Chapter 6 - Analyzing Business Markets
I.    Chapter Overview/Objectives/Outline
A. Overview
Business markets consist of individuals and organizations that buy goods for purposes of further production, resale, or redistribution. Businesses (including government and nonprofit organizations) are a market for raw and manufactured materials and parts, installations, accessory equipment, and supplies and services. The variables impacting the business buyer are similar to those of the consumer buyer in some ways but very different in others. In general, the business buyer generally is much more technical, price-oriented, educated for the job, and risk averse than the consumer buyer. In addition, with the business-buying environment, there is more concern for the status and power of potential vendors, and persuasiveness and empathy play relatively lower roles. 
The industrial market buys goods and services for the purpose of increasing sales, cutting costs, or meeting social and legal requirements. Compared with the consumer market, the industrial market consists of: fewer buyers, larger buyers, close supplier/customer relationships, geographically concentrated buyers, derived demand that is relatively inelastic and fluctuating, professional purchasing with several more buying influences involved, direct purchasing, reciprocity, and leasing. Industrial buyers make decisions that vary with the buying situation or buyclass. Buyclasses comprise three types: straight rebuys, modified rebuys, and new tasks. The decision-making unit of a buying organization, the buying center, consists of persons who play any of seven roles: initiators, users, influencers, deciders, approvers, buyers, and gatekeepers.
The industrial marketer needs to know: Who are the major participants? In what decisions do they exercise influence? What is their relative degree of influence? In addition, what evaluation criteria does each decision participant use? The industrial marketer also needs to understand the major environmental, organizational, interpersonal, and individual influences operating in the buying process. The buying process itself consists of eight stages called buy phases: problem recognition, general need description, product specification, supplier search, proposal solicitation, supplier selection, order-routine specification, and performance review. As industrial buyers become more sophisticated, industrial marketers must upgrade their marketing capabilities.
The institutional and government market shares many practices with the business market and has some additional characteristics. Institutional buyers are less concerned with profit than with other considerations when they define the products and services to buy for the people under their care. Government buyers tend to require many forms and favor open bidding and their own nationals when they choose their suppliers. Suppliers must be prepared to adapt their offers to the special needs and procedures found in institutional and government markets.
 
B. Learning Objectives
• Understand what a business market is and how it differs from the consumer market.
• Evaluate organization buying situations.
• Identify participants in the business-to-business buying process and how buying decisions are made.
• Discover how companies can build strong relationships with business customers
C. Chapter Outline
I. Introduction – Review Oracle example
II. What Is Organizational Buying?
A. The business market versus the consumer market:
1. Fewer buyers, larger buyers, close supplier-customer relationships, geographically concentrated buyers, derived demand, and inelastic demand. (refer to Table 6.1 for a list of the characteristics of business markets)
2. In addition: fluctuating demand, professional purchasing, multiple buying influences, direct purchasing, reciprocity, and leasing
3. Business markets are similar to consumer markets in that they both attempt to produce value for their customers.
4. Key challenges include:
a) Identifying new opportunities for organic growth
b) Improving value management techniques
c) Develop metrics for measuring marketing performance and accountability
B. Institutional and Government Markets
1. The institutional market
a) Institutions tend to have low budgets and captive clienteles 
b) Firms that serve this market have developed unique operations to serve this market
c) Objective is not profit
d) Examples: schools, hospitals, nursing homes.
2. The government market - a major buyer of goods and services 
a) Decision to purchase usually based on cost 
b) Excessive paperwork, but Internet-based changes bringing reform
C. Buying situations 
1. Straight re-buy (reorder on a routine basis)
2. Modified re-buy (product specs, prices, delivery requirements, or other terms may be modified)
3. New task (a purchaser buys a product or service for the first time with major sub-decisions involved in the buying decision)
4. Because of complicated selling requirements, some organizations utilize a “missionary sales force” which is made up of their most effective salespeople
D. Systems buying and selling
1. Systems Buying - Purchasers buy a total solution to their problem from one supplier. Effectively provides a turnkey solution
2. Prime Contractors, usually hired by government, are responsible for bidding out and assembling system’s subcomponents from second tier contractors.
