distinctly Anti-Visual

Business targeted ads, for understandable reasons, tend to be more about content than appearance. Many use several illustrations and concepts — as opposed to single powerful image and one "unique selling proposition" — to get key points across.

Business-to-business advertisers may expect their ads to be read by an audience hungry for information and, therefore, anticipate that the audience will work hard to get into the ads even if they are not pretty or simple.

That supposition, however, flies in the face of proven research findings. Magazine readers will read even copious amounts of copy in advertising, but they must be invited in. The best invitations use illustrations that delight the eye and headlines that that express one simple iea, usually in the form of a benefit.

Contrast the use of strong visual images in each of these three ads. Here we see three different levels of visual intensity — and three different levels of effectiveness. On the left we see one of a series of DuPont ads that combine excellent composition with a strong message. The middle image, although it employs a fairly strong visual, the crumpled paper borders on the abstract. The ad on the right is almost painful for us to look at. Bugs? Unless you’re an exterminator, would you want your product associated with bugs?

2. They Tend to Emphasize the Abstract, Rather Than The Human Element

Business advertisers tend to overestimate the reader’s interest in their products. This translates into an assumption that your target audience will get the inside joke or hidden meaning in your ad. This may be a fair assumption, but industrial companies tend to skimp on costs and often skip pretesting that would reveal flawed assumptions.

How do you know if an ad avoids
abstraction? If someone who doesn’t
know your business can understand
the gist of your message from the visual alone.

Compared to the previous
example, this ad manages
to take an abstract concept
and convey it in very human,
concrete terms.

3. They Do Not Emphasize Benefits

Advertisers would improve their advertising immeasurably if they simply, clearly, and powerfully told the reader what their product or service will do for them. The problem seems to be that industrial advertisers assume — along with a great number of consumer advertisers — that readers are as interested in the product as the advertiser is. That is rarely if ever the case.

Business-to-business advertising has a tangible
advantage over consumer advertising: an audience
that is by its nature favorably disposed to the
advertising message. At the same time, b-to-b
advertisers in large part fail to take advantage
of the opportunity before them.

We love ads like these because
they emphasize benefits. We also
chose these because they all do a
good job of avoiding abstraction.
These ads are telling us that
products are about people, and
people, after all, do the buying. In
this respect, industrial advertising
and consumer advertising address
identical issues.

There is no great secret to effective industrial advertising. The key point to remember is that the best advertising is like a good conversation. In light of that, all advertisers should remember the words of Benjamin Disraeli: "The art of conversation consists of the exercise of two fine qualities; you must originate and you must sympathize; you must possess at the same time the habit of communicating and the habit of listening. The union is rare, but irresistible."

One simple way to check your own advertising is to look at the picture. Does the picture tell you, at a glance, what is for sale? Contrast these two ads, and you start to see what we mean. The one on the left (our reproduction may be a bit difficult to make out) is clearly selling airplanes. What is the one on theright selling...piles of paper?

If the picture invites you in, the next step is to check the copy. Does it clearly state benefits in the first paragraph? The first sentence? Finally, does your copy go beyond the mere statement of benefits, and address at least one core issue that your target audience is deeply concerned about? Our next article, discusses this important consideration.

Those who wish to create irresistible ads need to bear in mind that when anyone confronts an ad, his primary purpose is to walk away with the feeling that he has been listened to or understood. For industrial advertisers, that means understanding that all readers — not just those who read consumer advertising, yearn to delight in what they see, to make a human connection with the product that is advertised, and to depart with a sense that they have benefited from the experience.

Effective Industrial Advertising: So simple, yet so elusive

This Weeks post is written by Mitch Goozé. Mitch Goozé is an experienced manager with operating experience in the high technology and consumer products industries. He is the author of It’s Not Rocket Science: Using Marketing to Build a Sustainable Business. Mitch was president of Teledyne Components, a division of Teledyne Inc. from 1985 through 1990. He is the president and founder of Customer Manufacturing Group. Email Mitch at :mgooze@customermfg.com.

Setting Advertising Priorities

Advertising is a highly effective method of spending money fast. Done well, it returns many times its cost in bottom-line benefit. Done poorly, advertising costs much more than money: at least, time and opportunities are lost forever; at the extreme, alienating customers can jeopardize the company’s entire future.

