Ch-I Introduction to Industrial Marketing

CHAPTER ONE

Introduction to Industrial Marketing

1.1 The Industrial Marketing System

This text is written specifically to develop better understanding of industrial marketing, that area
of overall marketing that addresses customers of an organizational nature as opposed to the
ultimate consumer and the household. To many, the marketing of industrial goods and services is
seen as mechanical and unimaginative and because of these feelings, this area of marketing has
been slighted. One estimate' is that more than one-half of all business school graduates in the
United States start or continue their careers in Industrial companies that market to other business
and nonbusiness organizations rather than to ultimate consumers. Of this total number of
business school graduates, some two-thirds are employed by Industrial companies. These figures
provide some Insight into the potential that the industrial market provides for marketing
graduates and yet, less than 2 percent of those employed by Industrial companies have had any
course exposure to industrial marketing In their college class work.

In reality, the industrial market is dynamic and challenging. Those fortunate enough to find
careers In Industrial marketing will attest to their work being both stimulating and challenging.
This book is written primarily for courses in industrial marketing and assumes that the reader has
a sound understanding of basic marketing principles. The basic format followed is traditional In
that the text covers the areas of market segmentation, buyer behavior, marketing strategy and
planning, and the four marketing sub strategies of product, channels, promotion, and price. The
Intent of this book Is to use the base of marketing principles and build upon, it a sound
understanding of how those same principles apply' to the specific area of industrial marketing.

A DEFINTION OF INDUSTRIAL MARKETING

In a general sense; industrial marketing describes all marketing activities not directed toward the
household or the ultimate consumer. Viewed from this perspective, Industrial marketing can be
defined as human activity directed toward satisfying wants and needs of professional buyers and
other individuals Influencing purchases in commercial, Institutional, and governmental
organizations through exchange: processes.
 Ch-I Introduction to Industrial Marketing

The basis for defining Industrial marketing appears to lie in the understanding of the industrial
customer rather than in the products Involved. In theory, this is not any different from the way it
is in the consumer market. Products and services are want satisfiers and as such must fulfill the
wants, needs, desires, and expectations of. Selected target customers if the companies producing
those products and services are to survive and succeed. This is just as true in the industrial
market as it .is In the consumer market even though the products and services involved in the
former are usually more complex and more expensive. But some big differences exist in the
rationale behind buying motivations in the tow markets, and the basic structures of the two
markets contrast sharply. Unless these differences are understood and properly assessed as to
their marketing importance, it is impossible to formulate and implement realistic and practical
marketing decisions in the industrial market.

INDUSTRIAL MARKETING MANAGEMENT

The following definition is appropriate for describing the marketing management function in the
industrial market:

Marketing management is the analysis, planning, implementation, and control of programs

designed to create, build, and maintain mutually- beneficial exchanges and relationships with
target markets for the purpose of achieving organizational objectives. It relies on a disciplined
analysis of the needs, wants, perceptions, and, preferences of target and intermediary markets as
the basis for effective product design, pricing, communication, and distribution.

This definition is useful in that it implies a managerial perspective. Someone within the
marketing organization is responsible for the marketing process taking place in an effective and
economical manner. That someone is typically the chief marketing executive. This person may
hold anyone of a number of titles including vice-president of marketing, director of marketing,
and marketing manager. In this text, references shall be made to the industrial marketing
manager and this shall imply any of these titles, Regardless of the title, this person's task is one
of managing change in the marketplace to the mutual benefit of both the marketing organization
and its customers.

Marketing management refers to the managing of subordinates in the completion of those

marketing programs and activities necessary to achieve the organization's marketing objectives.
This involves the implementation of required marketing activities through the efforts of others
 Ch-I Introduction to Industrial Marketing

inside the organization and often outside of it. These activities typically include the areas of
products and/or services to be offered, distribution channels to be used, promotional efforts to be
employed, and prices to be charged. Ultimately, the marketing manager is responsible for the
implementation of such activities.

WHO ARE INDUSTRIAL CUSTOMERS?

Within the definition of industrial marketing thus described, industrial customers are all
customers other than the ultimate consumer. The latter term is generally used to describe the
household buying unit in the marketplace. Industrial customers can be classified into three
groups, which, at times, may overlap.

