Monday, September 30, 2013

Early Indications September 2013: How the Internet is Changing Business-to-Business Marketing

My colleague Ralph Oliva has done a great job running a research center here at Penn State called the Institute for the Study of Business Markets (ISBM). They just celebrated their 30th anniversary, and that milestone promoted me to ask how digital business is reshaping B2B markets. Here are some initial thoughts.

A) Product
Let's start with the product, or more properly, the offer: what customer problem is being solved? The rapid drop in the prices of many sensors, along with nearly universal access to wi-fi, means that B2B providers can instrument a customer's business process and sell "holes rather than drills," as the old saying goes. That is, if I'm a body shop, I don't want to buy sandpaper and abrasives; I want to know that I can prep and paint any car that comes in without delays for out-of-stock supplies. Thus 3M's model, as I understand it, of continuous restocking of the abrasives and masking tape supply closets turns their stuff into a service. Add sensors on nozzles or chemical tanks for remote monitoring, access to product engineers and experts to explain exactly how best to address a new challenge -- or custom-design a fresh solution, testing and certification services, or operator training for Green or Lean or other objectives. The result is that something as mundane as industrial lubricants can become a differentiated offering, as achieved by Castrol Industrial and other providers.

Thus the Internet and related technologies can play a crucial role in "servicization": recall that an Qantas Airbus A380 had its Rolls Royce jet engine fail spectacularly in November 2010. Rolls Royce knew immediately about the issue because the Trent 900 engines are monitored by satellite in real time all over the world. Not long ago, such a capability would sound like science fiction, but with the reality of "thrust by the hour" payment options, engine builders must maintain this kind of close oversight of their assets.

Finally, the Internet's power as an information medium makes it well suited for conveying knowledge. In B2B markets, this is often critical: engineers want to know parameters, plant managers want to know work-arounds, and designers want to know next-generation capabilities. It's been said that information about stuff is more valuable than stuff: if a supplier can differentiate its offer with the kind of supplemental expertise Castrol is providing, the purchasing decision can move from a low-price bake-off to a specified non-competitive contract. The customer goes from buying granules or goo to paying a premium for the knowledge of how to extract unconventional or optimal performance of the now-differentiated commodity.

B) Channel (Place, in marketing-speak)
Here's a revealing experiment: search for a B2B product on Google. See what channels have the product available: it's quite likely eBay and/or Amazon have resellers -- sometimes licensed ones -- offering everything from test equipment to medical devices to raw chemicals to forklifts. This isn't just used goods either: some are new, with unclear warranty backing.

Now repeat the experiment on Baidu, enlisting a Chinese speaker if at all possible.

C) Price
Search costs, in the economic sense of the word, have been dramatically altered by search, in the Google sense. Price transparency is a real issue, whether across national boundaries, across competitors, or across primary (new) versus secondary markets. One response is to bundle products and services, which can defeat transparency in some instances, but the once-secret pricing sheet is now often semi-public information.

D) Promotion
Here we will consider what a company can do to reach potential customers.

The first point worth mentioning here is that Internet marketing cannot replace all the things the marketing team has been doing for decades: thought leadership, sales collateral, conferences and trade shows, even direct mail. Thus there are four related challenges raised by Internet methods:

1) Identifying how marketing supports corporate strategy

2) Identifying profitable areas of Internet action

3) Identifying the points of connection with the previous marketing portfolio.

4) Identifying the right metrics, communicating them to the proper parties, and adjusting action to enhance profitability, market share, or whatever the high-level objective may be.

Companies in B2B often put a premium on innovation because commodity price pressure crashes profit margins. If the objective is to get X% of revenue from products less than Y years old, profitability can be enhanced, but the task becomes to tell the buying public about all the new items in the pipeline, often without the shorthand benefits conferred by a brand.

Other companies in B2B innovate less frequently but at greater scale: WL Gore comes to mind. In these situations, patents and brand can combine to create a high-margin scenario. Steep barriers to entry clarify the marketing objective to focus on product performance.

Still other companies run with ruthless efficiency and can underprice most any competition.

These three types of companies would each require dramatically different marketing strategies. In the real world, markets might not be so clearly sorted out, so aligning marketing effort to larger objectives can be tricky.