Never forget: “Advertising is a highly effective method of spending money fast.” No matter the size of your company or the size of your budget, advertising is an expensive proposition. Done well, it returns many times its cost in bottom-line benefit. Done poorly, advertising costs much more than money. At the very least, time and opportunities can be lost forever. And at the extreme, alienating or offending customers can place the company’s entire future at risk.

But advertising is not a black art, and it need not be mysterious or random in the way it works. In fact, you can control its performance to a considerable extent by properly setting your advertising priorities.

START WITH YOUR CUSTOMERS

Start with your customers and stay with your customers. They are the people who buy and use what you sell. They are the only reason you are in business, and the degree to which you understand them will determine, in large part, the success of your company.

Your first advertising priority is to know who your customers are: what their responsibilities, experiences, and priorities are. Then you can apply the same psychology to them as you do to the other people in your life to maximize your chances of success.

To borrow money, you would make a very different appeal to your brother, say, than you would to a bank, yet the objective is the same. You simply customize the appeal according to the audience.

Apply the same process to your advertising program. First, find out who could buy your product, and what they have in common.

If you don’t know, find out what factors affect the way they make decisions. What is important to them at home or on the job? What contributions do they make to their communities or their companies? What are their ages, incomes, education, family styles? Purchase research, survey your own customers, check industry data, or all three. Do whatever it takes to find out enough about your customers to talk to them in their language.

A word of caution: do not confuse competitors with customers. Those who advertise in “trade” magazines, whose readership is mainly other suppliers in their industry, or use ads to answer insults or challenges from competitors, commit a very expensive error in perception. Industry acknowledgement will come quickly enough when you start winning the customer’s business.

BE GREEDY

Yes, be greedy. It’s your advertising program. Decide just what results you want from it, and stick to your guns. And be more specific than “increased sales.” Unless you are in the direct response business, you’re highly unlikely to receive an avalanche of orders in the mail just because you ran a few ads.

The purpose of advertising is to help the sales effort, which it can do in many ways. Advertising can create awareness. It can position products and services. It can identify probable new customers. It can encourage customers to take immediate action. Your second priority is to specify exactly why you are advertising.

What do your customers need to know? That you exist? That you’ve changed? That you haven’t changed? That you’ve solved your problems? That you’ve solved their problems? And what do you want them to do about it?

Whatever results you want, set them out clearly. If you are firm in measuring every advertising opportunity in terms of its probable contribution to their achievement, selecting between creative and media alternatives becomes fairly straightforward.

REALITY CHECK

Establish a realistic picture of where you stand, in the customer’s eyes, right now. Ask them, and believe what they tell you. No wishful thinking, no dismissal of criticism, no unchallenged acceptance of the sales manager’s rosy projections, and no patriotic dismissal of a competitor’s achievements.

Your third priority is to know where you are, so you can understand how far you have to travel to achieve your goals. Only with an accurate understanding of the distance involved can you effectively evaluate what you have to do to get there.

A brand new company, unknown to its future customers, has so much distance to cover that its only effective choice may be a “high impact” campaign to achieve marketplace awareness: Aggressive messages and an aggressive media schedule dominate its program. An established firm, however, even with a brand new product, can count on its name drawing attention to whatever it publishes. This firm may find that incorporating its new message into its standing schedule achieves the same level of recognition as does “Brand New’s” greater expenditure.

CHECK YOUR RESOURCES

Know what you have to spend, both in terms of money and in staff time. Industry averages of advertising expenditure as a percent of sales are of questionable relevance in an era of rapidly changing techniques and technologies. Electronic production may reduce the costs of localizing an international campaign. In-house telesales resources change the cost of follow up. Customization of messages and materials can multiply costs.

Your marketplace position also has its demands. Established companies using advertising to reinforce existing customer ties have vastly different spending patterns than does the company introducing a new product, service or technology.

With so many variables, a budget target is critical in assembling the right mix of creative, production, logistics, and media efforts. This is your fourth priority.

MESSAGES AND MEDIA

Your fifth priority is to decide just what it is you want the audience to conclude about your product. This is where it is most critical to remember that what they’re buying may not be the same as what you’re selling, and that what they’re buying is the only thing that matters.

Catchy slogans, famous directors, beautiful graphics, engaging soundtracks; these do not make successful advertising, unless they were directed by a clear understanding of customers, marketplace, and objectives. Even the most accurate rifle can’t hit the target if it’s aimed in the wrong direction.

