McKinsey Marketing

Thomas Baumgartner
Alex Bhrer
Philipp Kobus
Hajo Riesenbeck
Hermann Ude
Felix Weber
McKinsey & Company, Inc.
Business-to-Business Marketing
Business-to-Business
Marketing:
a cornerstone of
profitable growth

Dsseldorf
1st edition 1998
2nd edition 2000
Printed by Frhlich Druck AG, Zollikon

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Contents
Prologue
Strategy: Setting the stage
Understanding customers and market
Pinpointing the right segments and customers
13
Defining a distinctive value proposition
18
Operations: Putting the system in place

Standardized product businesses:
25
27
learning from consumer goods

System businesses:
37
profiting from integrated solutions over the whole lifecycle

Project-based businesses:
46
providing economic value to the customer
Organization: Capturing the opportunities 55

Building an attractive platform
57
Executing a well-orchestrated set of initiatives
59
Ensuring implementation and adjusting the organization
62
Confidentiality
We invariably treat information about our clients as confidential. To
make the case for business-to-business marketing come alive without
compromising this confidentiality, we have only mentioned by name a
number of companies that are acknowledged marketing all-stars or talented specialists in a particular area. Their success stories, drawn from
public sources, are supplemented by further disguised examples from
our consulting work.
Foreword
In most industrial companies, marketing used to be a lower-level management job. Often it was synonymous with supporting the sales force;
sometimes it was associated with creative advertising. Most companies
were centred on engineering and on offering a wide range of standardized and/or technically advanced products.
Those days are ending. More and more managers are realizing
that developing and selling are not enough. Knowing how to position,
value, price, and brand your product or service is now the key factor
for success. Companies that very early on adopted a systematic marketing orientation based on a good understanding of these fundamentals
have gained share and outperformed competitors.
Their success has generated intense interest in business-to-business marketing or B-to-B for short. It is a vast arena. Last year, more
than 20 million businesses around the world sold more than $20 trillion dollars of products and services to other businesses. As one of my
American colleagues put it: It is BHP Steel selling processed metals to
Motorola; Motorola using that metal to make semiconductors, which
are sold to Arrow Electronics. Arrow Electronics reselling those same
semiconductors to IBM. IBM using the semiconductors to build mainframe computers, which in turn are sold to Boeing. Boeing using its
mainframes to build airplanes, which are sold to GE Capital. GE Capital leasing those airplanes to Delta Air Lines, which then uses those
planes to provide special charter flights for Coca-Colas annual meeting of bottlers.
Of course, B-to-B marketing is never this linear. The market is
really a multiplicity of user communities; the customer is a multiplicity of decision-makers. Suppliers who already have strong marketing processes naturally have an advantage.
With this brochure we would like to summarize the great benefits

of developing a superior marketing orientation, the levers that can be
used to do this, some examples of successful practical approaches from
companies in various types of businesses, and a roadmap for doing it,
using consultant support to accelerate the process.
On behalf of the authors, I would like to thank the clients and
colleagues who generously shared their views with us. My special thanks
go to Terry Gilman, whose great dedication and skilful editing have
enabled a diverse team of authors to produce a readable whole, and to
Charles Whitehouse for his invaluable contribution to design and production.
In my own experience, the focus on delivering value to the customer that is at the heart of marketing makes it an infinitely fascinating
and satisfying field of professional activity. I hope we have managed to
convey our enthusiasm.
Hajo Riesenbeck
Director
Prologue
Prologue
As an introduction to excellent business-to-business marketing, here

are some brief answers to the five key questions on the back cover:
Why learn to sell your customers products to their customers?
Because the industrial companies that grow profitably are the ones
that focus obsessively on their customers business needs. They put
themselves in their customers shoes and think about how to satisfy
their customers. This helps them to identify the main points of leverage
to improve customers performance in the marketplace a source of
hard-to-copy ideas for even better products and services.
Why have a list of customers you dont want to serve? Because all
customers are not created equal. Even the best understanding of customer conduct is no guarantee that a particular account will be profitable. But if your basic market segmentation reflects customer needs
and attractive earnings potential, a hard look at individual accounts
will make plain where to focus your energy and adjust your offering.
And for great growth, excellent marketers know that Its better to own
80% of one customer segment than 10% of the market.
Why go all-out to convince customers that your offering is distinctive? Because you can only own a segment if customers believe there
is no substitute for your product offering. Rapid short-term growth can
be achieved by developing a value proposition that, in customers eyes,
offers benefits they cannot get elsewhere. It is often enough to have a
profile just 510% better than your competitors in carefully selected
areas. But the higher the real or perceived price-value positioning, the
Prologue
harder it is for competitors to copy. It also deflects competitive attacks