3. Systems selling
a) Systems contracting single supplier provides buyer with its entire requirement of MRO (Maintenance, Repair and Operating)
b)  Key to building large scale industrial products

III. Participants in the Buying Process

A. Purchasing agents usually influential in straight-rebuy and modified re-buy while new tasks include other personnel from respective disciplines with knowledge required to make purchase decision
B. The buying center
Buying center includes initiators, users, influencers, deciders, approvers, buyers, and gatekeepers
C. Buying Center Influences
1. Important to know the major decision players and their motivations and operations
2. Business function may dictate priority, finance person concerned about ROI, while engineer concerned about quality
3. Organizations are made up of people. People have personal biases, job perceptions, and preferences, which are influenced by their own age, income, education, job position, personality, attitudes toward risk, and culture
D. Targeting Firms and Buying Centers
1. Marketers must determine:
a. Who are the major participants?
b. What decisions do they influence?
c. What is their level of influence?
d. What evaluation criteria do they use?
2. Regarding the effort of targeting segments, business customers usually fall into one of several categories:
a. Price orientated
b. Solution orientated
c. Gold standard
d. Strategic value
3. Small sellers concentrate on reaching the key influencers
4. Larger sellers go for multilevel-in-depth selling to reach as many participants as possible
IV. Stages in the Business Buying Process
         Business buying passes through eight stages called “buyphases”as identified by
         Johnson and associates in the “buygrid” framework shown in Table 6.2. These
         phases can be compressed or bypassed depending on the specific situation
A. Problem Recognition (stage can be triggered by internal or external stimuli)
1. Internally, most common triggers are need for new equipment or inputs to develop new product, mechanical or system flow breakdowns requiring new parts or solution, poor product quality, cost reduction efforts
2. Externally, new ideas precipitated in industry, potential new supplier defines opportunities to reduce cost or purchase better product 
B. General Need Description and Product Specification
1.    Determine general characteristics and quantity
2.    Organization takes on an advisory role with complex solutions
3. Product value analysis (PVA): cost reduction approach to determine products can be redesigned, standardized, or made with a cheaper production method
4. PVA is also used to help organizations win business
C. Supplier search (refer to table 6.3 for examples of electronic marketplaces for businesses)
1.   Suppliers can use a variety of ways to find suppliers
a. Vertical hubs focus on industries
b. Functional hubs focus on specific functions
c. Other sources are trade directories, contacts, trade advertisements, trade shows
2.   Suppliers need to make themselves visible
d. Get listed in major online catalogs or services, communicate with buyers, build good reputation in marketplace, exposure to agents
e. Develop knowledgeable sales force
D. Proposal solicitation
1.   Buyers may invite suppliers to submit proposals. Proposals may be simple or complex
2.   Suppliers must be efficient and skilled in writing, submitting, and presenting proposals
E. Supplier selection – Buyer identifies key attributes and rates each supplier on these attributes. Researchers found eight different Customer Value Assessment (CVA) methods
1.  Developing a Compelling Value Proposition
             a. Learn more about the customer by conducting formal
                 research methods
             b. Specify the customer value proposition
             c.  Implement value proposition supported by respective
                  employee training and rewards.
2. Overcoming Price Pressures
             a.  Need to differentiate from the competition in order to
                  counter buyer’s request for lower price
             b.  Lower price but set conditions, i.e. reducing value.
3.  Determine How Many suppliers to Use
4.  Buyers need to determine number of suppliers to be used. Trend
      is for less  or single-source suppliers
F. Order-routine specification
1.  With MRO items, trend is to use blanket contracts also called
      stockless purchase plans and automatic replenishment, which
      tends  toward using single supplier. This environment also raises
      entry barriers for new suppliers
2. There are trends to more vendor-managed inventory systems.
    Suppliers have access to buyer inventory levels and have
    responsibility for continuous replenishment programs
G.  Performance review (three common methods)
1.  Buyers solicit internal users of supplier evaluation
2.  Buyers rate supplier via weighted core method
3. Buyers aggregate the cost of poor supplier performance to determine adjusted costs of purchase, including price 
                     
V. Managing Business-to-Business Customer Relationships
A.     The Benefits of Vertical Coordination (refer to “Marketing Insight: establishing
    Corporate Trust, Credibility, and Reputation”
  1. Basic Buying and Selling – single routine exchanges with moderate levels of
      cooperation and information exchange
  2.  Bare Bones – Require more adaption by the seller and less cooperation and
     information exchange
3.  Contractual Transaction – Exchanges defined by formal contract and
     generally have low levels of trust, cooperation and interaction.
4. Cooperative Systems – Partners ar eunited in operational ways, but neither
    demonstrates structural commitment through legal means or adaption. 
