The Importance of Market Conditions in B2B Relationships. Per V. Freytag University of Southern Denmark. Eileen Bridges Kent State University

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1 The Importance of Market Conditions in B2B Relationships Per V. Freytag University of Southern Denmark Eileen Bridges Kent State University Track 16 Strategic Marketing Issues Keywords: Strategy, Dynamic, Balance, Relationship Abstract Within economics, strategy, and marketing, much attention has been focused on conditions of competition and on how companies can and should respond situationally. In the present research, we compare market conditions defined by dynamics and balance in the marketplace, highlighting differences and similarities as we search for a coherent picture of the impact that such conditions have on the formation of marketing strategy and B2B relationships. Possible strategies based on the different situations are also described. Drawing on specific concepts, a general constitutive model is outlined. The model proposes possible impacts that different market conditions may have on choice of marketing strategies and of the nature of relationships that tend to develop between firms. We then operationalize our constructs using data describing the actual behavior of 196 small manufacturing companies, and consider whether the proposed relationships between constructs may be supported by the data. 1. Introduction Choice of marketing strategy, including the marketing mix as well as B2B relationship design issues, depends on many factors. Fundamentally, strategy is based on two driving forces the resources and goals of the company and the conditions for competition in the marketplace. Depending on the industries in which they compete and the nature of competitors, suppliers, and customers, companies operate under different market conditions. If competition is very fierce and products are undifferentiated, prices may be low and customers typically react to minor price changes. In other situations, customers may be less concerned with prices and more interested in value-added options that can be obtained with the core product. For firm decision makers, such market conditions are of crucial importance, because it is necessary to adapt to the prevailing rules of the market to some extent. However, each company can choose how closely to follow the existing rules of its marketplace. Prior literature in marketing, strategy, and economics suggests that market conditions, which are primarily exogenous to any given firm, act as a key influence on the firm s competitive strategies. Although the company does not determine its market conditions, it does have the opportunity to react to the conditions it faces by several means. 2. The Problem 2415

2 Day and Wensley (1983) point out that defining marketing strategy involves recognizing an opportunity and finding a way to achieve an economic advantage. The market conditions provide the rules to play by, and thus a company new to the marketplace must learn its rules (Hooley and Saunders 1993). As a way to begin identifying these rules, we consider several questions: What are key factors affecting conditions for competition? In theory, how should companies react to these conditions of competition? How do companies actually react to the conditions of competition? One key marketplace characteristic that influences firm decision-making is the degree of homogeneity or heterogeneity in the marketplace. Markets are said to be more and more fragmented due to increasingly sophisticated customer needs and wants. Buyers are not only more sophisticated, but their preferences are changing more quickly than ever before. This affects product lifetimes and other aspects of competition. Drawing on Wensley (2003) and many others before him (e.g. Robinson 1939), competition depends on both the character of supply and demand and the rate of change in the marketplace. Individual firms may differ in many respects (capabilities, resources, culture, etc.), but if the marketplace is considered in its entirety, the question is, to what extent can a single firm dominate (or be dominated by) its market? In other words, to what extent is one firm able to impose its own rules on the market? Size of the company would therefore appear to be an important determinant. Further, markets can be more or less stable (e.g. Christensen 2003). This rate of change, or degree to which the market is dynamic, may also impact the firm s ability to impose its will on the marketplace. Thus, dynamics may influence the importance of company size in terms of its impact on the market. Porter (1985), writing in the strategy literature, proposed three generic strategies by which companies may use size or differentiation as means for success on the market; these are (1) price, (2) value, and (3) market share. Several authors in marketing have also addressed key factors affecting conditions for competition, including Jackson (1985), Campbell (1985), Christopher, Payne, and Ballantyne (1991), Webster (1992), Juttner and Wehrli (1994), Lambert, Emmelhainz, and Gardner (1996), Olsen and Ellram (1997), Sheth and Sharma (1997) and Wilkinson et al. (2003). Looking closely at this literature, there appears to be a high degree of consensus regarding the nature of competition and best possible reactions in different situations. As Porter notes, the commonality between the different approaches may be that they look at competition as being dependent on offering either price- or value-based differentiation. Drawing on these concepts, a general model is outlined and described in the following. 3. The Importance of Market Conditions Looking more closely at market conditions, let us develop a more detailed description of this initial portion of our model. A large number of factors might be considered as part of the definition of market conditions; for instance, our review of the literature suggests that we could include buyer and seller characteristics such as firm size and abilities, product technology and design, distribution, and style. However, we could choose instead to look at the marketplace from more of a macro-viewpoint, which may help us to achieve focus on the 2416