These three classifications are

(1) types of commercial enterprises buying goods and services,

(2) governmental, organizations purchasing goods and/or services, and
(3) institutional customers in the market for various goods and/or services:

BASIC DIFFERENCES BETWEEN INDUSTRIAL AND CONSUMER MARKETING

Another way to gain a better understanding of the industrial marketing area is to contrast it with
consumer marketing. There are many major differences, and they will be developed in depth
throughout this text. At this point, however, it may be worthwhile to create an appreciation of
these differences.

These differences maybe classified in terms of such criteria as

(1) those related to market characteristics,

(2) those related to characteristics of industrial buyers,
(3) those related to characteristics of the products involved,
(4) those related to characteristics of the channels of distribution involved,
(5) those related to promotional characteristics, and
(6) those related to pricing characteristics.

The following sections discuss some of the major differences between industrial and consumer
marketing based on these criteria and may help in understanding why industrial marketing is not
just another type of consumer marketing with minor variations of basic principles.

Differences Related to the Characteristics of the market

 Ch-I Introduction to Industrial Marketing

There are many differences between industrial and consumer marketing that can be traced to
differences in the markets served by the two. The following illustrates some of these differences;

(1) often a relatively small number of customers comprise the market for a particular industrial
good—it is not uncommon to find instances where fewer than 25 companies comprise the entire
market for a product;

(2) although there may be relatively few industrial customers, they are normally large in size;

(3) their purchase orders are often very large, and they engage in volume purchasing of goods
and services on repeat bases;

(4) industrial customers are not spread uniformly throughout the nation but are rather
concentrated in such areas as the Northeast, the Southeast, and the pacific cost;

(5) the industrial market is characterized by derived demand, which means that the demand of
industrial customers for goods and services is derived from the ultimate consumer demand for
the product that they, in turn, produce—if the demand for their product is falls off, they, in turn
require fewer industrial goods and services; and

(6) the industrial market is characterized by joint demand, which means that industrial customers
often purchase products that they combine with other purchased or manufactured products to
form their final products, which are in turn, sold in to their markets. When this happens,
industrial goods are demanded jointly with other goods, or they are not demanded at all.

2. Differences Related to the Characteristics of Industrial Buyers

Some of the major differences between industrial and consumer marketing occur because of
differences in the buyers in the two markets. The following illustrate some of these differences

(1) the industrial market is normally characterized by more technically qualified and professional
buyers:

(2) their buying motives are usually more rational than those found in the consumer market—
their buying decisions are often made on the basis of such factors as specifications, vendor
analysis, and cost effectiveness as opposed to emotional or impulse purchasing motives;
 Ch-I Introduction to Industrial Marketing

(3) multiple buying influences are involved in almost all industrial purchases; this means that
decisions to buy are not made by one person, out rather by those individuals within a purchasing
company who will have use for the product being bought either in a direct or an indirect manner;

(4) committee buying is often found in the industrial market where a committee in various
positions in the purchasing firm have the responsibility of making the buying decision and
choosing the vendor;

(5) there are very few women buyers in the industrial market in contrast to the large amount of
purchasing by women in the consumer market;

(6) industrial purchasing people often will select two or more suppliers from which to buy the
same product just to protect themselves against the possibility of a single supplier’s nit being
able to supply required amount;

(7) The industrial market is characterized by situations of reciprocity whereby buyers buy only
from their own customers when the opportunity presents itself-two companies are both buyer and
seller to each other; and

(8) buyer expectations of future price changes often bring about situations of reverse elasticity of
demand in short-run instances. What this means is that buyers buy more goods when suppliers
increase price because they expect still further price increases, and they hope to protect
themselves against these anticipated changes.

3. Differences Related to the Characteristics of the Products Involved

There are differences in the products sold into the consumer and industrial markets.

Some of the major differences are as follows:

(1) the products in the industrial market are usually of a more technical nature;

(2) products in the industrial market are normally purchased on the basis of specification;

(3) there is multiuse of products in the industrial market as different buying influences within a
purchasing company may use the same product for a different use;

(4) Industrial buyers purchase products for production inventories as opposed to immediate use;
 Ch-I Introduction to Industrial Marketing

(5) there is a predominance of raw and semi finished goods found in the industrial market-these
products are sold into the consumer market only on rare occasions;

(6) there is tremendous emphases on the importance of product service after the sale in the
industrial market;

(7) there is also tremendous importance placed in the industrial market on presale servicing and
technical assistance in setting up and operating products in the customer's plant;

(8) packaging in the industrial market is generally more protective in nature rather than
promotional, although instances of the latter can be found, especially With distributor items;

(9) there is tremendous emphasis placed in the industrial market on promptness and certainty of
delivery of products owing to effects of delays on production line operations, and so forth; and

(10) industrial customers do not always have to purchase the products they require, but can
sometimes produce them with their own productive facilities--this is very rare in the consumer
market.

