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Chapter 13 Products and Services for Businesses

Teaching Objectives
The overall objective of this chapter is to illustrate how the differences in the motives between
buyers of consumer products and industrial goods and services place different emphasis on the
marketing of these products. It is important to stress that much of what has been discussed in
Chapter 13 is relevant for industrial goods and services but that emphasis is affected by the
inherent nature of industrial goods. The teaching objectives are to:
1) Emphasize a fundamental difference in consumer demand vis--vis industrial demand
the inherent volatility of the latter.
2) Explore the relationship between a country's stage of economic development and demand
for industrial goods.
3) Stress the growing importance of technology and quality in successful product
development.
4) Illustrate the important role of relationship marketing in maintaining competitiveness in
industrial goods marketing.
5) Examine industrial trade shows as an important means of promotion.
6) Present the major issues in marketing business services globally and the affect of the
fundamental characteristics of business services on marketing.
Comments and Suggestions
1. Perhaps the most important point to make regarding the marketing and development of
industrial products is the inherent volatility of derived demand. Demand for capital
equipment is particularly susceptible to huge fluctuations in demand. This is the central issue
of case 410 (Boeing).
2. The growing importance of technology and quality in successful industrial goods marketing
cannot be overstressed. The level of technology reflected in the product, compliance with
standards that reflect customer needs, support services and follow through, and the price
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relative to competitive products are all part of a customers evaluation and perception of
quality.
Lecture Outline
I.

The Volatility of Derived Demand

II.

The Industrial Product Market


A. Stages of Economic Development
B. Technology and Market Demand
C. Attributes of Product Quality
D. Quality is Defined by the Customer
E. Service and Replacement Parts
G. Universal Standards
H. ISO 9000 CertificationAn International Standard of Quality

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III.

Relationship Marketing and Industrial Products

IV.

Promoting Industrial Products


A. Industrial Trade Shows

V.

CountertradeA Pricing Tool

VI.

Marketing Services Globally


A. Services Opportunities in Global Markets
B. Entering Global Markets
1

Client Followers and Market Seekers

2. Entry Modes
C. Market Environment for Business Services
1. Protectionism
2. Transborder Data Flow
3. Competition
D. Cultural Barriers and Adaptation

Discussion Questions
1.

Define the following terms and show the significance to international marketing:
Derived demand
ISO 9000
Price-quality relationship
Relationship marketing
Client followers

2. What are the differences between consumer and industrial goods and what are the
implications for international marketing? Discuss.
The committee on definitions of the National Association of Marketing Teachers has broken
down the differences between consumer and industrial goods by four areas. They are:
a. Nature of the market or buyer this typically means that consumer goods are used by
the end customer in a channel of distribution and are consumed by this customer in its

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finished stage. The industrial goods are typically those goods which are used for the
further production of other goods and are not used for the personal benefit of the
customer. There are, however, many overlapping categories within this description.
b. Organization or operational setup.
c. Characteristics of the product as was mentioned, industrial goods are typically used
for the production of other goods while consumer goods are consumed by the final
customer.
d. Miscellaneous differences including such points as the need for a sales force (highly
skilled or not), speed and dependability of delivery, and the like.
e. We must of course add the volatility of derived demand, which if noticed, has huge
implications for the marketing of industrial products.
These differences are the same in international marketing, and they are further complicated
by the foreign environment.

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3.

Discuss how the various stages of economic development affect the demand for industrial
goods.
Perhaps the most significant environmental factor affecting the market for industrial products
is the degree of industrialization. Although generalizing about countries is a dangerous
practice, the stage of economic development of a country can be used as a rough gauge of
market characteristics for industrial goods. Regardless of the stage, demand for industrial
goods exists, but different levels of development typically result in changes in the demand
and the kinds and quality of the industrial goods sought. According to the text in the first
stage, that is preindustrial or commercial stage, there is little or no manufacturing, and the
economy is almost wholly based upon the exploitation of raw materials and agricultural
products. There is, however, a demand for industrial products even though it is limited to
those items used in the simple production of the country's resources; that is, the industrial
machinery, equipment, and goods required in the production of the country's natural
resources. Also in this stage, a transportation system typically develops and this creates a
market for highly specialized and expensive construction equipment that must be imported
from other countries.
The second stage generally reflects the development of primary manufacturing industry
concerned with the partial processing of raw materials and resources. At this level, there is a
demand for the machinery and other industrial goods necessary for the processing of the raw
materials prior to exportation.
The third stage of development is characterized by the growth of manufacturing facilities for
nondurable and semidurable consumer goods. Generally, industry consists of small local
manufacturers of consumer goods which have relatively large mass field. The demand for
industrial products extends to entire factories and the supplies necessary to support
manufacturing. Such a degree of industrialization requires machinery and equipment to build
and supply the factories and the supplies to keep them operating.
A country at stage four is really a fairly well-industrialized economy. This stage reflects the
production of capital goods as well as consumer goods including such products as
automobiles, refrigerators, and machinery. Even though industrial goods are in production,
there is still the need for the importation for other goods which the country does not produce.