3 interactions between the players. Doing this, we consider two key marketplace dimensions, which we term dynamics and balance. We define marketplace dynamics in terms of the rates of change of key marketplace phenomena. For example, if products are based on developing technology, there are typically high rates of product entry and exit, consistent with rapid introduction of new and improved products. Thus, innovation and changing technology may be viewed as drivers of a dynamic marketplace. Firm entry and exit rates may also be high, as such an environment is often conducive to entry but may also experience shakeout as the marketplace adjusts following a period of rapid entry. Spending on the marketing mix would be expected to be high, especially for promotional activities related to new products. Employees might be very involved, as many jobs would be interesting, with a high degree of learning occurring. B2B relationships in such a marketplace may also be expected to be dynamic, due to changing marketplace conditions. A static marketplace, on the other hand, is one in which very little change occurs. Products themselves change infrequently, and the lack of growth in the market results in very few entries or exits, of either products or firms. Marketing mix spending would not be high, as there would be no need to build awareness or fuel growth. B2B relationships may not be particularly sought after, but may appear to exist because there is no impetus to change either buying or selling patterns. Employees would not be expected to have a high level of job involvement, as any changes due to their contributions may not be utilized in an unchanging environment. We define marketplace balance in terms of the relative size and strength of buying and supplying firms. If there are considerably more suppliers than buyers, and/or if the suppliers are able to provide more than what is demanded by the buyers, then balance is tipped in favor of the buying firms. If the reverse is true and product is in short supply and/or there are considerably fewer suppliers than buyers, then balance is tipped in favor of the suppliers. Finally, as demand and supply approach equality, the marketplace is more balanced as well as competitive, and buyers and suppliers have similar levels of power in the channel. Thus, balance refers to relative amounts of firm presence on either the buyer or supplier side. However, it should be noted that absolute levels of buying and selling firm presence may also contribute to the degree of competition that occurs. If a greater number of firms and/or products are present, it makes sense that the marketplace would become more complex and that competition would be increasingly value-based to obtain differentiation. Based on this proposal, firms competing in static marketplaces buy/sell products that have become commodities; competition is price-based and value-added innovations do not appear. Switching costs tend to be low, due in part to lack of customization, and if buyers and suppliers are equally present in the marketplace, marketing mix spending tends to occur at a moderate level as switching is encouraged. In dynamic marketplaces, competition tends to be on the basis of value added, as innovation and other change lead to opportunities for customization. Switching costs are high because of the existence of relationships that permit customization, last-minute changes, and other valueadded product features. Due to the need for new product introductions, other innovation, and customer education, marketing mix expenditures tend to be high, and increasing as the absolute levels of buying and selling presence increase. If buying firms have greater marketplace intensity than selling firms, then suppliers do not need to invest as much effort to 2417

4 attract or retain buyers, and marketing mix activity may be reduced and buyers begin to pay more of the product development costs (e.g. installation of data links). Alternatively, if suppliers have greater intensity than buyers, sellers tend to spend more on marketing activities intended to attract or retain valuable customers, including providing technology to facilitate a B2B relationship. 4. Description of Data and Analysis To test the concepts described above, we were able to obtain the results of a recent and extensive survey of 196 small manufacturing companies located in Denmark. By small, we mean that these firms have up to 250 employees, and two-thirds of them have between 10 and 50 employees. Industries represented in the sample include food/beverages, timber, plastics, metals, engineering, electronics, and furniture, among others. Of these industries, the largest group includes 59 firms from iron and other metals. The data were collected by personal interviews; interviewers were from the Technological Information Center, a branch of the Danish Industry Ministry. Survey items were designed by the first author and others from his university. Although not prepared specifically for the present research, many of the survey items appear to be useful in investigating the topics we require, including marketplace dynamics and balance, marketing strategy (marketing mix decisions), and B2B relationship characteristics in the industry. Table 1 provides a list of the items that we utilized in the present study. All were measured on seven-point scales anchored at each end; thus, we presume interval scaling for purposes of data analysis. TABLE 1 SURVEY ITEMS USED IN DATA ANALYSIS Dynamics Price versus value in relationship with suppliers we have a very close relationship with our suppliers we have very little contact; price is the most important factor Price versus value in relationship with outsourcers we have a very close relationship with our outsourcers we have very little contact Trying to adopt new technology matters a lot matters very little Balance Sharing of information with competitors (cooperative) we often share information we seldom share information Noticing and learning from competitors (not cooperative) we analyze our competitors products in detail we take little notice of our competitors activities Insistence on having things done a certain way by suppliers we have very specific requirements we only care about on-time delivery 2418