4. Differences Related to the Characteristics of the Channels Involved

There are very distinct differences between the channels of distribution used in the two markets.
Some of the major differences are as follows:

(1) channels of distribution in the industrial market are generally shorter and more direct;

(2) there is much more usages of the direct channel (no Independent middlemen) in the industrial
market than in the consumer market;-industrial distributors and manufacturers' representatives
are the primary middlemen found in the industrial market;

(3) there is greater expectation of sales effort from industrial channel components than from
those in the consumer market;

(4) all told, there are fewer feasible channel alternatives in the industrial market than there are in
the consumer market; and

(6) physical distribution is extremely important in the industrial market because of production
line inventory requirements.

5. Differences Related to Promotional Characteristics

 Ch-I Introduction to Industrial Marketing

Promotion also differs in the two markets. Some of the major differences are as follows:

(1) there is generally a much heavier emphasis on personal selling in industrial marketing than
there is in consumer marketing;

(2) salespeople in the industrial market are more like consultants and technical problem solvers
to their customers than salespeople in the consumer market;

(3) the industrial market characterized by the use of inside or phone salespeople;

(4) there are relatively few saleswomen in the industrial market;

(5) salespeople in the industrial market possess more technical backgrounds and are more likely
to fall into the classification of sales engineers than those found in the consumer market;

(6) advertising in the industrial market often plays a different role than advertising in the
consumer market-it is often used to lay a foundation for the industrial salesperson's sales call;

(7) advertising themes in the industrial market normally stress more factual and technical data
and are generally less emotional;

(8) advertising media the industrial market differ from media in the consumer market-the two
prime media in the former are trade journal publications and direct mail; and

(9) sales promotion activities in the industrial market center around the catalog and the trade
show.

Differences Related to Pricing Characteristics

There are also very distinct differences in pricing in the two markets. Some of the major
differences are as follows:

(1) price is less of a determining factor in industrial purchasing-It is often of much less
importance than quality and uniformity of the .products purchased, certainty of delivery of the
products purchased, service, and technical assistance;

(2) prices are often based on competitive bidding in the industrial market;

(3) negotiated prices are very common in the industrial market;

(4) in pricing their products, industrial marketing firms often must provide financing
arrangements; for their customers owing to the high dollar amount of industrial sales;
 Ch-I Introduction to Industrial Marketing

(5) there is wide -usage of list and net pricing of industrial goods, which involves the use the use
trade and quantity discounts off published price lists;

(6) leasing is often used as a price alternative to marketing capital goods in the industrial market;

(7) penalty clauses for nonperformance affect the final prices paid in the industrial market;

(8) there is little use of price as a promotional tool in the industrial market-rarely are loss leaders
used;

(9) stabilization of price is quite common in the industrial market particularly with manufacturers
resulting in non price competition;

(10) return on investment pricing is widely used in the industrial market; and

(11) Industry price elasticity of demand in the industrial market is generally inelastic owing to
the derived demand aspect, whereas company price elasticity of demand is often quite elastic
owing to product specifications making products almost identical. There are other differences,
but these make the desired point. There are enough fundamental differences between the
consumer and industrial markets to make the job of marketing management in each market a
separate area of specialization. The consumer marketing manager moving into the industrial
market would have to learn these differences as they are manifested in the products to be
produced, the prices that are to be charged, the channels that are to be used, and the promotional
efforts that are to be employed.

The industrial marketing system was described in terms of who produces industrial goods and
services, who consumes these goods and services, and who are involved as middlemen between
producers and uses. Basic differences between industrial and consumer marketing were
examined with emphasis on market characteristics, buyer characteristics, channel characteristics,
promotional characteristics and pricing characteristics. The central point is to emphasize that
although marketing in the industrial market is similar in principle to marketing in the consumer
market, there are distinct differences that must be understood if effective marketing management
is to take place.