Internet marketing
The sheer number of options in this one domain can make priority-setting a complex matter. E-mail, social media, webinars, YouTube videos, search engine marketing, user communities, mobile applications, product configurators and other widgets, knowledge bases, and many other tools can be useful in the right context. Each can also turn out to be an expensive diversion of scarce resources and public goodwill. Devising a fresh portfolio appropriate to a given competitive context, product suite, and customer segment can be extremely challenging.

Integrated marketing  - now with added Internet goodness
As hard as it is to build an effective Internet effort, getting leverage across all the firm's marketing investments challenges lines of authority, budgeting processes, cultural assumptions, and customer habits. In some instances, budget decisions might come down to an either/or: choosing either a local seminar series or a website re-launch. In more promising scenarios, identifying how a Twitter campaign can enhance the trade show presence, or how "chalk talk" videos can drive demand for white papers, or how a mobile app can feed call center volumes can reinvigorate old methods as well as giving the team credibility across demographics.

The number of potential combinations in a grid with the following axes grows very big very fast. In many cases, causation is not immediately apparent: in any given cell, which activity is driving outcomes in the other?

Traditional marketing efforts (an incomplete list)

Public relations
Analyst relations
Editorial connections: obtaining product reviews, for example, or placing guest editorials
Advertising: print, TV, other
Trade promotion (rebates, etc)
Thought leadership
Trade shows
Direct mail
Other marketing events
Sponsored content
Case studies and testimonials
Certifications (LEED, fair trade, organic, cruelty-free, conflict-free, etc)
Call centers
Sales force support (print, gifts, laptop or tablet demos, pitch decks, proposal templates, etc)
Customer events (golf, auto racing, etc)
Professional associations

Internet marketing (also incomplete)

Estimation and configuration tools
Knowledge bases
Search engine optimization
Customer communities
Chat/discussion boards
Mobile apps
Banner ads

That hypothetical grid should make the point: building an integrated marketing plan with Internet activities connected to a coherent portfolio requires thinking digitally, in terms of word of mouth (no longer controlled by brands), in terms of speed, in terms of customer engagement, and in terms of revenue paths.

Knowing how and what to manage becomes more complex in the online era, in part because certain forms of measurement (tweets, clicks, downloads) are so straightforward. Finding true signal, relative to the strategic objectives noted above, amidst the noise is a critical first step - but only that. Communicating evolving measurement systems, and the rationale behind them, to a broadly distributed, demographically diverse population is a true test of both management and leadership.

Thus there's a lot to discuss here. The game, the rules, the players, and the scoreboard are all in a state of flux, but in such times, the advantage goes not to the biggest, but to the most nimble and the fastest learners. Tallying those winners will be the task of a future newsletter.

Sunday, September 01, 2013

Early Indications August 2013: The Bicycle Issue

Whether one looks at professional cycling, commuting, or recreational riding (including mountain biking), these are interesting days for the bicycle industry. While it's not a massive economic sector -- the biggest player is about a 2 billion USD company -- bicycles are one of the few products that are sold essentially everywhere, from the developing world to New York boutiques. As a result of this ubiquity, bicycles can provide some useful insights into contemporary business and economics.

As the Tour de France recently showed, cycling is an international sport with great appeal at the professional level: great riders have come from all over Europe, Russia and nearby nations, the US, and now South America. Much like soccer and unlike American football or basketball, physical stature isn't really an advantage: anyone can take up racing. George Hincapie and Bradley Wiggins are both 6' 3" while the great Greg LeMond raced at about 5' 9". Somewhat counterintuitively, as Lance Armstrong realized, the world championship or an Olympic medal can mean less, commercially anyway, than a TdF title. Riders at the top level can earn superstar money: England's Mark Cavendish, a former world champion and superb sprinter currently ranked 23rd in the world, was worth an estimated $8 million in 2012, while Peter Sagan, a promising young Slovak, is reported by an Italian newspaper to be in the running for a 4 million Euro contract for 2015. Add in endorsements, where the big money is (cycling race purses are tiny), and Armstrong's estimated $125 million net worth becomes plausible.

At the corporate level of racing, Amaury Sport Organization, a family-run company that owns newspapers and produces sporting events including the TdF and the Paris marathon, is estimated to be a $200 million enterprise. As the Armstrong matter showed, governance in the sport can be complex, with national teams, the global cycling body (UCI), sponsors, broadcasters, and ASO all having various motives and stakes in the sport. Move into extreme sports, and ESPN (via its X games) becomes a very different kind of broadcast partner.