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Demand is generally for more specialized and heavy capital equipment to supply the
domestic industry.
A country in stage five has reached the point of complete industrialization which generally
denotes world leadership in the production of a large variety of goods. Even though these
countries have achieved the highest level of industrialization, there is still a market for
industrial products because a country at this stage typically does not produce all of the goods
it needs but specializes in the production of certain goods and imports those highly
specialized items which it cannot profitably produce but still needs. Although each stage of
economic development appears to be clear cut, most countries are actually in a stage of
economic and industrial flux, striving for greater and more rapid economic growth. Thus, a
country may be in more than one stage at any one time, which again has an effect on the
industrial demand within that country.
4. Industrialization is typically a national issue, and industrial goods are the fodder for
industrial growth. Comment.
The main points in the solution of this problem center around the desire of the
underdeveloped countries to industrialize. This industrialization is not a haphazard, natural
growth, but a planned growth, and as a consequence the sale or purchase of industrial goods
both to help industrialize a nation as well as the purchase of those industrial goods which a
country cannot produce become virtually a national issue rather than just a private venture
between a buyer and a seller. The reason is very obvious since industrial goods are part of
industrialization in the sense that industrial goods must be purchased to build plants and to
supply raw materials for plants. In those cases when plants have not been built, industrial
goods are still in need in the country but are always subject to evaluation in terms of should
the country build the plant; that is, further industrialize, and thereby not have to import the
goods, or should it continue to import the goods. Industrialization is a national issue which
adds another ingredient to the environment that the foreign marketer must face. There are
political overtones to the statement in that a country may have support for its industrialization
from a second country, and this support may take the form of industrial products at very low
prices or extra-liberal credit terms. All of this, of course, adds still another dimension to the
competitive situation for industrial goods in the industrializing country.

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5. . . . The adequacy of a product must be considered in relation to the general environment


within which it will be operated rather than solely on the basis of technical efficiency.
Discuss the implications of this statement.
The statement really refers to a major problem faced by many U.S. marketers in that the
industrial goods they intend to sell abroad are the same ones which have a market in the
United States. The United States, being a highly industrialized nation, obviously has need for
equipment of the highest technical standards and technical efficiency. For example, highly
technical automotive equipment that can operate within extremely close tolerances. The
demand for as fine a piece of equipment as is produced in the United States and consumed in
the United States may not exist in countries which are less developed and have different labor
cost structures, or it may not exist in the sense or in relationship to the price that must be
charged for the equipment. Besides the price, there is the capability of the labor force to
utilize the equipment in terms of maintenance and in terms of being able to effectively make
use of some of the refinements that may exist. Thus, a product should be considered in
relation to how it is going to be used, the purpose for which it is going to be used, the
environment within which it is going to operate in measuring its efficiency rather than on the
basis of it being technically sound from an engineering viewpoint or from the viewpoint of a
highly industrialized country as the United States.
6. Why hasn't the United States been more helpful in setting universal standards for industrial
equipment? Do you feel that the argument is economically sound? Discuss.
It seems that the main reason why the United States has not been more helpful in setting
universal standards is that a rather large demand still exists for products or replacement parts
which are based on the inch-pound system of measurement. This demand exists in the United
States and foreign countries as well. Another reason for the lack of help is that the expenses
involved in such a change are considerable, and no one particular firm is willing to incur
such an expense when none of its competitors or other companies are willing to either lead or
follow the example. This argument may be economically sound when one considers a shortrun period but not sound over a longer period of time. Over a short period of time, the
domestic sales lost and the foreign sales gained would probably not be enough to offset each
other nor adequate enough to cover the expenses incurred in such a change. However, when