based solely on savings from restructuring.
Why worry if customers pay a competitor more for products with
fewer technical features than yours? Because they are building a relationship you may never be able to penetrate. Instead of just relying on
the technical advantages of a product to attract and retain customers,
top competitors like SAP, Federal Express, Intel, Cummins Engines,
and Gore-Tex have also actively invested in branding the value. They
have forged a link between their names and customer satisfaction, laying the basis for lasting customer relationships.
Why figure out how much you could earn by giving customers your
equipment for free? Because knowing all the numbers gives you an
edge. We are not advocating selling below cost, but understanding the
entire lifecycle of the customers investment. System suppliers like Otis
and Tetra Pak are professionals at this. They have grown by thinking
through the total profit stream that can be generated over the useful
life of the initial investment, whether an elevator or a packaging line.
Their bundled product and pricing solutions for equipment plus
services, spare parts, software, and supplies are being emulated by more
and more industrial companies. The lifecycle perspective points the
way out of the commoditization trap of pure price competition and
eroding profit margins. It also suggests new strategies for teaming up
with suppliers and customers to create more value.
Why ask yourself questions like these? Because they go to the core
of marketing strategy. Coming up with explicit answers here will help
your company or business unit to identify the two or three activities
that really drive profitable growth, and then to perform them excellently, day by day.
Prologue
Marketing makes the difference

Our studies in the international electronics, machinery, and components manufacturing industries confirm that what distinguishes the top
companies is not better restructuring skills. What makes the difference
is a much greater aptitude for high growth combined with great marketing skills. Figures 1 and 2 quantify the impact of the way successful
companies use growth levers to expand and increase their revenue.
Of the two main ways to expand, strategic growth meaning product innovation, mergers and acquisitions, and expansion into emerging
markets poses major investment, time-lag, and culture clash problems. By contrast, operational growthaccelerated by outstanding business-to-business marketing and sales skills is usually a more costeffective choice. And, because it involves an evolutionary build-up, it is
a more reliable way to create a sustainable competitive advantage. Each
step up the growth staircase captures opportunity, builds capability,
and creates new options for the next step.
Putting marketing to work

This brochure offers a sample of the best practices we have observed
for developing excellent insights into customer needs, adjusting your
marketing approach and tools to the nature of the business, and positioning your company or brand name as superior to that of your competitors.
Our observations are grouped around the main strategic, operational, and organizational tasks involved in pursuing excellent marketing:
Chapter 1 Setting the stage discusses how to set the strategic
direction understanding your customers and market, developing a
good segmentation, and defining a distinctive value proposition. The
Prologue
Restructuring and growth by successful companies

Percent
55
136
35
100
5
89
11
113
14
ROS
+11%
ROS
+17%
Sales
Cost
Outset
Restruc- Price
turing
erosion
levers
Volume Growth
loss from levers*
existing
products
Cost due Cost

Sales
to addit2 years later
ional
volume
Main source of difference
between successful and
less successful companies
Figure 1
* New products, new customers, new regions

Source: McKinsey Excellence in Electronics survey
Figure 2
Restructuring and growth by less successful companies

Percent
100
105
12
28
30
ROS
5%
Sales
Cost
Outset
101
93
ROS
9%
Restruc- Price
turing
erosion
levers
Volume Growth
loss from levers*
existing
products
* New products, new customers, new regions

Source: McKinsey Excellence in Electronics survey
Cost due Cost

Sales
to addit2 years later
ional
volume
Main source of difference
between successful and
less successful companies
Prologue
ideas gathered here are applicable to business-to-business marketing

in general.
In Chapter 2 Putting the system in placewe turn to the operational levers. Unlike the strategic levers, the basic operational levers in
marketing managing customer access, pricing the product offering to
capture an adequate economic surplus, and building a brand name or
reputation need to be handled differently depending on the type of
business. We therefore take a closer look at successful marketing approaches in three main types of business:
u Standardized product businesses
u System businesses
u Project-based businesses.
Chapter 3 Capturing the opportunities discusses the organizational aspects of implementing excellent marketing processes. Often
the biggest hurdle is not figuring out the right strategy, but rather
building the few right capabilities and attitudes into the organization that are needed to execute the strategy consistently.
Developing effective business-to-business marketing takes years of
leadership by example and hard work on all fronts. In our experience,
however, quick wins and a huge motivational effect can be achieved in
the short term with coordinated actions to create and focus energy and
promote learning.
6
Prologue
Strategy
Great marketing is built upon a foundation of solid industry understanding coupled with creative insights into customers, competitors,
and the companys core manufacturing/operating skills, including its
dealings with suppliers and distributors. In all types of businesses, a
three-step cycle helps set the stage for success:
u Study
customers and the market to know what products and serv-
ices will create economic value

u Develop
a segmentation that also reflects customers economic
attractiveness for you

u Come
up with a distinctive value proposition for each segment.
Many managers believe that their companies already have a solid

foundation in these areas. Yet market dynamics are now much faster
paced than even a decade ago. To get and stay competitively fit, most
companies need a 10,000-mile check-up every two or three years to
review and strengthen their market research, segmentation, and value
proposition, the three main levers for developing marketing strategy.
Figure 1 sets out the various elements involved in achieving excellence
in business-to-business marketing, along with key factors for success
and tools for achieving it.
Strategy
Strategy:
Setting the stage
Strategy
Achieving excellence in marketing