5 Marketing Strategies Having a marketing planning system in place Having a product development system in place New products introduced in the past two years major introduction small adjustment B2B Relationships Price versus value in relationship with customers we have a very close relationship with our customers we have very little contact The organization is told about customer wants and needs Having a marketing research system in place Having a customer satisfaction system in place Preliminary analysis of these data indicates that our four constructs may be measured with reliabilities adequate for exploratory research. Specifically, we obtain Cronbach α s of for dynamics, for (un)balance in the marketplace, for marketing strategies, and for B2B relationships. Following these results, we tested a structural equation model using SPSS AMOS software. The results indicate that a model may be supported in which dynamics and balance in the marketplace influence marketing strategies, which influence relationship building. However, it is possible to improve upon this result by consider a model in which dynamics impacts balance, which in turn influences marketing strategies and relationships. This makes sense because a more dynamic marketplace might be expected to lead to less balance in the market, due to the rapid entry and exit of technology, among other factors. 5. Results and Conclusions The literatures in marketing, economics, and management have noted that conditions of competition influence firms marketing strategy decisions. Marketing theory in particular has focused attention on how companies might avoid competition through various means of differentiation. The purpose of the present article is to look at how marketplace conditions (from a theoretical point of view) compare to what is actually happening. We define market conditions in terms of the relative presence of buyers and sellers (balance), and in terms of the rate of change in means of competition in the marketplace (dynamics). Based on this view of the market, we deduced propositions describing firm behavior. The propositions could then be compared with the actual behavior of 196 manufacturing companies. 2419

6 In general, our observations appear to confirm the expected company strategies. However, we believe that continued research is necessary to complete the picture, including testing of alternative structural models. Based on what has been completed thus far, we can state that both the relative marketplace presence of buyers and sellers (balance) and the degree of dynamics in the marketplace are good predictors of behavior, including marketing strategies and relationship building. Companies that compete in a balanced marketplace are more likely to form stable relationships than companies competing in an unbalanced marketplace (where pressure from buyers and sellers is asymmetric). Dynamics appear to have direct or indirect influence on balance, marketing strategy decisions, and relationships. As we continue with this line of research, we plan to outline strategies for competitive advantage under various scenarios, and to suggest how competition might develop. 2420

7 References Campbell, N.C.G. (1985), An Interaction Approach to Organizational Buying Behavior, Journal of Business Research, 13, Christensen, P.R. (2003), Sub-Suppliers Grow through Globalization, White Paper for the Danish Foreign Trade Ministry, Kolding: University of Southern Denmark. Christopher, M., A. Payne, and D. Ballantyne (1991), Relationship Marketing Bringing Quality, Customer Service and Marketing Together, Oxford: Buttersworth-Hienemann Ltd. Day, G.S. and R. Wensley (1983), Marketing Theory with a Strategic Orientation, Journal of Marketing, 47 (Fall), Hagg, I. and J. Johanson (1982), Företag i Netverk, Stockholm: Studieforbundet for Naringsliv och Sammhallet. Hooley, G. and J. Saunders (1993), Competitive Positioning: The Key to Market Success, Englewood Cliffs, NJ: Prentice Hall. Jackson, B.B. (1985), Build Customer Relationships That Last, Harvard Business Review, 63 (November/December), Juttner, J. and Wehrli (1994), Relationship Marketing from a Value System Perspective, International Journal of Service Industry Management, 5, Lambert, D., M. Emmelhainz, and J. Gardner (1996), So You Think You Want a Partner, Marketing Management, 5 (2), Olsen, R.F., and L. Ellram (1997), A Portfolio Approach to Supplier Relationships, Industrial Marketing Management, 26, Porter, M.E. (1985), Competitive Advantage, NY: Free Press. Robinson, J. (1939), Økonomisk Politik, København: Lademann. Sheth, J.N. and A. Sharma (1997), Supplier Relationships: Emerging Issues and Challenges, Industrial Marketing Management, 26, Webster, F. (1992), The Changing Role of Marketing in the Corporation, Journal of Marketing, 56 (October), Wensley, R. (2003), The Basics of Marketing Strategy, in M.J. Baker, ed., The Marketing Book, Oxford: Butterworth & Heinemann, Wilkinson, I, P. V. Freytag, L. Young and M.-C. Chery (2003), Business Mating: Who Chooses Whom and Who Gets Chosen?, Lugano: IMP conference. 2421