5.  Collaborative – Trust and commitment lead to true partenrship
6.  Mutually Adaptive – Buyers and sellers make many relationship-specific
     adaptations, but without necessarily achieving strong trust or cooperation..
7.  Customer is King – Seller adapts to meet the customer’s needs without
     expecting much adaption or change in exchange.
B. Business relationships: Risks and Opportunism
1.   Vertical coordination can facilitate stronger buyer-seller ties but
      may increase risks for specific investments by both parties
a.       Specific investments are those expenditures tailored to a
          particular company and value chain partner and can consist
          of investments in company-specific training, equipment
          and operating procedures or systems
b.       Specific investments entail risk to both parties:
          investments are sunk and lock parties into the relationship,
          sensitive information may be exchanged, presence of
           switching costs
2.   Opportunism
a.     Opportunism can be thought of as “some form of cheating
        or undersupply relative to an implicit or explicit contract.” It
         is a concern due to the opportunity cost of assigning
         resources for control purposes rather than other productive
         purposes
VI. Executive Summary 

II.  Lecture
 “Business Marketing in a Changing Global Environment”
This discussion focuses on some of the day-to-day considerations the business marketer faces in organizing and operating in the increasingly complex business-to-business marketing setting. Students may have difficulty identifying with the business marketing process since few have had any direct connection with the process. For this reason, the discussion focuses more on some of the rules or guidelines and allows the instructor an opportunity to add various current examples.
The discussion begins with an overview of the changes in the business-marketing environment and then moves through some of the most important rules for the business marketer. It concludes with a discussion of the implications of some of these concepts in industry.
Teaching Objectives
• To stimulate students to think about the critical issues in business marketing.
• To consider how to proceed with the considerations and strategies related to business marketing.
• To discuss some specific approaches to help the marketer more effectively meet his or her business-to-business marketing objectives.
Discussion
INTRODUCTION
In this era of fast-paced marketing change, mistakes can be and frequently are fatal for the unwary or lackadaisical. This is especially true in the business-marketing arena. In fact, some of the “Must” items can turn into “Never!” depending on the industry, product, service, offer, and positioning in the marketplace.
There are as many or more variables in business marketing than in consumer marketing.  Everything depends on the way the product or service is distributed and sold, the seasonality of demand for the product, the length of time that it takes to sell the product, whether the product is sold directly through the mail or leads are created for the sales force, the details of the offer, credit availability, size of the order, and much more.
RULES OF BUSINESS-TO-BUSINESS MARKETING
The first rule is that the business marketer has to invest considerable time and effort to prepare to deal with customers in the business-to-business marketplace. Within the “B-to-B” arena, it is essential to know what is going on with all the significant players in the industry. It is a well-known rule that professionals ask around in the industry. They take advantage of various business-to-business direct-marketing programs by examining every piece of direct mail received. 
Another rule is that if you are likely to be the other firm’s customer, they could be your customer as well. Professional buyers check into all the likely, and unlikely, industry periodicals they can think of. One often finds a competitor has just begun, or just been eliminated, and there is some new sales program worth checking. We can learn from the successes and mistakes.
A good and efficient rule is to check out public information about parallel businesses that have the same or similar customer base but are not competitors. For example, both bath soap and corn flakes are sold to supermarkets across the country, but they are not competitors for the same dollar. What do they have in common? Which bath soap ideas can be used to sell more corn flakes? It is likely that there will be selling parallels that can be carried from industry to industry.
An old adage in business marketing holds that typically about 40 percent of business-to-business direct marketing results will come from the firm’s choice of database or list. Sadly, it is often the case that the amount of time, thought, and energy put into the selection of the list for a direct-marketing effort is far less than 40 percent, and the campaign suffers for it.
 
OTHER CONSIDERATIONS
The next 40 percent of the results will be determined by the offer. Business marketers must consider what they are trading with the audience in exchange for their time, commitment, money, or attention. There are many variables such as credit, delivery, bulk pricing, and other similar arrangements. Overall, the primary variable is the degree to which the potential supplier firm is able to differentiate itself and make dealing with the potential customer firm special and better than dealing with any other option.
The remaining 20 percent of the results are determined by the “creative” copy, art direction, headlines, and the overall appearance of the marketing/advertising effort to create a positive attitude with the client/customer about the supplier’s products. However, this is not the only variable, because the best creative in the world is useless if it is not seen by the right people or does not include an offer that provides visible value for the customer.