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one considers the impact of such a change over a long-run period, the foreign sales gained
would probably be substantial enough to cover both the domestic sales lost and the expenses
incurred from such a change. What is presently being done is that companies are sitting back
and waiting for the other fellow to make the first move and seeing what effect this has on
the profitability of the company and its accompanying aspects.
7. What role do service, replacement parts, and standards play in competition in foreign
marketing? Illustrate.
Service, replacement parts, and standards are an important aspect of competition in foreign
marketing. These aspects all rate high with the foreign customer; and the company which can
meet these demands, and several others, is the company which will profit and will be more
competitive. It should also be noted that the lack of any one of these factors may mean the
loss of business for a foreign or a domestic based firm. Take, for example, the factor of
delivery time on spare parts. If two companies are equal in all other factors, the company
which can deliver the goods the fastest and most economically will be the company which
will get the business. This is true for many of the other aspects as well as for those mentioned
above.
8. Discuss the part industrial trade fairs and trade centers play in international marketing of
industrial goods. What is the difference between industrial trade fairs and trade centers?
A trade center is a permanent, year round display location in which the products of a
particular country are displayed, demonstrated, and sold. These centers are located in
countries other than the guest countries which display the products. Thus, an
American-based company may be able to utilize the display facilities in such centers as
London, Frankfurt, Milan, Bangkok, or other such cities. These centers provide a place where
foreign-based companies can exhibit their goods and stimulate sales for these goods.
A trade fair is a government-sponsored attempt to facilitate foreign trade with the host
country. Foreign-based companies are invited to exhibit their goods within the host country
at a particular location. Trade fairs are scheduled periodically and any interested
manufacturer can reserve space to exhibit his goods.
9. Describe the reasons an MNC might seek an ISO 9000 certification.

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One research report examining the purchase decision variables of importer managers found
that product quality, including dependability of suppliers and timely delivery, were the most
important variables influencing purchase decisions.
With quality becoming the cornerstone of global competition, companies are requiring
assurance of standard conformance from suppliers just as their customers are requiring the
same from them. Outside of regulated product areas, the importance of ISO 9000 registration
as a competitive market tool in the EC varies from sector to sector. In some sectors, European
companies may require suppliers to attest that they have an approved quality system in place
as a condition for purchase. ISO 9000 may be used to serve as a means of differentiating
different classes of suppliers (particularly in high-tech areas) where high product reliability
is crucial. In other words, if two suppliers are competing for the same contract, the one with
ISO 9000 registration may have a competitive edge.
If a company practices Total Quality Management (TQM), the system probably meets ISO
9000 standards but it would have to be audited and certified as such.
10. What ISO 9000 legal requirements are imposed on products sold in the EC? Discuss.
ISO 9000 is not a legal requirement for access to the EC market but ISO 9000 certification is
required under EC law for product certification on a few highly regulated, high-risk products
such as medical devices, telecommunications terminal equipment, gas appliances, and
personal protective equipment. Although ISO 9000 is voluntary, except for regulated
products, the EC Product Liability Directive puts pressure on all companies to become
certified. The directive holds that a manufacturer, including an exporter, will be liable,
regardless of fault or negligence, if a person is harmed on an object that has been damaged by
a faulty product. Thus, customers in the EC need to be assured that the components of their
products are free of defects or deficiencies. A manufacturer with a well-documented quality
system will be better able to prove that products are defect-free and thus minimize liability
claims.
11. Discuss the competitive consequences of being ISO 9000 certified.
A strong level of interest in ISO 9000 is being driven more by marketplace requirements
than by government regulations and ISO 9000 is becoming an important competitive

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marketing tool in Europe. As the market demands quality and more and more companies
adopt some form of TQM (total quality management), manufacturers are increasingly
requiring ISO 9000 registration of their suppliers. Although a legal requirement in only a
small number of directives, ISO 9000 is becoming increasingly important commercially for
gaining access to EC markets. As of 1991, 42 countries had adopted the ISO 9000 standards
as national standards.
12. Discuss how the characteristics that define the uniqueness of industrial products lead
naturally to relationship marketing. Give some examples.
Two basic factors account for greater market similarities among industrial goods customers
than consumer goods customers. First is the inherent nature of the product: industrial goods
are goods and services used in the process of creating other goods and services. Consumer
goods are in their final form and are consumed by individuals. And second, the motive or
intent of the user differs: industrial consumers are seeking profit whereas the ultimate
consumer is seeking satisfaction. These factors are manifest in specific buying patterns,
demand characteristics, and a special emphasis on relationship marketing as a competitive
tool.
The characteristics that define the uniqueness of industrial products discussed above lead
naturally to relationship marketing. The long-term relationship with customers which is at the
core of relationship marketing fits the characteristics inherent in industrial products and is a
viable strategy for industrial goods marketing. The first and foremost characteristic of
industrial goods markets is the motive of the buyerto make a profit. Industrial products fit
into a business or manufacturing process and its contributions will be judged on how well it
contributes to that process. In order for an industrial marketer to fulfill the needs of its
customer, the marketer must understand those needs as they exist today and how they will
change as the buyer strives to compete in global markets that call for long-term relationships.
Relationship marketing ranges all the way from gathering information on customer needs to
designing products and services, channeling products to customers in a timely and
convenient manner, and following up to make sure the customer is satisfied.
The industrial customer's needs in global markets are continuously changing and suppliers'
offerings must also continue to change. The need for the latest technology means that it is not
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a matter of selling the right product the first time but one of continuously changing the
product to keep it right over time. The objective of relationship marketing is to make the
relationship an important attribute of the transaction thus differentiating oneself from
competitors. It shifts the focus away from price to service and long-term benefits. The reward
is loyal customers that translate into substantial profits.
Relationship marketing can often give a company the competitive edge when a customer's
ultimate success depends on more than technical expertise.
13. Discuss some of the more pertinent problems in pricing industrial goods.
Pricing industrial goods in a foreign market is a problem which domestic manufacturers find
to be shaded oftentimes with political overtones. That is, political rather than economic
reasons may often be the backbone of a country's pricing policy with respect to certain
goods. Such is the case in many of the underdeveloped, yet industrializing, nations. Russia is
able to undercut American prices by as much as 50 percent because of the degree of
government control over industry and the desire to build goodwill in these countries.
Another area where pricing policies led to a problem is that many American manufacturers
insist on payment in cash. Credit terms are often lacking for other countries, especially the
underdeveloped ones. Thus, those manufacturers in competition with American
manufacturers oftentimes have a competitive advantage when they extend more liberal credit
terms to various countries.