Elements
Key factors for success
Understand
Walking in your customers
market/customer shoes (understanding your
needs
customers customers)
Levers/tools
Systematic market
research (ear to the
ground)
Expansive mindset (broad

market definition); three
horizons for the future
Come up
with right
segmentation
High market share in chosen

segment instead of low share in
market as a whole
Meeting both business and
marketing criteria
Conjoint analysis
Basing segmentation on
customers key buying factors
and breakpoints
Define value
proposition
Figure 3
Leaving some white space

(follow 80/20 rule; dont go for
100%)
Best price/benefit ratio for
selected segment
Migration from selling to
consulting
Price/value framework
Manage access to Tailoring supply channels to

the customer
customer segments (control,
programming)
Distinguishing between
coverage and penetration
issues
Key account
management
Capture the
Perspective on life-cycle
economic surplus economics
(not: single sale)
Pricing tactics geared to
capturing maximum economic
surplus over lifetime
Product management
Price management
Brand/
communicate the
value
Branding
Source: McKinsey
Evolutionary build-up of branded

relationship (vs. placing an ad)
Communicating customer value
effectively
Sales force
effectiveness
Channel management
Risk management
New workshop formats
Strategy
Understanding customers and market

Because they are over-focused on developing proprietary technological
breakthroughs as a source of growth, many industrial companies grow
blind to what customers really want. Classic symptoms of this are overengineered products, muddled sales arguments, and idle capacity.
The best way to correct this situation, or avoid it altogether, is a
steady stream of information from the market. At companies with strong
marketing processes, knowledge of customers is detailed, fact-based,
broad, and collected systematically and never anecdotal. They always
use a mix of methods. The three most important are: discussions with
individual customers about existing products and their strengths and
weaknesses, customer focus groups led by a neutral third party, and
statistically reliable research and analysis.
Allen Bradley, a US subsidiary of Rockwell International and a
leader in industrial automation control technology, achieves customer
intimacy with very highly systematized core processes for collecting
and analyzing information. Customers are the main source of ideas,
and the company conducts a worldwide survey every year to get the
real facts about the pros and cons of its product lines. Suggestions
made by multiple customers are prioritized for action, and new product concepts are monitored and developed with an idea tracking database. The market intelligence department systematically adds to the
companys store of knowledge by doing reverse engineering of competitive products and regularly combing the sales force and channels for
news.
Combining these techniques into systematic, cross-functional approaches gives excellent marketers both microscopic insights into
customer needs and a telescopic overview of the market and market
trends. Doing this involves far more than just going through the mo-
Strategy
10
tions. Marketing-minded industrial companies succeed by paying extra

attention to detail and to intangibles. For example, a superior understanding of the power structures in their markets helped both Intel
and Gore-Tex to tap the value of ingredient branding creating brand
awareness among consumers, thereby generating a pull on their immediate customers.
Walk in your customers shoes

The industrial companies that are growing profitably are the ones that
focus obsessively on their customers business needs. They put themselves in their customers shoes and think about how to help them
reach their customers. This helps them to identify the main points of
leverage to improve customers performance in the marketplace a
source of hard-to-copy ideas for even better products and services.
Cummins Engines, a US manufacturer best known for its engines
for tractor trailer trucks, pleasure boats, and mobile homes, gets close
to customers by sending out cross-functional teams for seven-day customer walks (scripted on-site interviews) to bring back the information the whole company needs to deliver superior customer value.
Cummins also measures marketing system performance against tough
external standards. The system includes six main processes that are
measured against best-in-class external benchmarks, for example,
AT&T for Customer Satisfaction.
Because they are fundamentally outward-looking, marketing-oriented companies know their customers all the way down the value
chain not just their immediate channel or distributor, but also downstream processors, customers, users, and consumers. This often helps
them know what their customers need before the customers know themselves.
Some companies use their knowledge to team up with their imme-
Strategy
diate customers to create win-win solutions. US-based Mead Packaging

has grown, for example, by helping a brewery in South Africa to enhance its marketing activities. Arrow Electronics, a distributor of semiconductors to companies initially too small to buy direct from Motorola,
Intel, etc., has shaped its industry by extending its brand to its customers, contract manufacturers (CM), designating them Arrow-certified
CM, thereby giving them a reason not to switch to buying direct from
the major manufacturers. Taking a slightly different approach, Cummins
Engines has increased its bargaining power vis--vis its direct customers, the original equipment manufacturers (OEMs), by deliberately learning more about the consumers the people who actually drive the
tractor trailer trucks, boats, and motor homes than the OEMs do.
Look for new value horizons