On the manufacturing side, there are four major bike makers. The field is dominated by the aptly-named Giant, headquartered in Taiwan, which makes both complete bicycles and frames at all levels, including road, commuter, and mountain models. The other three main players are Cannondale (part of the same Doral conglomerate that makes Cosco child seats and currently owns the Schwinn brand), Specialized out of California, and Wisconsin-based Trek. Other large frame-makers are based in Italy, Germany, Spain, and North America. The vast majority of frames are manufactured in Asia (usually not by the company whose name goes on the bike), though Trek still lays up some carbon-fiber frames in Waterloo, Wisconsin. For a price, riders can get a US Trek, custom painted, and they're gorgeous.

In components (the moving pieces that attach to the frame), Japan's precision manufacturer Shimano has been around the longest and earned $2.6 billion in 2012 revenues; the bicycle business is about three quarters of that while fishing tackle is most of the remainder. The other major player is younger: SRAM was founded by four MBAs in Chicago and continues to be run from a business focus. In 2008, for example, SRAM took $235 million from the former buyout arm of Lehman Brothers, and an IPO has been mentioned of late, but not scheduled. SRAM has grown through acquisition, most notably of the Rock Shox mountain bike component company, and is currently about a $500 million company. In third, size-wise if not by racing heritage, is the Italian firm Campognolo.

At the retail level, bicycle shops are a tough business. In much of he world, there's seasonality. Inventory is expensive, with manufacturers having leverage over mom-and-pop shops that must buy ahead of demand. In the mass market, big retailers like Sears enjoys volume buying power, while in the specialty market, competition can be intense. After 100+ years, genuine innovations are rare, and get copied quickly in most cases. Given the component group oligopoly, sustained radical differentiation in complete bikes is extremely difficult, but branding effects can be significant -- hence the heavy marketing budgets, including racer sponsorships. Not that long ago, Lance Armstrong basically put Trek on the map. Given the carrying costs, the seasonality, and the comparability between rival brands, bike shops must compete on service and high-margin accessories such as clothing, racks, tires, and so on. Here, labor economics enters the picture: lots of bike mechanics love bikes, love riding, and work in part for product discounts. After a time, that can diminish as a motivator, especially as families and mortgages come into play, so employee turnover can be an issue.

No nationwide chain of bike retailers has emerged; instead, several regional chains include Performance Bike out of Chapel Hill (that owns the apparently competing catalog+web business) with 90 stores, BikeStreetUSA's 17 stores in the southeast, and Mike's Bikes' 11 stores in northern California. The economics of local bike shops (LBSs are they're known in the US) are interesting: according to a trade group, the roughly 5,000 LBSs in the US sold 17% of the units but accounted for half the revenue in 2007. Big chains including Wal-Mart and Toys 'R'Us, meanwhile, moved 73% of the units while collecting 36% of revenues. Online retailers are plentiful, and a constant threat to LBSs., based in Salt Lake City, has revenues of roughly $300 million and is part of Liberty Media -- the parent of QVC, the Atlanta Braves, and part owner of Live Nation and other media properties: all told, an $11 billion operation. In 2011, Backcountry bought Competitive Cyclist, with estimated revenues of $30 million in the very high end of the market. Online retailers can offer substantial price discounts, particularly on the high-margin items that keep LBSs afloat.

With any bike but especially for expensive models, fit is particularly personalized. While some manufacturers certify dealers in a particular fitting system, the process is generally time-consuming, whether or not a system is used. In a given frame size and system of angles (not all 54 cm frames are shaped the same way), a fitter can:

*adjust the seat up and down
*move the seat back and forth
*tilt the saddle
*raise and lower the handlebars
*rotate the handlebars
*adjust the placement of brakes and shifters on the handlebar
*bring the handlebars closer in or push them farther out
*select pedals from several different system philosophies
*adjust the cleats bolted to the shoes that clip into the pedals
*choose different crank arm lengths to connect the pedal to the front gear, and
*work on the angle of the foot inside the shoe.

Each adjustment affects most of the others, and no two riders are alike: body weight, body proportions and ratios, leg strength, back tightness, neck flexibility, shoulder range of motion, balance, and desired riding goal all vary, sometimes considerably. From a retail perspective, the process can be a time sink -- but it's a crucial advantage of the LBS over online retailers that have considerably greater buying power. For their part, the online retailers have developed sometimes sophisticated fit calculators, liberal return policies, and libraries of YouTube videos to counteract the local advantage.