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14. What is the price-quality relationship? How does this affect a U.S. firm's comparative
position in world markets?
The price-quality relationship is a factor related to standards of various products a country
will produce. Typically, the higher the quality of a product, the higher the ensuing price. This
relationship oftentimes has an adverse effect on the marketability of American products in
their competitive stand against products of another country. That is, the standards for
American products are too often domestic standards and are not commensurate with the
needs of a foreign country whose standards are not as high as ours. Hence, our high-quality
products are more costly and less needed than lower-quality, lower-priced products.
15. Select several countries each at a different stage of economic development and illustrate how
the stage affects demand for industrial goods.
Library project.
16. England has started the process of shifting from the inch-pound system to the metric system.
What effect do you think this will have on the traditional U.S. reluctance to such a change?
Discuss the economic implications of such a move.
With England's recent indication of changing from the inch-pound system to the metric
system, the American reluctance to such a change will probably be softened to a certain
extent. That is, with pressures from competing countries and the search for new markets for
U.S. products, the inch-pound system is slowly but surely being pushed out of competition
with the metric system. England realized that the demands for products measured by the
metric system in foreign countries is greater than demands for inch-pound measured
products. America, to a large extent, is not following the basic marketing concept; we insist
on making a product and then looking for the market instead of the reverse. Even though
such a change is one of a large scale, American industry will probably have to make it
eventually if it expects to grow by marketing industrial products to foreign countries,
especially since England's move will leave the United States virtually alone with the inchpound system. This should put added force behind those in the United States who have
advocated that the United States shift to the metric system. If the decision is made to adopt a
metric system, the period of changeover will be at least a decade, and the cost will be very
high. In the long run, the United States cannot afford not to convert.
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17. Discuss the importance of international business services to total U.S. export trade. How do
most U.S. service companies become international?
International trade in services is becoming more important in the economies of both the
United States and other countries. It is the fastest growing sector of international trade. It is
estimated that services account for about 1/4 of the value of all international trade. Currently
international trade and services are estimated to be 650 billion dollars compared to $1,870
billion in global merchandise exports. The United States portion of services and merchandise
export is 3540 percent of overall trade. These figures, however, may be underestimated
since such services as advertising, accounting, management, consulting, legal services, most
insurance, and most of the new computer and communications services are omitted from the
balance of payments figures from which the service portion of trade is determined.
Most U.S. service companies' initial entry into the international market is to follow their
American customers to overseas markets. However, as they became established in these
countries, they began to expand their services to local companies. Many firms established
branches and acquired local affiliations to serve both U.S. as well as local clients.

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18. Discuss the international market environment for international business services.
Service firms face most of the same environmental constraints and problems confronting
merchandise traders. Protectionism, controls on transborder data flows, competition, and the
protection trademarks processes and patents are probably the most important problems
confronting multinationals in today's international service market. Protectionism looms
because U.S. business service firms are threatening local companies. Many local companies
have developed as a result of foreign service companies operating in their countries and are
now seeking direct and indirect trade barriers to restrict foreign companies from domestic
business service markets. A study of U.S. service firms reported that ownership restrictions or
prepaid royalties, discriminatory tax policies, and barriers to transborder data flow were the
most frequently encountered barriers to trade.
Restrictions, however, are not generated only by foreign firms. The U.S. government also
creates problems for service firms. The biggest domestic headache is U.S. export controls.
Getting a U.S. export license is the greatest domestic barrier foreign selling services abroad
face. Not only is it time consuming but it is frequently not clear which of the many U.S.
agencies are involved in approving the request. A last issue of importance facing the business
services is protection of property rights. Since most business services can be duplicated with
ease, there is a major problem in protecting services from piracy. In many cases, laws are not
clear and as a result, it is difficult to enforce laws to protect processes, trademarks, etc.

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