An intense interest in and curiosity about customers helps excellent
marketers think broadly about how and where to apply the companys
strengths to create new value. The dimensions for expansion are multiple: offering a new product or a product line extension, serving a new
region or a new industry, or a combination thereof. Gillette is an instructive example of growth driven by such an expansive mind-set in
the consumer goods industry. Its history clearly reflects an evolving
definition of the product markets in which it competes. From a solid
base in mens shaving products, Gillette expanded its horizons to mens
grooming products, achieving 24 straight quarters of double-digit
growth without missing a target, as Business Week noted when Gillette
announced a further expansion into personal use/personal care consumer products.
Imaginative approaches in the business-to-business context often
lead to integrated solutions for new products, for instance, by enriching the product transaction with a variety of services (installation, main-
11
Strategy
12
tenance, financing, and advice on processing) or, as another example,

offering not just a microscope, but an entire system for early disease
detection including computer, image processing, and other peripheral
equipment. The next horizon may be forward integration, taking over
operations for the customer. One supplier of heating equipment we
worked with now provides heating. It seized the opportunity to create value by uniting previously fragmented activities from making
boilers to monthly billing. This cuts unnecessary costs and provides
customers and consumers with better value for money.
SAP offers an example of successfully looking for and finding new
value horizons in multiple dimensions. Its evolution from a local German software house into the leading vendor of enterprise application
software is the result of a superb combination of excellent product
development, international expansion, and successful strategic alliances.
The touchstone of its expansion is a customer-focused vision centred
on using standard business software to address top managements need
for transparent financial data. From successful completion of its first
project in Germany, SAP evolved geographically, first to the other German-speaking markets, then across Europe, then internationally, in each
case following a philosophy of being there locally for its major accounts. Once established internationally, it focused on increasing its
resource network and deepening its relationships by forming partnerships in hardware, consulting, and service. It also used this steppingstone approach to build its customer base first in process industries,
then in manufacturing. It is now emphasizing joint industry solutions,
for example, in its development agreement with Microsoft, and building bridges into new customer segments, such as retailing.
Strategy
Pinpointing the right segments

and customers
The strategic value of a good segmentation is that it makes it easier to
tailor your approach and thus monopolize customers in a selected
segment. With this approach and a good understanding of the market,
a company can influence industry trends in favour of its own profitable
expansion, even in highly competitive markets, for example, petrochemicals and steel.
Markets can be segmented in various ways for different decisions
ranging from selecting a product/market strategy to optimizing sales
force deployment and channel management. At the most basic level,
what is important is that the segments reflect both customer conduct
and substantial earnings opportunities:
u From
a marketing perspective, a good segmentation passes the
following tests: (1) Customers are classified by buying behaviours and needs into distinct groups whose members are similar and (2) the profile of each group suggests a practical course
of action for satisfying its requirements.
u From
a business perspective, a good segmentation: (1) Contains
more than one segment offering a sizeable profit potential and

(2) at least one segment offers a good chance to build a competitive advantage because its requirements can be met by a
capability that you already have (or can realistically attain).
What extra steps do best practice marketing companies take? How
do they differentiate themselves from ordinary performers? First they
come up with a macro-segmentation of the relevant customers by identifying and ranking customers key buying factors (as opposed to geographic location and demographics). Then they develop a micro-segmentation by assessing existing and potential customers, account by
13
Strategy
14
account, in terms of mutual customer-supplier attractiveness. This

knowledge expands the potential market by pinpointing accounts
which offer good chances of increasing volume and margins.
Macro-segmentation: identifying
and ranking key buying factors
An excellent understanding of market mechanisms lays the basis for
identifying the key buying factors (KBFs). Price may be a knock-out
factor in most industrial purchasing contexts, but successful marketers
keep in mind that, as shown in Figure 4, non-price factors such as
quality of product, logistics, and on-time delivery often account for 6070% of the customer decision.
Starting from a conventional regional/customer-industry segmentation, a European chemical company that sells petrochemical products successfully redefined its approach to serving its main customers
in terms of the key buying factors quality, speed of service, and
Figure 4
Importance of buying factors
Buying factors
Relative importance to customer, points
Price/terms of payment
355
Technical service
120
Logistics
120
On-time delivery
Product range
113
89
Technical service
81
Commercial service
75
Waste management
70
Source: McKinsey
Non-price factors
Strategy
low price. The analysis helped managers recognize a latent strength