The group known as commercial enterprises includes any type of commercial business enterprise
purchasing industrial' goods and/or services for use other than selling directly to the ultimate
consumer. There are basically three types of this customer in the industrial market.
 Ch-I Introduction to Industrial Marketing

Original Equipment Manufacturers

The original equipment manufacturer, more commonly referred to as the OEM, is a commercial
customer that buys products and sometimes services to incorporate in to the products that it in
turn, produces and sells either in to the industrial or ultimate consumer markets. Thus, an
electronics company selling components to a manufacturer of television sets would consider
television firm as an original equipment manufacturer or OEM customer. The important point to
realize with this type of customer is that the product of the industrial marketer (in this case, the
electronics company). The purchased product becomes an integral part of the final customer’s
product. OEM customers may also purchase service from subcontractors, but normally the term
OEM refers to an industrial customer of products

User Customers

A second type of commercial enterprise customer is known as the user. In the industrial market,
this term refers to those commercial enterprises purchasing goods and/or services for use in
producing in turn, other goods and /or services, which are then sold in to the industrial or
consumer market or both. Examples of user customers are manufacturing companies purchasing
lathes; drilling machines, gear-curling machines, punching and shearing machines, bending and
forming machines, and other similar pieces of machinery that they use in their production
processes. In contrast to the OEM, the industrial products purchased by user customers never end
up in the final product being produced by the Industrial customer. In a purely economic sense,
the user customer is a purchase of capital Goods--- good that are used to produce other goods
and/or services. The user customer buys the product or service and uses it to produce the product
or service that it, in turn, sells to its customers.

Industrial Distributors

The third type of commercial enterprise customer is the industrial distributor. Strictly speaking,
distributors are: not customers, in the industrial market, but rather middlemen who purchase
products, from -manufacturers or other distributors and then other distributors and then in turn,
sell these same products, often in the same form as purchased to other distributors, OEMs, or to
user customers. They are resellers rather than actual customers for industrial goods. In a lose
sense, distributors are very similar to industrial wholesalers, and they may be highly specialized
or much generalized in their product offerings. AS stated they are technically middlemen as
 Ch-I Introduction to Industrial Marketing

opposed to customers, but because they take title to the products they purchase, many practicing
industrial marketing managers trat them as customers. Examples of such distributors are
plumbing supply houses, steel service centers, electronic supply houses, and the like. Although
they are often thought of and treated as customers in the Industrial market, they are technically
middlemen reselling industrial goods to actual customers of the OEM or user variety.
Throughout this text, distributors shall be considered as middlemen rather than as Industrial
customers.

It is important to realize that industrial customers of this commercial enterprise classification are
not exclusively OEMs or users or distributors. To illustrate, a fabricating plant might be an OEM
customer when purchasing component parts from some suppliers. At the same time, however, the
machinery that the company purchases for its production line qualifies it as a user customer to
the suppliers of such machinery. At the same time, a manufacturer might act as a distributor for
another manufacturer, distributing products that are compatible with the products that the former
manufacturer produces on its production line. This means that the same company can be an
OEM, a user and distributor at the same time, but normally not for the same supplier As might be
expected, It Is of critical importance that any marketing manager In the Industrial market know
whether customers are OEMs, users, or distributors. lf this is not known, the industrial marketing
manager can hardly market effectively, as the manager will be completely ignorant of the
differences in buying motivations predominant with each type of customer. An OEM does not
purchase for the same reasons as does a user customer. And, of course, the OEM does not
normally buy the same product as the user.

Governmental Organizations

Industrial customers of the government variety can range all the way from. the smallest township
or village in the United States to the Department of Defense, which is sometimes considered to
be the largest single concentration of economic power in the world. Great variations occur
among governmental customers in their buying patterns, purchasing procedures, and volume of
their buying; but basically they all fit into the general classification of governmental customers.
Broadly defined, government customers fall into three basic classifications: (1) local; (2) state;
and (3) federal.

Institutional Customers
 Ch-I Introduction to Industrial Marketing

The institutional market includes all those customers of the industrial variety not failing into
commercial or governmental classifications. Examples of institutional customers are schools,
colleges and universities, churches, hospitals, nursing homes, sanitariums, rest homes, medical
clinics, trade schools, nonprofit foundations, and other such types of institutions. As can be seen
by these examples, institutional customers can be public or private. A company could market
products to both state universities and private, universities, to both public and parochial schools,
to both private and government sponsored vocational schools, and so on.

The point to remember is that institutions do not fall in to clear cut classifications, but are rather
a high hybrid of government and private organizations that must be considered on an individual
basis according to their purchasing practices and policies.