As in the consumer market, if the business marketer is not really tuned into the business customer, there will be problems. Unless the supplier firm’s products or services are perceived as completely new, the supplier’s sales and marketing staff will have some historical perspective on who buys those products. It is not enough to know that “50 percent of the sales come from SIC (Standard Industrial Classification) code 12345, 30 percent from SIC 98765, and the last 20 percent from a mix of automotive mechanics and university professors.” Rather, it is better to look at the people in the industry as individuals, understand their past buying patterns, their requirements, etc.
The business purchasing process usually has more players involved than the typical consumer purchase effort. The user very often only recommends but does not specify; the user’s supervisor also can recommend and sometimes can specify. Above these strata is the level that specifies; these are the people who control the budget and make approvals. Finally, there is the purchasing agent. Every one of these people has a name, a title, a role, a turf to protect, employees to serve, bosses to manage, quotas to meet, budgets to beat, and a thousand other headaches as well.
It is now widely recognized that the best place to invest marketing and sales efforts is in the current customer base, recalling that it is much harder to gain a new customer than to make an existing customer more satisfied. One way to wed customers to a company and its products or services is to show them that they are so important that the supplier firm takes the trouble to learn as much as possible about the customer firm. Every business marketer should start by knowing names, companies and products, as well as critical buying concerns.
It is useful to keep in mind that the more the business marketer knows about his or her customers at this moment, the better he or she can decide which lists and databases to use when prospecting for new clients. Unless the marketer and company change the product and service mix considerably, future customers are likely to be like the current customers.
A response file is a database of individuals in companies who have responded to a business-to-business direct-marketing message. A list of people in the commercial refrigeration business who accepted an offer for a free book on “Developments in Commercial Refrigeration” would be an example of a response file.
The alternative is a “compiled” file: a database that has been constructed from researched information. For example, a list of purchasing agents, vice presidents of purchasing, and purchasing executives in the umbrella industry compiled from membership rosters in various umbrella and purchasing industry organizations would be a compiled file. There may be a tremendous amount of overlap between a response file and a compiled file.
Why is one type of “file” preferable to the other? The answer is that there is one thing we know for sure about the people in the response file: they have shown that they respond to direct marketing. Individuals on a compiled database may or may not be responder material. Using a response list helps the business marketer to stack the deck in her or his favor.
Other ways of stacking the deck include testing for affiliations and other objective correlatives that mean they are the kind of people you want to hear your business-to-business message. Look for people who attended industry conventions and read industry publications. Among buying professionals these are key contact points.
Up until 1997, the business marketer could use SIC codes to segment the business market. If an organization’s product is used to move liquids from one place to another on dairy farms, then the SIC code is 0241. Anther possible SIC is 2033, Canned Fruits and Vegetables Manufacturing, or SIC 2061, Cane Syrup, Made from Sugar Cane; or even SIC 2013, Canned Meats. All of these options could provide additional business that might use the equipment. Then the marketer could seek out lists of other food or cosmetics producers to see if there is a reasonable fit with the product. As businesses began outsourcing or moving part or all of their operations across borders in North Amercia, it became increasingly difficult to identify which business an organization was in and where they were located. A new business coding methodology, the North American Industrial Classification System (NAICS), was put in place in 1997, when the North American Free Trade Agreement (NAFTA) went into effect. NAICS uses a six-digit coding scheme. The first five digits are standard across North America. The last, sixth digit, is country specific.
Business marketers also improve marketing operations and success by approaching others in the potential customer company. They talk to sales people, staff engineers, etc., to identify the sales process at the customer firm: who to talk to, titles, how long it takes to get an appointment, how many visits over how many months it takes to make a sale, and who the players are in a company, by title, and by function. Organizations are increasingly reliant on software systems to maintain their competitive position in the sales environment. Systems provided by companies such as salesforce.com and Seibel are a critical component of an organization’s competitive toolkit. Real-time access to information on a customer or prospect is almost the norm.
Another approach is to ask company sales people for the names, titles, and addresses of 50 individuals they want to sell to but who are buying from the competition; then market to their hit list.
It also pays to identify the “worst” customers, too. The comparison can be useful in designing a program to migrate the “worst” customers into a better category. A customer who provides a large amount of revenue usually demands more from their business partner and thus may be less profitable especially when opportunity costs are included in the profitability assessment.
Achieving and measuring results is very important in business marketing. An ad for a retail store in the local newspaper can be measured by the number of cars in the parking lot and the amount of cash in the cash register the following morning. It can take a lot longer to fine-tune business-to-business marketing activities into a moneymaking machine.