Charles Revson said of Revlon, “We don’t sell cosmetics. We sell hope.” Car companies don’t sell cars, they sell transportation, social status, or safety. Xerox surveyed word processor users and found that while “reliability” ranked near the bottom of the list of desirable attributes, “it doesn’t break” was number one.

What is it that purchasing your product will do for the customer? Will it improve their appearance, their finances, their job performance, or their social life? And how will it do that better than any other alternative? This is what you need them to know, and this is your advertising message.

Now, what do you use to deliver the message?

The mass media are just the ticket for sending your message to vast numbers of people at once. In print media, magazine and newspaper readers enter that environment when they choose to. Your advertising takes advantage of their receptive frame of mind. But if you need to involve sound and motion to make your point, then broadcast media — radio and television — may be the better delivery vehicle.

As a more focused effort, direct marketing — literally delivering your advertising message to specific individuals who are likely prospects — can be exceedingly effective and should be considered for at least a portion of your target customers.

Only when you know what you want to get across, and what vehicles you’ll need to use, can you commission creative product.

CHOOSE THE RIGHT PEOPLE, AND LET THEM DO THEIR JOBS

Your sixth priority is to entrust your advertising to the best people you can find. In-house or outside your agency people should be pros at hiring and managing creative talent and vendors, at analyzing media, and at project management.

Let them evaluate creative strategies to communicate the needed messages. Let them determine the most cost-and time-effective tactics to get that message through to the right people. Let them perform the cost-benefit analyses on print, broadcast, and other media alternatives. Let them establish the schedules and direct the budgets to most effectively complete the work. And keep your personal prejudices to yourself. You are not the target market.

CHOOSE THE RIGHT PEOPLE, AND MAKE THEM DO THEIR JOBS

Everyone working on your advertising program answers to the ultimate priorities of customers and results. Priority number seven is for you to make sure they know it.

Don’t let them get off track due to a tangential “brilliant” idea, or prejudice a decision out of favoritism to a vendor, a talent, or a publication. Make them stick to the schedules and budgets you approved, and make sure that the final product says the right things, in the right manner, and in the right place to get the right reaction from the customers.

If you follow these seven principles, the rest is fairly simple.

Supply Chain Management: Is it Finally Taking Over?

We chose this month’s topic because an increasing number industrial marketers must sell into markets that utilize supply chain management — or claim to do so. I wrote this article in 1998, but the basic conclusions are still the same.—PWH

Supply chain management has become a market in its own right. Companies that have implemented the principles of supply chain management behave differently, and acquire products in a manner that is different enough to justify special emphasis.

But what is it?

Supply Chain Management (SCM) is the process that manages the suppliers’ role in a company’s value creation process, from raw materials into its operations. According to one VP of manufacturing, “it’s about figuring out who does which task best, letting them do it, and not duplicating efforts.”

OK, but what is it?

To really appreciate SCM, one first must understand a more fundamental concept: the Value Chain.

The term “value chain” was invented by Michael Porter about 15 years ago. Like many fundamental concepts, when you see it, you say “gee, that’s obvious! Anybody could have thought of that.” The best ideas in business are usually very simple to understand. Most are not obvious, however. The value chain is one such concept.

In a nutshell, it is extremely simple: You make money when you transfer something you have to somebody else who values it more than you do. That’s how people, companies, societies, and nations become wealthy.

What are five activities, in order:

• Bring materials into the business

• Operate on themMichael Porter did was to look specifically at a business, and figure out what it must do to become wealthy. There

• Send them out of the business

• Market them

• Service them

In addition, Porter defined four support activities that act as a lubricant to the big five. They are:

• Procurement

• Technology development

• Human resources management

• Infrastructure

The support activities are omnipresent. Most companies have a procurement department, but it buys only a fraction of what the company buys as a whole. Most companies also have an R&D function, but it conducts only a fraction of the technology development that the company actually performs. And so on with the other support activities.

Nice concept. Everybody can understand that any business must do five activities to stay in business. In practice, it is of limited use. Mapping an entire value chain is a vast undertaking. In an environments where markets are changing, it is nearly impossible. Most companies that work on value chains start with their own supply chains, since they are easier to understand and control. Most of them end there too.