Although all three types of industrial customers are dissimilar in many respects, they are
generally considered to comprise the industrial market because they all purchase .goods and/or
services to use either directly or indirectly in providing goods and/or services to their own
customers. They all differ from the ultimate consumer in that they all purchase goods and
services only to satisfy the demand of their own customers, either directly or indirectly. In
addition, they are often remarkably similar in their purchasing behavior. A hospital often buys in
much the same manner as an industrial manufacturer, and, at times, they will both be purchasing
the same products from the same suppliers. In a loose sense, the industrial market refers to all
those companies marketing to industry and commerce, government, and the institutions. In this
text, the emphasis throughout will be primarily on industrial customers of the commercial
enterprise classification with particular attention to OEMs and user customers. Time and space
do not permit an exhaustive analysis of the governmental or institutional markets, although many
of the concepts covered in this text will apply to marketing into both of the latter markets.

CLASSIFICATIONS OF INDUSTRIAL PRODUCTS

Although there are many types of products that can be sold into the Industrial market, they
generally fit into one of the six following classifications.

Heavy Equipment
 Ch-I Introduction to Industrial Marketing

The heavy equipment classification of industrial products includes such as metal- cutting’
machine tools (lathes, boring mills, drilling machines, gear-cutting machines, grinders, and
polishers), metal-forming machines (punching and shearing machines; hydraulic, mechanical,
and forging presses; and forging machines), forklifts, overhead cranes, blast furnaces, electrical
drive systems, and other such heavy capital goods.

Heavy equipment products are basically capital goods and, as such, their purchasers are normally
user customers. But it is possible that situations can be found where such goods are purchased by
a fabricator who purchases several pieces of heavy equipment and then integrates those into one
overall package and; in turn, sells this package to a user customer. In this case, the first industrial
purchaser would actually be an OEM customer. Generally, heavy equipment can be purchased
outright or, it can be leased by industrial user customers, and each approach has its own
marketing merits, of which the marketing manager should be aware. In cases where capital
equipment is purchased, it is treated as an asset by the purchasing firm and depreciated for tax
purposes. This cannot be done with some of the other types of Industrial products.

Light Equipment

The light equipment classification of industrial products include such as portable power tools
like drills, saws, grinders, sanders, polishers, and so forth, me; instruments, typewriters,
calculators, and other similar products. The market for light equipment is also normally
comprised customers, but transaction values are considerably lower than with heavy equipment,
and the products purchased are not permanently affixed to the buyer's physical plant as is heavy
equipment. Again, light equipment may also be leased or purchased outright by the industrial
customer, and in the latter situation this classification treated as an asset and depreciated for tax
purposes

Consumable Supplies,

The consumable supplies classification of industrial products includes any products that are used
up or consumed by the purchasing company in the operation business. Typical of such products
are cleaning compounds, business, forms, cutting fluids, and small tools such as welding rods,
drill bits, and so forth. The essential characteristic of this classification of product is that the
product purchased used up by the customer firm, either directly or indirectly, in the normal
operation of its business. These products are considered expense items and cannot be depreciated
 Ch-I Introduction to Industrial Marketing

by the industrial customer for tax purposes. Industrial customers of the consumable supplies
variety are normally user customers.

Component Parts

The component parts classification of industrial products includes all those products that are
purchased for the purpose of inclusion into the final product of an industrial company. Examples
of this classification are switches, transistors, motors, gears, nuts, bolts, screws, and other such
products of this type. When sold to industrial customers using them in their production
processes, they are marketed as OEM products. Such products, however, are very often sold to
distributors who, in turn, resell them to other distributors or to OEM customers, and in these
cases the Industrial marketing manager may not consider them to be OEM products. At other
times, component parts are sold into the replacement market to repair and service facilities,
distributors, and other such outlets. Thus, component parts may have two distinct markets-an
OEM market and a replacement market. It is also important to realize that component parts may
be marketed by their manufacturers as finished goods whereby the industrial customer uses them
directly in its product with no modification whatsoever. They may at times also be marketed as
semi finished goods, in which case the purchasing manufacturer modifies the component in some
manner prior to using it in its product. The essential point to remember with this classification of
industrial products is that it ends up within the product of the purchaser, oftentimes contributing
to the salability of the customer’s final product in the market place. As such component parts are
normally sold in to OEM markets.