in technical advising that they could exploit in the high-tech, qualityoriented segment. They also discovered an area of vulnerability in their
relatively slow delivery, which was driving another group of customers
to competitors.
The real challenge is not coming up with a list of relevant factors
such as quality and reliability, but understanding their relative value
to different customers in order to rank their importance in and across
segments. A useful tool for this is conjoint analysis, used to identify the
perceived value of product features in various combinations. Obtaining
the data involves detailed interviews with a number of customer decision makers to identify the relative importance of the factors associated
with a purchasing event. The rankings are used to group customers
with similar buying behaviour and preferences.
Within the segments (or, if you have few customers, for specific
accounts), you need to identify the things you can do that will build
customer loyalty. Identifying breakpoints increases in the performance of the supplier that will lead to a significant increase in the value
perceived by the customer helps excellent marketers decide where to
apply their energies and determine how much better they have to be in
order to beat the competition. Figure 5 shows the concept, using the
example of a machinery manufacturer. The first breakpoint was the
introduction of a 24-hour emergency service for its customers. The
second, which really provided the customer with added value, was moving to continuous remote diagnosis of the machinery, thus preventing
unexpected problems and downtime occurring at all. To take another,
classic example, Federal Express crossed a new benefit threshold by
providing guaranteed overnight delivery. It has grown so strong in North
America that you hear Just FedEx it nearly as often as the Nike
slogan Just do it!
15
Strategy
16
Performance breakpoints concept
Value to
customer
Breakpoints
Performance
of supplier
Figure 5
Source: McKinsey
Micro-segmentation: evaluating each major account

in terms of mutual attractiveness
Besides determining what level of performance will offer the most value
to customers in each of the macro-segments, excellent marketers are
better able to target the customers that will be attractive for the company to serve. They develop this understanding by classifying and grouping accounts from two perspectives: supplier attractiveness to customer
and customer attractiveness to supplier. Figure 6 shows how these
two perspectives can be combined to form a matrix, which can then be
used to define and position the various types of customers and noncustomers. The object of the exercise will ultimately be to move the
customers and non-customers in the top left and bottom right squares
into the top right square.
This dual perspective is important because customer profitability
varies widely, and it pays to find out exactly where the profitable customers are. In our experience, as much as 3040% of a typical indus-
Strategy
17
Attractiveness
portfolio
High
Content, less
attractive existing customers
Attainable, but
unattractive
customers
Attractiveness of supplier
to customer
Value delivery
Price/benefit positioning
Available alternatives
Attractive existing customers

Attractive,
attainable noncustomers
Malcontent
unattractive
customers
At-risk, attractive
existing
customers
Undesirable
non-customers
Desired noncustomers
Low
Low
High
Attractiveness of customer to supplier

Customer size/growth/profitability
Repurchase loyalty
Source: McKinsey
Figure 6
trial companys revenue comes from customers who are too expensive
to serve, as measured by pocket contribution margins. These customers
rarely provide enough other intangible value in the form of new ideas
or new customer referrals to compensate for the low or negative margins they generate.
Dropping unprofitable customers is the easy-to-understand extreme.
In competitive markets and when moving into new arenas, the dual
perspective helps companies plan ways to achieve higher volumes and
margins with their target customers by:
u Raising
the profitability of marginal customers, using a combi-
nation of sales force productivity levers, channel management,

pricing, business scope expansion, and customer integration activities.
u Improving
the profitability and retention of attractive custom-
ers through key account management, customer loyalty management, and pricing.
Strategy
18
u Enhancing
the value proposition to high-potential customers
by improving both the value offered to the customer and the

ability of the sales force to communicate this value.
A common misconception is that focusing only on certain groups
of customers will rob a company of volume sales. This might occur
temporarily, but if the basic segmentation passes the business tests, any
loss will be offset by a better, more profitable competitive position in
core segments and correspondingly higher margins and higher sales.
As SAP and other companies show, this platform produces the ideas
and funds needed to successfully expand into new arenas.
Defining a distinctive value proposition

I dont know the key to success, but the key to failure is trying
to please everyone
Bill Cosby
An exact understanding of customer needs and, building on that, a

well-thought-through segmentation give marketing-minded companies
what they need to formulate a distinctive value proposition. Again, the
point here is to draw firm boundaries between your product offering
and your competitors in ways that give you a distinct profile and thus a
natural advantage. As an executive at Mead Packaging put it Find a
strategy to play the game differently: dont just do what your competitors do.
Examples from various industries indicate that persuasive value
propositions have clear strong points or spikes plus a few weak
points. This makes the value proposition more credible in the eyes of
the customers than claims to all-round excellence. The products with
clear spikes in their value proposition have much higher shares than
Strategy
19
those with a flat profile provided the spike is relevant to the customer segment. To illustrate this: a sports car with very high performance has a more distinctive and credible appeal for sporting drivers if the value proposition admits to the cars weaknesses in terms
of comfort, space, and ease of use. Figure 7 sets out the essential elements of a well-thought-through value proposition.
Offer the best price/benefit ratio