Another reason your customers focus only on SCM is based on organizational politics. A significant portion of supply chain management can be managed almost completely within the procurement department. In order for a company to execute a true value chain strategy, many functional areas must cooperate. That rarely happens, even in a crisis.

The Essence of SCM

Let’s examine more carefully what your customers are trying hard to do. They are trying to become more competitive by being more cooperative. That is to say, companies that have adopted SCM thinking are trying to discontinue the practice of viewing their suppliers as cost centers. In essence, they are trying to build a competitive advantage by developing a network of companies that, by sharing information, produce goods of market value faster and at lower cost.

In theory, it would work like this: Say your customer sells power tools to Sears, and you’re in the wire business. Every night, Sears downloads the number of power tools sold, by model, by location. Your customer then electronically orders more wire from you, in the appropriate gauge and composition. In turn, you order more base metal from your supplier.

The Reality of SCM

In reality, industrial companies talk a good game, but are a long wayfrom implementing anything close to supply chain management. In a recent survey conducted by Purchasing magazine, it was found that the majority of purchasing organizations are struggling with the basics. For example, while 69% of companies have taken steps to automate basic purchasing transactions, 73% of companies reported that they have seen no significant shift in their day-to-day activities.

Automated transaction processing is a basic capability all companies in the supply chain must have, but the companies that stand to benefit most aren’t close to making it a reality. When asked to rate their progress toward automation goals on a 1-10 scale (10 being “at goal”), buyers provided a weighted average score of only 4. Nobody rated their progress higher than 8, and only 27% rated their progress greater than 5.

Simply put, they’re muddling their way through it. Many companies are jumping on automation without rethinking how they get things done. To make matters worse, they are not involving other members of the supply chain. Buyers rated supplier involvement as a 6 on a 1-10 scale (10 being “very important”) and supplier’s willingness to cooperate as a 7 (10 being “very cooperative”). Yet, very few companies are doing anything at all with suppliers; they remain internally focused.

Yet, it is not uncommon today to receive requests for quote (RFQs) full of language that suggests that buyers are considering a number of supply chain factors in their decision making process.

Let’s be nice and say that, although their hearts are in the right place, the typical buyer struggles with the most basic steps of supply chain management. Even the ones who believe in the concept — and lots of “old school” buyers don’t — have trouble getting beyond simple comparing purchase prices.

How to Use SCM to Your Advantage

Earlier in this article, we said that SCM companies are their own niche. Given the low level of implementation, this statement may not seem to make sense. We think it makes perfect sense, and here’s why.

Companies that are trying to change their thinking about how they buy things are most likely to buy from you for reasons other than low price. In particular, they probably already believe that the goal is to design and manage a superior value delivery system for their customers. If your company positions itself properly and expends the necessary effort to target the right senior-level managers in your customer’s organizations, you are likely to win more than your share of new business.

Two implications emerge here: Simply responding to RFQs as they present themselves won’t work, and dealing with lower level purchasing managers won’t work either. You must identify potential SCM companies in your marketplace in advance, and present yourselves to their senior buyers before any RFQs come down the pike.

What you want to do is differentiate your company as the most capable partner for your customers to begin building a value chain. To make this strategy work, you must call on general managers or above — a Very Important Top Officer, or VITO as Anthony Parinello terms it.

How To Do It

The key to making this approach profitable is to first understand your customer’s current supply chain, and develop your own map of how your products impact your customers operation, with particular attention to the problems you generate for your customers. The map is not only your way of understanding how to position your company, it’s your selling toll.

To make the map effective, you must take two steps: First, understand how your customers make money, and how they expect to make money in the future. Second, your team must take a critical view of how your company gets in the way of your customers achieving these goals.

Your company, not just your products. Not just how you package, deliver, and sell, but also your contract terms, discount policies, distributor policies, your contract terms, and your customer service. Everything you can think of, from your customer’s perspective. Involve your sales force. They probably can tell you what you need to know in 20 minutes.

Next, you take this information and literally put together a picture for your customer — or a series of pictures, if you will. The picture will explain what problems you cause your customer, and how you propose to solve them. This will become your sales tool. For it to be effective, you must make sure you’ve identified an important problem and a real solution for it. And not just any solution — the ideal solution is one your competitors cannot easily copy.