Global ridership
The global bicycle market has so many local nuances it's difficult to generalize. One trend is toward off-road cycling in beautiful parts of the developing world as a form of tourism; pedal taxis and farm produce haulers still constitute a major segment worldwide. In China, bicycle use is declining as automobiles gain market share. For our purposes, the more salient development is the rapid rise of bicycle commuting in the US. The numbers are moving off of a small base: Portland, Oregon leads the US with 4.2% of commuters using bikes, but in Copenhagen bicycle commuting is 9 times as popular, at 37%. Chicago has seen bike traffic increase 120% from 2000 to 2009 -- but the former population was only .5% of the commuting public. In New York, more people are riding, but issues related to statistical calculation mean that most people can't agree on the numbers. Among the issues: do you "commute by bicycle" if you ride 3 days a week? What about if you ride to the grocery but not to work? How are people who haul their bike on the bus counted?

Mayor Bloomberg has increased the mileage of bike lanes and encouraged a bike-sharing program, much to some people's dismay and thus one reason for statistical disagreement. (For comparison, New York's public Citi Bike program has 6,000 bikes, while Paris has 14,000, London has 8,000, and San Francisco launches this weekend with 600, helping the total US bike-share fleet double in the past year). The relationship between cyclists and cars can be delicate anywhere, but in a city, tempers are often high. Cyclists are understandably fearful of getting "doored" by a driver who doesn't look; motorists who may be trying to drive carefully grow tired of daredevil cyclists who ignore stop signs, harass pedestrians, and flip a middle finger at people who protest. Similar debates are underway in Chicago, Paris, and elsewhere, where mayors try to increase urban quality of life at the cost of vehicular convenience.

Bike manufacturers and others are attempting to capitalize on the commuter phenomenon. New frame shapes, tires, and seats are aimed at this segment. Gates (the fan belt people) has introduced a belt drive system that eliminates chain ring teeth and chain grease, two enemies of riders wearing work clothes. The challenge is getting the belt inside the rear triangle of the frame; chain links are an ideal solution from that standpoint. For five years Levi's has sold a water-resistant line of jeans that address the needs of this population and must be doing well: they are priced at a premium and hardly ever go on sale. Messenger bags are a staple of many companies' lines, joining the ubiquitous backpack as a default shape.

Social media
Much like runners, serious riders can be highly attuned to workout logs, social rankings, and personal bests. A number of online services address this set of impulses, among them Mapmyride, Fitocracy, and Bikemap. One app that has gained traction is called Strava. It runs on a freemium model: no ads, clean interface, GPS and /or heart rate monitor integration. One feature allows anyone to denote a stretch of road as a "segment," so when riders traverse that stretch with the smartphone app running, their performance is automatically plotted on a leader board. The Premium service allows people to slice the leader boards more finely, facilitating comparisons within age groups and not just overall ranking, which is standard on the free version. Knowing the population, it seems like a safe bet that people are paying up.

Much like the GoPro DV video camera, Strava has unintended side effects among an outdoorsy, adrenaline-driven population. In the process of trying to set speed records on segments, Strava riders have been known to blow through traffic lights and otherwise disregard their surroundings. Just as some ski resorts have contemplated restricting GoPro cameras to try to keep outrageous stunts under control, it seems like a matter of time before law enforcement, park management, or other authors forbid Strava-powered virtual competitions on certain roads or trails.

Where next?
Bicycles are made of many materials: steel, aluminum, titanium, carbon fiber, and hybrids of the above. But all of these materials are relatively expensive: how can entrepreneurs sell more affordable bikes to the poorest, the "bottom of the pyramid"? Many experiments with paper/cardboard have been tried but none have solved the engineering and economic challenges. (See here ). Similarly, air-filled tires have their drawbacks but solid alternatives work only in particular circumstances.

At the infrastructure level, the world's growing population is straining bicycle routes just as it stresses roads, bridges, and airports. Given how many people ride to work in Copenhagen, for instance, where are all the bikes parked safely, in a Nordic climate, either in the morning or at home at night? Will mayors preserve bike lanes or relent to the large numbers of frustrated automobile commuters? Will more workplaces install showers to encourage ridership? (In one office where I worked, a colleague took to drying his riding gear in the public bathroom and that didn't work so well.) The only sure bet is that ridership will continue to change shape; will mix pleasure, fitness, and commuting; and will represent the ultimate expression of efficient human-powered locomotion. Literally and figuratively, no other mode of transportation comes close to the mechanical wonder that is cycling.