Customers do not buy simply on price; they buy on value, which is the
perceived benefits that a product provides minus the perceived price.
Checklist for value proposition
Figure 7
Benefits explicit, specific, clearly stated
Price explicitly stated
Target customers clearly identified
Value proposition superior for target segment
Evidence of adequate demand
Evidence of acceptable returns
Viable in the light of competitors value proposition
Achievable with minor changes in current businesses system
Clear and simple
Source: McKinsey
Benefits are defined here as the attributes of a product or service that

determine customer choice, such as product quality, features, performance, design, technical service and support, and sales staff competence
and friendliness.
To decide where to take a stand vis--vis competitors, best-practice
marketers use the value map, a basic tool for understanding value posi-
Strategy
20
tion issues and opportunities, shown in Figure 8. The horizontal axis

quantifies the benefits that a product provides to a customer. The vertical axis reflects its price. The dots on the map represent the pricebenefit positions of the offerings competing in the market.
In a stable market, perceived benefits will equal perceived price,
that is, there is a clear, logical choice for all customers at each price/
benefit level. Graphically, the competing alternatives in the market will
line up along a straight diagonal line, the value equivalence line.
Figure 8
Value map
Value
equivalence line
Perceived
price
Value disadvantage
Share
loser
Share
gainer
Value advantage Perceived

benefits
Source: McKinsey
In a turbulent market where market shares are changing, some

competitors will be below or above the value equivalence line. Over
time, competitors below the line will win share as they are perceived to
deliver greater benefits for the same price, or equal benefits at a lower
price, compared with competitors on the value equivalence line. Competitors above the line will lose share as they are perceived to deliver
fewer benefits for the same price, or equal benefits at a higher price.
Strategy
21
Basically, there are two main points to observe:

First, the higher the price-benefit positioning, the more difficult
it is for competitors to copy. At the same time, a high positioning also
blunts competitive attacks that are based only on price cutting, made
possible, for example, by restructuring.
Second, repositioning along the benefits axis tends to damage profits less than price reductions would. It is also easier to withdraw benefits that are rejected by the market or are uneconomic to provide than
to try to raise prices after reducing them.
The value map sheds light on why some strategies that sound
sensible at first turn out to be major mistakes. Three common mistakes, shown in Figure 9, are:
1. The market leader introduces low-price products, but leaves
the benefit level too high, resulting in cannibalization of the
Value map mistakes

Perceived
price
Market leader introduces low-end

product but leaves
benefit level too
high
Perceived
price
resulting in cannibalization of leading

product and a downward shift in price
across markets
Value-disadvantaged player just

lowers price to get
back to value equivalence line
and takes huge

and sustained loss in
operating profit
Leader upgrades
product but does
not raise price
to match ...
resulting in a
downward shift in
price across markets
Perceived benefits
Source: McKinsey
Figure 9
Perceived benefits
Strategy
22
leading product and a downward shift in price across the whole

market.
2. A player at a disadvantage over value just lowers price to get
back in line with competitors, and takes a huge and sustained
reduction in his operating profits.
3. The leader enhances benefits but does not raise the price commensurately, resulting in a downward shift in price across the
whole market.
Excellent marketers naturally also take into account the fact that
customers do not necessarily view benefits and prices in a linear way.
Just as there are price-capped accounts that cannot spend beyond a
stipulated limit (often found in the public sector), there are benefitbracketed customers who explicitly want minimum or maximum benefit levels and find other combinations unacceptable.
Move from selling to consulting

In marketing-minded companies, marketing and sales people think and
act like business consultants. Their offering is not limited to selling a
traditional product line, but aims at solving a problem or capturing
an opportunity linked to the suppliers product portfolio. For more
conventional sales people, the transition to consulting means thinking
much more actively about how customers currently use products (or
could use them). Excellent marketers continually expand this knowledge and make it readily available to the sales force.
For example, some years ago, a software house developed a system that dramatically increased transmission volume per time unit
in telecommunications networks. Despite the products undisputed technological superiority, the market did not respond initially. It was only
after the software vendor had made a significant investment in market
Strategy
research and developed sales support materials that explicitly described

the benefits of the product for customers, outlined ways for customers
to capture business opportunities with the product, and enabled sales
people to calculate customer-specific profits that the new system finally
took off.
With this understanding of the product, the suppliers sales people approached customers much more successfully. When describing
the customer benefit, they emphasized how the system helped to improve effectiveness and efficiency in the customers day-to-day business.
In explaining how to capture the benefit from the customers point of
view, they made specific suggestions for consumer marketing to increase
the customers market share. Finally, with clear-cut calculation of the
value to the customer, they demonstrated that using the suppliers products would generate additional profit for the customer.
For a typical order, the benefits for the supplier were threefold:
u First, by presenting a complete picture of an attractive business
opportunity in effect, a revenue stream that can be bought