When you make your call, explain up front that you’re not trying to make a sale. Instead, you’ve identified a problem that your company probably is creating in their organization, and you wanted to talk with them about making it go away. If you’ve done your homework, you will be able to be specific about the problem. Calling to say you’ve identified a “$2 million inventory problem” is an effective way of getting an audience with a top manager.

That’s the bait. Companies that are trying to implement SCM will bite hard and quickly.

In the meeting, you simply go through the logic of your map. Explain the situation from their perspective, and ask them to confirm your thinking at each step. Start with your company, its policies, products and practices. Most buyers will be pleased that you begin your meeting in this way. Conclude your presentation with a numerical example of how the problem impacts VITO. For instance, you might conclude by saying something like “and that’s how we concluded that the contract we’ve asked you to sign is causing you to carry $2 million in excess inventory. We’ve realized that as long as our policies create problems for you, they will create problems for us as well.”

The hook is set, now all you do is jerk the line. When you finish your presentation, VITO will realize that, finally, he has a vendor who really understands his problems.

VITO will glare at you and say “you’re right! So what do you plan to do about it?”

Then they’re hooked.

At this point you present the rest of your map, along with your vision for how your company can continue the process to address the core business issues your customer is trying to solve.

It works even better if you are calling on a competitor’s account.

What’s Driving VITO
Up the Wall

The reason you must focus your discussion on your customer’s top management is because at industrial companies, the P&L comes together only at the top. What they see at the top is that 30-40% of their final costs are tied up in physical distribution — transportation (15%), inventory carrying costs (9%), warehousing (8%), and administrative overhead associated with distribution (8%). Not only are these costs eating up VITO’s profits, but competition is fierce in the areas of price, and delivery.

Vito knows that 30-40% of YOUR costs are also tied up in distribution. If you show VITO how he can help you reduce that cost, he knows it will go straight to his bottom line.

The other things driving VITO up the wall are related to the overall Value Chain Problem. It’s so impossibly huge that it cannot be addressed economically or quickly. It can only be taken on in sections. Supply chain management is one section that is tied to material’s movement into the company. The three other key problem areas include:

New products. All the activities associated with developing new products.

Order-to-remittance process. All the activities that occur between receiving an order and receiving payment for it.

Customer service. All the activities associated with making it easy for customers to reach the right people to get satisfactory answers and resolutions to their problems.

To the extent that your solution map can address these other core issues, you will differentiate your company better than your competition. Once this relationship is established, it becomes the basis of your response to future RFQs. Your objective is to position yourself as an advisor to your customers as they write their RFQs.

Here’s an actual example of how a company did that. For many years a container company saw itself as being in the “box business.” They would produce corrugated containers to their customer’s specifications, and ship them to their customers’ plants on a JIT basis. The customers would put their manufactured goods in the boxes, and ship them to stores, where the goods would be removed and the boxes discarded. No matter how the container company tried to improve its products, its competitors always were able to match its performance and pricing.

After careful analysis, the company decided to bypass its traditional customer base and develop a strategy targeted specifically at Wal-Mart. The company built a state-of-the-art “package solution center” next door to Wal-Mart’s headquarters. Next, they invited about 20 executives, including Wal-Mart’s head of purchasing for a tour of the new facility.

As part of the tour, they presented Wal-Mart with their solution to one of Wal-Mart’s core problems: How to reduce merchandizing costs and get products on the shelves faster. The package solution center was capable of producing a full-color prototype package in a single day, beginning with a round-table discussion with the customer, rather than the usual 7-14 working days imposed upon Wal-Mart by other companies. It wasn’t long before the company was nabbing lots of new orders at premium pricing, and taking share from its competitors. The idea worked so well, they have put an executive in charge of the operation and expanded it into a “global package solutions center.”

As it turns out, Wal-Mart is one of those SCM-focused companies that we suggested you focus on in the beginning of this article. Supply chain management, although poorly implemented by most industrial companies, can be a powerful concept if utilized in a manner that positions your company to better solve your customer’s problems.—Prentis Hall

MARKETING EXPERT VS INDUSTRY EXPERT

Note:

This week's post is contributed by marketing consultant John A. Murphy. -- PWH

A serious mistake managers often make when planning to engage the services of a marketing consultant is to insist upon previous industry-specific experience. This article will explain why such experience is of minimal value to the client (as well as the consultant) and often, even DANGEROUS for the client.

