Value Creation in Markets

Value Creation in Markets A Critical Area of Focus for Business-to-Business Markets Arun Sharma R. Krishnan Dhruv Grewal The business market has been undergoing a paradigmatic on ways in which business marketers are creating value in the change. The rise of the Internet, market fragmentation, and in- Internet and digital age. Examples from business marketers creasing global competition is changing the “value” that busi- are discussed and managerial implications are highlighted. © ness marketers provide. This paradigmatic transformation re- 2001 Elsevier Science Inc. All rights reserved. quires changes in the way companies are organized to create and deliver value to their customers. Business marketers have INTRODUCTION to continuously increase their contribution to the value chain. If not, value migrates from a given business paradigm (e.g., Scholars have suggested that business markets are go- minicomputers and DEC) to alternate business paradigms ing through an evolution similar to the Industrial Revolu- (e.g., flexibly manufactured PCs and Dell). This article focuses tion. The fundamental methods of doing business are evolving rapidly toward the use of a ubiquitous information platform (Internet). As we move toward an informa- Address correspondence to Arun Sharma, Department of Marketing, University of Miami, P.O. Box 248147, Coral Gables, FL 33124. Tel.: 305- tion era, the business processes and paradigms of the in- 284-5935; fax: 305-284-5326; E-mail: [email protected]. dustrial era will increasingly become obsolete. Growth in Industrial Marketing Management 30, 391–402 (2001) © 2001 Elsevier Science Inc. All rights reserved. 0019-8501/01/$–see front matter 655 Avenue of the Americas, New York, NY 10010 PII S0019-8501(01)00153-5 Enhanced information availability will change the way businesses evaluate the “value.” the industrial era was based on information asymmetry; companies to adopt organizational forms and value mea- one side of the relationship had more information than surement systems that centered on products [1]. the other. In the present era of information ubiquity, both As more firms entered the market, the resulting in- buyers and sellers have increasing information about the crease in product variety rendered mass-market tech- other. Business customers’ power is growing as the ex- niques less effective [1]. This value shift occurred primarily plosion of technology and the globalization of markets in the 1950s when the marketing concept was first recog- effectively increase customers’ choices. This enhanced nized. McKitterick [2], Borch [3] and Keith [4] articu- information availability will change the way in which lated tenets of the marketing concept that were popular- businesses evaluate the “value” that they, their suppliers, ized by Kotler [5], and that were soon widely adopted. and their customers generate. The article examines the This turn took place as business customers realized that impact of environmental changes on value creation in mass production and mass-marketing activities did not business firms by building on earlier research by the lead satisfy their unique (non-mass market) needs. author and his colleagues [1]. With an increasing emphasis on markets, segmentation At this stage in the article it may be interesting to trace was a logical destination for marketers. The earliest ref- “value generation” in business markets. From traditional erences to segmentation were from Smith [6], who sug- small-lot production strategies, the first change in gested a rational and more precise adjustment of products “value” was derived when mass marketing came into and marketing efforts to user requirements through the vogue after World War II. In the post-WW II era, firms use of segmentation. An explicit recognition of several began to have better access to mass production technol- demand schedules resulted, where only one such sched- ogy, better transportation and communication facilities, ule had previously been recognized. In this era, value mi- greater financial resources, and more sophisticated hu- grated from mass-market solutions to segment-based so- man resources management. Consumers and business lutions. Buyers were willing to pay more for “business customers were satisfied with standardized products at solutions” that were developed specifically for their reasonable prices. Value was generated through the effi- needs. This shift in value generation led to a number of ciencies of mass markets and mass marketing. The em- changes in marketing thought and practice. phasis was on products rather than on markets, leading In the organizational context, marketing thought lead- ers developed the concept of “market orientation” [7, 8]. They suggested that organizations should focus on the markets that they serve. In practice, firms organized ARUN SHARMA is Professor of Marketing at the University of around markets and segments (i.e., created segment- Miami, Coral Gables, Florida. based organizations). For example, AT&T divided its R. KRISHNAN is Professor of Marketing at Cal Poly, San Luis marketing department into groups dedicated to household Obispo, CA 93407. and business markets, with subsequent subdivisions DHRUV GREWAL is Toyota Chair of E-Commerce and within each market, while IBM organized itself into “ver- Electronic Business at Babson College, Babson Park, tical” industry-based groups [1]. Massachusetts. At the start of the new millennium, we propose that the availability of the Internet will change the way business 392 Key to value-driven strategy is to move away from traditional functional job roles. marketers generate value. The emphasis will be on one- costs are rising, marketing is not finding new ways to im- to-one marketing with adaptive solutions for each cus- prove marketing efficiency” [10, p. 8]. tomer. In the following section, the article discusses Therefore, established business-to-business firms face an ur- value migration from the perspective of industries and in- gency to combat value migration and to capture value. In the novation. We then present our framework, highlighting following sections we propose a framework for value cre- the marketing activities that enhance value generation by ation and discuss the reasons for the change in customer se- business marketers. Within the context of the framework, lectivity and strategy, as well as investigate how progressive we discuss business customers and the 4Ps. business marketing firms are combating value migration. VALUE MIGRATION THE FRAMEWORK Value migration is an issue that has affected most industries at most times. For example, value migrated from Research shows that the key to value-driven strategy is the small-lot manufacturing of automobiles toward the to move away from traditional functional job roles and to- mass-produced Ford automobiles in the early part of the ward a process model that links the functions in creating century. Similarly, General Motors captured value and value for customers. We propose a framework that con- enhanced their market share in the automobile market by sists of two strategic processes: the management decision providing variety to customers. process and the value creation process. The value creation Slywotzky [9] first highlighted the dramatic implications process has three major sub-processes: technology deliv- of “value migration” for established industries. Value mi- ery process, product delivery process, and customer deliv- gration identifies how firms such as Nicor have captured ery process. Value-based strategies are logical outcomes of growth in revenue, profits, and market value from previ- the value creation process (see Figure 1). Companies ously dominant firms such as US Steel. The shift in markets adopting value-based strategies without proper value cre- is not due to products, but is due to the innovative “business ation process in place are destined for marketplace failure. design” of these new firms that allows them to capture “value.” These firms use superior customer selection, dif- Management Decision Process ferentiated offerings, go to market strategies, and configure To combat value migration (and to create value), busi- resources to capture value in the market space [9]. ness marketers are becoming selective about customers As well, the role of marketing in delivering value is in- and are attempting to serve a smaller group of customers. creasingly under review [1]. Concerns of business- Firms have realized that by becoming customer oriented, to-business firms regarding marketing productivity are they can provide value to a specific group of customers reflected in Webster’s [10] research on CEOs’ views of while optimizing allocation of resources. Companies like the marketing function: Procter & Gamble and Intel have built their businesses “[T]he major issue is one of marketing productivity. Mar- around their business customers (OEM and retailer insti- keting needs a better method of making cost/benefit anal- tutions), as opposed to the end-consumer [11]. For exam- ysis on marketing expenditures—to make good, intelli- ple, Procter & Gamble has reduced the number of busi- gent choices on how to get the most out of our marketing ness customers (distributors) by 80% so that it can better dollars, including marketing support, not just research on serve the needs of its more important customers [1]. The new products, media, et cetera. The concern is that while primary reason for customer selectivity is that business 393 Becoming customer-oriented enables a company

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