The buying environment has become more challenging as organizations leverage technology in support of the buying process. Reverse auctions have to a certain extent commoditized some products and services. Marketing databases have become an increasingly important asset as organizations can leverage all relevant data surrounding their relationships with businesses. The request for information (RFI) and the request for proposal (RFP) are now all mechanized, and the speed of creation and dissemination puts more time pressure on potential suppliers. Conversely, technology can also be leveraged in the creation of responses to these vehicles. The end result is that the buying environment is becoming more dynamic and organizations must invest and optimally use these technology enablers.

III.  Background Article(s) 
Issue: Developing B to B Campaigns 
Source: “Constructing B-to-B Campaigns,” BtoB, April 16, 2001, p. 20.

Solid marketing fundamentals are most important component in building B-to-B campaigns 10 lessons that B-to-B marketers should follow when building ad campaigns are provided includes being clear about the campaign’s objective.
If there is one thing marketers have learned in the past year, it is that nothing replaces solid marketing fundamentals when it comes to constructing B-to-B campaigns.
During the go-go advertising craze in 1999 and early 2000, driven largely by dot-coms looking to drive up their IPO stock prices, marketers spent with an almost reckless abandon. Many neglected their core audience in favor of wide-appeal TV campaigns that would capture interest on Wall Street, while others quickly wore out the novelty of Web banner ads and saw the return on their Internet investments plummet.
Now, in the slow economy, where every ad dollar must be justified, marketers are going back to the principles on which all effective ad campaigns are built.
In talking with a variety of advertisers and agencies for this special report, BtoB identified 10 valuable lessons that B-to-B marketers should follow when constructing ad campaigns:
1. Be clear about your campaign’s objective. Everything during the development of the campaign, from positioning strategy to media placement, should be designed to meet that objective.
“Internally, as a client, you need to be certain about exactly what you want to do, then you need to evangelize the hell out of it,” said the director of worldwide brand management at Seagate Technology Inc.
When developing an integrated campaign for its Barracuda ATA III disk drive, Seagate brought together its product marketing, channel marketing, and branding teams to agree on positioning even before the agencies got involved.
“If the client isn’t sure of what he wants to say, the agencies aren’t going to say it right.”
2. Communicate openly about everything with your agency. In working with outsourced experts, communicate regularly on everything from brand positioning to copy used in creative development. If multiple agencies are involved, the advertiser should have a lead contact person to handle all communication.
“It’s got to start with straight talk with the agency,” said the VP-worldwide marketing, IBM Software Group.
“It’s important to leverage the creative juices of the agency with the business discipline of the advertiser, and together drive those synergies to establish a world-class campaign,” he said.
3. Identify the core influencers. When IBM Corp. was developing its “Codernaut” software campaign, it did extensive research with its agency OgilvyOne to identify the core influences for middleware software. After it learned that these users spend a great deal of time online, IBM doubled its ad budget for Web spending.
4. Use integrated media when possible. An integrated approach usually yields higher results than a single medium, such as TV, print, direct mail, e-mail, or online, particularly if the campaign has multiple objectives.
5. Test the product positioning and creative concept with the target audience. Use focus groups, teleconferencing, online research, and other market research.
When Emerson Electric Co.’s Micro Motion Inc. launched its new R-Series flowmeter, which was the introduction of its first low-cost measuring device, it conducted focus groups with its audience of manufacturing equipment buyers to make sure the positioning was well received.
“To answer the question, ‘How will we build awareness quickly?’ we went straight to the people we were going to sell to,” said the manager of global marketing communications at Micro Motion.
6. Use creative that will stand out with relevant messages. Balance intrusion with information. This is especially important for hard-to-reach target audiences.
When developing the online ads for Seagate’s Barracuda ATA III campaign, Lot21 Interactive Advertising Group Inc. used larger pop-up ads that contained a lot of product information, because the value-added reseller audience tends to respond less to online ads, according to the director of media services at Lot21.
7. Follow up on direct campaigns. It is vital to contact the recipient through telemarketing, sales calls and other sales efforts. The more contact with the target, the better, as long as there is permission given, such as a response to a direct mail or e-mail.
For the direct mail component of its R-Series campaign, which was supported by print, Micro Motion established three points of contact with prospects, including the targeted direct mailing, a follow-up telemarketing call to those who responded, then a sales call if the lead was “hot.” With these efforts, it achieved a 1,477 percent return on investment.