At the outset, an important distinction needs to be made between “industry specific experience” and “industry specific knowledge.” It might be a valuable exercise to ask: “What is it I expect a marketing consultant with “industry specific experience” to bring to the equation besides marketing capabilities?”

You should expect such a person to be familiar with the “key players” (competitors, customers and distribution chains-where applicable). She should also have a handle on industry trends (e.g. technological developments/innovations through trade associations, government contacts, industry “gurus” and trade press) and she should have an historical knowledge of how the macro environment (e.g. inflation, trade policy, etc.) affects the industry.

The truth is, after you meet with a consultant and she endeavors to understand your problems and expectations, she should return not only ready to make an “abstract” marketing proposal as to how she can meet your expectations, but she must do so in the context of such “industry specific” knowledge. Note, I said KNOWLEDGE, not experience.

How does the consultant come by such knowledge without corresponding experience? This is part of the “stock-in-trade” of the consultant. Secondary marketing research is a basic skill of everyone in the marketing profession. We all know how to check with the Commerce Department, trade associations, trade press and the basic library business indices, or turn on our computers and enter an electronic data base. We also know enough to call a few competitors and customers to get an even better feel for what is going on.

What we do not try to do is become a technical expert on the design or application of the devices a given company may manufacture. Odd as it may seem, the actual device that a company makes is not the first concern of a marketing expert. Remember, R&D, engineering and production are concerned with making devices; marketing, however, makes the product, and it is the product, not the device, that customers purchase.

Furthermore, one of the major reasons to engage someone from outside the company and industry is for their OBJECTIVITY. A “marketing consultant” with prior industry-specific experience runs a DANGEROUS RISK for the client in two ways:

First, the consultant’s previous “pertinent experience” may have dulled his/her objectivity. She may often have the tendency to shoot from the hip using a gun loaded with “instant answers.” Familiarity may breed not only contempt but also marketing myopia. Second, years of “industry specific experience” often comes at the expense of a depth in MARKETING experience. The trade-off is usually in the form of “doing the right thing” for “doing things right”. Of course, in marketing no room exists for such a trade-off. Yet such trade-offs are often made when one is focused on the present and not the future (in terms of profitability performance).

A case in point should illustrate this clearly: When Apple Computer needed to replace Steve Jobs, they did not tap IBM, HP, TI or even Tandy. They did not even go to industry-allied companies like Intel or NEC. In fact, they went to a company not even considered to be part of the “high-tech” culture. They took John Sculley from Pepsi! Mr. Sculley knew little about computers going in, but he was quite an accomplished MARKETING expert.

[Note: In the opinion of many Apple fans, Scully took Apple down the wrong path. Nevertheless, John’s point is well taken. Under Scully, Apple was more profitable than it is now. –PH]

Another, perhaps more down-to-earth, reason why a marketing consultant avoids “industry-specific experience” can be illustrated by the following scenario: A marketing consultant is engaged by company “A” in the “XYZ” industry, completes the assignment and then is engaged by company “B” a direct competitor of company “A”. (The consultant now has full knowledge of financial and trade secrets.) Company “B” might think it is about to get one up on its competitor until it realizes that it will be in the same position should the consultant return to company “A” or be engaged by yet another competitor.

The marketing consultant is aware of this dilemma and assiduously avoids it (nondisclosure contracts notwithstanding). The marketing consultant thus realizes that too much experience in any given industry could be the “kiss of death” for his own business.

A final word about Industrial Marketing Consultants and marketing expertise. All marketing consultants develop their expertise by specializing in certain areas of marketing — industrial, consumer, or the service

industry. Sometimes their field may be quite narrow; e.g., mergers/acquisitions, personnel, marketing information systems, etc. Within all areas of specialties there is, however, a shared expertise. All need to know certain fundamentals, on the one hand: how to conduct the market audit, fully understand the fine points of “OBJECTIVE/STRATEGY/TACTIC” – the dialectical nature of the marketing process. On the other hand they also need to have such expertise in operational activities as when to use tools like conjoint analysis or multi-dimensional scaling, even which algorithm within these “tools” will yield the best results. Moreover, the Marketing expertise of the consultant should be revealed by his membership in such professional associations as the certifying body called “The Institute of Management Consultants” as well as the “American Marketing Association” and the “American Management Association.”

What I am saying, essentially, is this: a truly professional marketing consultant would never, by definition, also be an expert in a specific industry.—John A. Murphy