by purchasing the new system the supplier easily persuaded
the customer not to spend a lot of time and effort haggling over
price, as it only represented 35% of the total system costs (and
an even smaller share of the projected sales).
u Second, the suppliers demonstrated understanding of the mar-
ket as a whole not just one corner of it thoroughly impressed the customer and led to a new level of trust in their
professional relationship, raising barriers to entry for the suppliers competitors.
u Third,
as a by-product of the trust-based relationship, the sup-
plier gained an excellent source for replenishing the idea pipeline for more business.
23
Strategy
24
As the examples suggest, setting the stage for profitable growth is

nine-tenths driven by fact, not by fancy. A large measure of the success
of excellent business-to-business marketers is due to their consistently
taking a more systematic and penetrating approach at each stage of
strategy development, from researching and segmenting the market to
defining a distinctive value proposition.
Once the stage is set with a good marketing strategy and product definition, how do you uncover specific opportunities to grow profitably?
How do you decide which marketing levers are key profit drivers for
your business? What is the best way to apply them for the highest
economic payoff?
In answering these questions, it helps to consider the type of business you are in. In our work, we have found that if you analyze industrial businesses in two dimensions the degree of product standardization and the average order size three types of businesses emerge:
standardized products, systems, and project-based businesses.
In Figure 10, the three types of industrial businesses are arrayed
along a continuum with consumer goods. While this perspective overlooks many details and differences, it also raises some useful questions.
For example: in what ways could you standardize your products or
parts of the business system to build an advantage in cost-efficiency or
consistency of execution? How could you increase your average order
size, or how vulnerable are your orders to being shrunk or un-bundled by customers or competitors?
This way of thinking cuts through the clutter to the most powerful
marketing tools for your business. For each type of business, we have
given the toolkit a thematic label to describe the richest source of ideas
for competitive differentiation.
Operations
Operations
Operations: Putting the

system in place
25
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26
For standardized products, which are most beset by the problems

of commoditization, the predominant theme is learning from consumer
goods; in other words, from the branding, channel management, and
product management approaches that work to make everyday items
like cars or microchips distinctive.
In system businesses , where the customers capital investment is
typically combined with recurrent, and usually more profitable sales of
services, the central theme is understanding both the whole and the
parts and, on that basis, profiting from integrated solutions over the
total investment lifecycle through creative product bundling and pricing.
Degree of product standardization

Medium
High
Type of business
Standardized product
businesses
Selling largely
standardized
products to
Selling complex largely unknown
products to more customers
customers
System
businesses
Project-based
businesses
Consumer
goods
businesses
Selling fully
standardized
products to the
mass market
Selling tailored
projects to a few wellknown customers
Low
Figure 10
Large
Medium
Average size of transaction
Small
Source: McKinsey
For project-based businesses , where most deals are mega-deals and

customers are usually few in number and well-known, the predominant
theme is providing economic value to the customer typically a group
of decision-makers. While any business must provide value to survive,
the special importance of this theme in project-based businesses is that
Operations
the complexity of the potential investment often makes it a black

box for customers. The competitor who is most likely to get the order
is the one who can identify and effectively communicate the potential
value of the investment in practical terms.
The approaches discussed in the following sections are not exhaustive. They are real examples, intended to highlight ways to apply
and adjust the settings of three main operational levers of marketing,
namely, managing customer access, pricing to capture economic surplus, and branding or communicating the value. We discuss these levers for that type of business in which they are especially relevant for
profitable growth; this does not necessarily mean they are unimportant
for the other types of business.
Standardized product businesses:

learning from consumer goods
How many people know the name of even one of Intels or Gore-Texs
main competitors? How come Compaq is growing fast whereas Apples
market share is shrinking, despite a technically superior product? What
powers Hewlett-Packards growth? All these companies are successful
suppliers of standardized products who support their ability to offer an
ever-better price-benefit ratio with great marketing skills.
As in the consumer goods sector, standardized product businesses
are characterized by a fairly large number of anonymous customers who
individually do not influence the design and manufacturing of a
product. The excellent companies in this field are typically distinguished
by three characteristics, which they share with excellent consumer goods
companies:
u They
stabilize existing business and create opportunities for
future growth by creating and cultivating strong brands
27
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28
u They
design their channel configurations to ensure distribu-
tion power that is unparalleled within their industry

u They
invest heavily in understanding customer value and ar-
range decision processes around this competence often a product management function.
The value of a strong brand

In the consumer goods industry, active management of a brand and
using it as a vehicle for growth is a core management activity. In industrial settings, branding is less common, but can be just as powerful. A
strong brand can play different important roles. It can serve:
u As
a shorthand emblem, representing a promise of superior
customer value to those buyers who have no time to investigate

the differences between competing products
u As
a security provider for managers who have to take a risk
using the product and want to be on the safe side

u As
a swayer that tips the scales in the customers mind in fa-
vour of the promise reflected in the brand name

u Or
as a saviour to the supplier, maintaining sales even when,
for a limited time, product features fall behind those of competitors.