8. Build in metrics to measure the results. If it’s a branding campaign, determine the timeline and measurement system to gauge movement in perceptions and attitudes about the brand and how that may lead to more sales. If it’s a direct response campaign, build in a link to follow, such as leads generated from direct mail or traffic driven to a unique URL from a print campaign.
IBM has a monthly monitoring cycle for all of its campaigns, during which time its market intelligence team contacts tens of thousands of prospects about the effectiveness of its advertising.
9. Don’t be afraid to make changes midstream. This includes pulling ads that are offensive to the audience and changing copy and creative when possible.
Particularly for online executions, offers can be adjusted to take advantage of changing variables such as pricing or inventory levels.
10. Take what you learn from one campaign and build on it. Just because one campaign worked for a specific objective does not mean it will work the next time around. Seagate learned that its VAR audience responded well to the larger online ad units, driving six to seven times the average traffic to its reseller’s site. So, in a campaign launched this month for its Barracuda 180 drive, Seagate is building on its online ads developed by Lot21, including an online product demo in a pop-up ad.
The bottom line of all this? Advertising is a constantly moving target, and campaigns need to reflect that. There’s nothing wrong with trying new techniques, but to forget the fundamentals is just plain foolish.
 IV.  Case 
Arrow Electronics
           HBS Case:  598-022     TN:  500-111   

Teaching Perspectives
The Arrow/Schweber division of Arrow Electronics, a distributor of semiconductors and other electronics components, must decide whether to sign onto Express Parts’ new Internet broker service. This is the largest division of Arrow Electronics, and the President and CEO of Arrow Electronics wants Arrow to keep its margins above 15 percent so that the parent corporation can continue to meet its financial goals.
The case deals with the issue of cross selling and managing a portfolio of products and services in business markets. Management must decide whether to pursue an opportunity to sell its products through a new ecommerce site, which could threaten the viability of its overall business model.
Due to the structure of manufacturers’ incentives, Arrow/Schweber has developed a selling strategy of subsidizing its value added services to ensure margins obtained from book and ship commodity product (B&S) sales. The Express proposal presents an opportunity to sell commodity products through a new electronic bidding site. It appears that this new channel has the potential to attract incremental sales to new customers that Arrow had never served. However, there is the risk that the new channel can break down Arrow’s current business model by siphoning out the lucrative high margin product sales.
The division president must decide how to respond to these challenges. In the case, students assess how a seller needs to manage a portfolio of products while managing customer relationships, and how the firm needs to change its customer management model in response to changes in the environment.
The case provides an avenue for discussing the role of electronic commerce in a business-marketing firm’s channel strategy. The electronics industry has become accustomed to doing business in a highly structured way, with a careful balance of power between manufacturer and distributor. The emergence of the Internet presents a challenge to Arrow’s value proposition since it is a traditional distributor. Arrow has to decide on how it wants to respond to the Internet-based e¬-commerce.
This case also deals with the issue of cross selling and managing a portfolio of products and services offered to customers ranging from transactional customers to relationship customers.  The firm supplies customers in both market segments with commodity products, and with “value added” (VA) products that include services such as programming, field application engineering, etc.  Arrow earns significantly lower margins on its specialty products than on its commodity products. Its suppliers, electronic chip manufacturers, have systems to protect prices in the marketplace. Assured that the margins on the chips will be protected, Arrow literally gives away its specialized value-added engineering and programming services in return for customer commitments to purchase chips. Arrow is thus able to make a reasonable return on the product and service bundle. The Express Parts Internet brokerage service option threatens to undermine this cross-subsidization model by siphoning the high-margin, commodity product sales from relationship purchasing into a competitive Internet-based auction channel.
The case also highlights a variety of innovative channel design issues. Through an ingenuous approach of offering distributors discounts based on the quality of information provided by the distributor, suppliers are able to access critical customer-level information despite using an indirect channel of distribution. Further, they can maintain price levels in the marketplace while employing multiple distributors in the same market.
Questions:
1. What does Arrow sell to whom, and where does it make money?
2. How do the Arrow/Schweber (Arrow) salespeople build their relationship with their customers? Specifically, how do they leverage Arrow’s product line B&S versus VA products to add value to their customers?
3. What is Arrow’s business model? What value does it add for its suppliers? What value does it provide its customers?
4. How does Express affect Arrow’s business model and its selling effort? Will Arrow be able to keep its margins above 15% - the objective?
5. Do you think the Internet is a friend or a foe to Arrow? In what ways can Arrow leverage the Internet to facilitate its sales effort?

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