Materials

The raw materials classification of industrial products includes all those products generated by
the extractive industries that, in turn sell those products to their customers with little or no
alteration. Examples of this classification are coal, iron ore, bauxite, gypsum, crude oil, fish and
other seafood, lumber, field crops, copper, lead and zinc ores, tungsten ores, and other such
similar products. These products may at times be marketed as either user or OEM products. An
example of the former is the purchase of coal by a manufacturer for heating purposes. An
example of the latter is the purchase by a seafood processor of tuna from the fishing Industry.

Processed Materials
 Ch-I Introduction to Industrial Marketing

The processed materials classification of industrial products includes all types of processed
materials not considered component parts. Typical of the products in this classification are steel
plate, chemicals, glass, coke, sheet metal, plastics, cold finished steel bars, leather, asphalt,
plywood, and other similar products. In most cases, processed materials are marketed to OEM
customers, but this is not a rule. A steel producer purchasing coke might well be considered a
user customer rather than an OEM customer. In addition, processed materials may also be sold to
distributors who, in turn, resell to the, OEM or to the user market. A good example of the latter is
steel service centers that purchase various types of steel products and then process them to
specifications for their customers.

It is extremely important that the industrial marketing manager realize the classification or
classifications of his products as they are purchased by his customers. This is because buying
motivations differ within product classifications-processed materials are not purchased for the
same reasons as are component parts-heavy equipment is not bought in the same manner as is
light equipment-and the replacement market purchases component parts quite differently from
the way the OEM market does for the same product. If the marketing manager sees the product
being purchased as light equipment and customers perceive it as being heavy equipment,
effective marketing can hardly take place, as buyer and seller is each operating on their own
ground rules. It is incumbent upon the marketing manager to determine into what classification
each product falls for each customer firm.

Industrial Services

Not all industrial marketing companies are involved with marketing physical tangible, products.
Many service companies also operate in the industrial market. Industrial

Services are of a great many varieties and often differ considerably in terms of cost, complexity,
and sophistication. Examples of services marketed in this market include janitorial services,
window cleaning services, protective services such as night-watch personnel and guard dogs,
installation services, delivery and warehousing services, consulting services, engineering
services, computer services, accounting services, Insurance programs, advertising services, and
leasing services. The Service Company provides a wide range of services to industrial customers
to over 5,000 companies across the United States. Buying motives and practices differ greatly
depending upon the type of service involved. Janitorial services are not purchased in the same
 Ch-I Introduction to Industrial Marketing

manner as are consulting services nor should they be marketed in the same manner. The
individual Industrial marketing manager must address the specific requirements of marketing his
or her company's particular services.

The industrial Marketing system

THE INDUSTRIAL MARKETING SYSTEM

Describing the industrial marketing system may be accomplished by viewing its basic
components. These are: (1) producers of industrial goods and services; (2) suppliers to these
producers; (3) customers for industrial goods and services; (4) channel components operating
between producers and customers; and (5) environmental and facilitating forces that affect the
relationships among producers, suppliers, customers, and channel components. A brief
description of the roles played by each of these components may be useful in better
understanding this total system.

Producers of Industrial Goods and Services

Industrial goods and services are produced by such business organizations as (1) manufacturing
plants such as machine tool manufacturers; (2).mill industries such as steel mills and pulp arid
paper mills; (3) processing plants such as food processors and petroleum refineries; (4) assembly
plants such as truck assembly plants; (5) machine shops; (6) fabricating plants such as electronic
manufacturers that buy component parts and fabricate finished products from those parts; and (7)
service organizations that specialize in the industrial market. Organizations such as these
produce the goods and services that are purchased by OEMs, users, institutions, and
governmental agencies.

Resource Suppliers

Producers of industrial goods and services require materials to produce their offerings and often
these materials must be purchased from other organizations. Producers purchase equipment,
supplies, and materials from other manufacturers, mines, farms, Fisheries, and forest industry
firms to run their plants and produce their goods and services.

Customers for Industrial Goods and Services

The primary customers for industrial goods and services are commercial organizations,
institutions, and governmental agencies.
 Ch-I Introduction to Industrial Marketing

Components in the Industrial Market

Based on a study of 156 industrial manufacturers, six channels of distribution are dominant in the
industrial market. These channels will be analyzed in depth later in this text, but the brief
description that follows of common channel components is necessary in developing
understanding of the link between industrial producers and customers.

The Manufacturer's Sales Branch

Manufacturer’s sales branches are wholly owned field operations of the manufacturers in the
industrial market and, as such, are not independent middlemen. Nevertheless, they provide
middlemen functions by the manufacturer. There are two basic types of this operation. The first
is the manufacturer's branch, also called the branch house. The branch house is primarily a field
warehouse owned and operated by the manufacturer and placed at strategic locations for serving
the firm's customers. Branch houses are very close to company-owned warehouses found in the
consumer market.

The second type is the branch office, which is essentially owned and operated by a manufacturer
as a field sales office. In contrast to the branch house, branch offices ordinarily carry no
inventory, but are rather strategically located offices from which the company’s field sales
personnel operate in their respective field territories. At, times, branch houses and branch offices
may be housed in the same physical facilities, whereas at other times they may be housed
independently of one another. In other instances, a manufacturer may elect-to use only a branch
office for selling purposes and ship directly from the factory, thus- performing no inventory
function in the field and therefore requiring no branch house. Yet, in other instances, a
manufacturer may use only branch houses to field inventory its product and use manufacturer's
representatives to perform the selling function.

Industrial Distributor

The industrial distributor was very briefly described in the section on types of industrial
customers. These are technically middlemen reselling-goods in the industrial market. They are
normally local and independently owned and operated, and they take title to and possession of
the goods they handle. They stock goods, .thus performing field inventory function for the
 Ch-I Introduction to Industrial Marketing

manufacturer. Industrial distributors will be analyzed in great depth later in this text. At this
point, all that is needed is to understand that they are middlemen who take title to and stock
goods in the industrial marketplace. They perform a function quite similar in some respects to
that performed by the wholesaler in the consumer market. And as has also been described,
industrial distributors can be highly specialized or widely diversified in their product line
offerings and their sales and service capabilities.

The Manufacturer's Representative

The manufacturer's representative, also called the manufacturer's agent, is also an independent
middleman, but is quite different from the distributor. Very common in the industrial market, the
manufacturer’s representatives are agents who sell on behalf of manufacturing principals. As
such, they take no title to the goods involved, and they often do not even see or handle those
goods. Basically, they are independent salespeople who sell on a commission basis for
manufacturers, thus eliminating the need for those manufacturers to employ company
salespeople. The manufacturers' representatives often represent a number of manufacturers
whose products are complementary and not competitive. They are compensated on a commission
basis and assigned to sales territories just as are company field salespeople. Simply viewed, they
compare to company salespeople except that they are independent and usually represent a
number of manufacturing principals. Their basic function as middlemen in the industrial
marketing system is to sell, but in recent years there has been a trend toward What is called a
"stocking representative" A stocking rep is basically a manufacturer’s representative who also
carries some field inventory and is a sort of hybrid between a distributor and a manufacturer's
representative. In industry, this general classification of middleman may be called the
manufacturer's representative, the manufacturer's agent, the manufacturer's rep, or simply the
MR. In this text, the term MR shall be used in reference to this type of middleman. Later in the
text, manufacturers' representatives shall be analyzed in great depth for their contribution toward
effective industrial, marketing.

In addition to the industrial distributor and the manufacturer's rep, such middlemen as brokers
and sales agents may sometimes be found. Overall, these middlemen do not form a significant
part of the industrial marketing system.

Environmental Forces
 Ch-I Introduction to Industrial Marketing

A number of environmental forces affect the behavior of components in the industrial marketing system.
Such external factors as economic changes (Inflation, recession, shortages of materials); technological
changes; ecological constraints (governmental pressures for cleaner air and water); changing political
climates; competition; and international pressures all affect producers, suppliers, customers, and channel
components in the industrial market. A good example is the manner in which the Environmental
Protection Agency exerts pressure on producers to reduce pollution caused by manufacturing processes.

Facilitating Forces

In addition to environmental forces, the industrial marketing system is affected by facilitating

organizations who may not be directly involved in the system but who become involved in
various capacities. For example, a number of industrial producers ship by common carrier and
store goods in public warehouses. Others use outside advertising agencies, marketing research
companies, and consulting firms in conducting their marketing programs. These forces affect
behavior in the system and thus must be considered parts of the total system.

This, then, is the Industrial marketing system. On one end are producers of industrial goods and
services who buy necessary materials from suppliers. On the other end are industrial customers
of the commercial OEM or user variety, government, and institutions. Linking these two together
are channel components through which industrial companies market their goods and services.
This structure is subject to both environmental forces and facilitating forces with the entire
package comprising the total industrial marketing system which itself is part of the larger total
economic system.