An example of how brands work as a shorthand emblem and security provider is ingredient branding or co-branding, which has become a buzzword thanks to Intels success with Intel inside. Ingredient branding puts pressure on PC OEMS; vendors who do not use Intel
chips are perceived as scrimping on quality. After Intel inside was
introduced, the share of buyers who preferred a PC with an Intel chip
jumped from 60% (1992) to 80% (1993), making Intel the third most
valuable brand in the US, after Coca-Cola and Marlboro. Intel also
benefited from the power of its brand name as a provider of security
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29
and as a swayer in the case of the Pentium. This brand was introduced
by Intel because Cyrix and AMD could not be forced to stop cloning
the 386 and 486 chips (a court ruling prevented Intel from trademarking
those numbers). Successful exploitation of the Pentium chips introduction has greatly strengthened Intels position in the market.
We have recently done some 13 studies on the impact of a brand
name on customers decisions in business-to-business marketing acrossa
range of industries. The results are summarized in Figure 11, which
Relative impact of brand name on customers decision

Percent
100
Brand name
18
Other factors
Product
Service
Price
Channel
Other
82
The influence of brand name

ranges from 7% to 26%
Factors influencing
customer decision
Source: McKinsey
makes it clear that the brand name itself plays an important role in
the customers decision.
Figure 12, based on research with various clients, shows the relative importance of a strong brand identity in different markets.
In many cases, Original Equipment Manufacturers (OEMs) can
also benefit from branding standard products to create a pull effect to
support existing push concepts. Take a product as mundane as water
taps. Fifteen years ago, it was the plumbers or contractors who selected
Figure 11
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30
such fixtures for a construction or renovation project. Under pressure

from the trends to do-it-yourself work and design quality, Grohe,
the dominant supplier in Germany, worked to establish a strong brand
name among consumers and further documented its success by going
public. This effort created a pull effect that helped the company double
sales in seven years.
Figure 12
Relative importance of brands for purchasing decision

Importance for purchasing decision by industry, percent
Type
Brand importance
Electrical utilities
26
Electronics computer
26
Telecom international calls
21
Airline
21
Telecom mobile
16
HMO
14
12
12
Telecom mobile
Source: McKinsey
The Intel and Grohe success stories are still fairly unusual, illustrating the fact that, in industry, branding initiatives have mostly been
undertaken as a defensive reaction to competitive pressure. Thus, a lot
of potential is still untapped. In a market research study some years
ago, people entering a car repair shop were asked which company they
thought was the best maker of brake linings. More than 50% said Bosch,
the brand name of Germanys largest auto parts supplier. They also
said that they were willing to pay a premium for Bosch quality. The
only problem was that Bosch neither made nor sold brake linings. Could
it be that your own brand is underutilized as well?
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Creative channel concepts to increase

distribution power
In addition to branding, many companies would benefit from thinking
more boldly about channel management. Few push beyond the conventional questions such as Should we have a direct sales force or sell
through indirect channels? Weve experienced a huge drop in prices;
how can we reduce the sales margin of our dealers or retailers? Do we
really have to spend so much on sales support, advertising/promotion,
etc.?
Questions like these are certainly worth asking. But in practice
they tend to distract managers from the full spectrum of options available. In a sample of fifty companies we found that increasing efficiency
and effectiveness allowed the successful, fast-growing companies to reduce the number of sales employees per value-added by 44 % within
seven years, whereas their less effective competitors added another 43 %
more sales employees without realizing the desired impact. The excellent marketers became effective by building more rigour and discipline
into their customer-facing activities, no matter whether these concerned
their own sales forces or their partners, by:
u Exerting
control over the purchasing event to ensure consist-
ency between mission and execution

u Programming
operational excellence into the sales-and-service
network.
Focusing on these activities when designing their channel configurations has made successful companies more effective in achieving superior growth performance.
Control: vital to ensuring customer value

Control refers to the influence that the supplier exerts over the purchasing event. Control instruments help the supplier make sure that
31
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32
customers are consistently treated in ways that conform with a superior

understanding of customer value. Contrary to popular belief, exerting
a strong influence on distribution channels does not necessarily mean
having a direct sales force. Control methods can also be executed with
a well-functioning franchise system, or other indirect channel approacher.
For instance, Braas, a construction materials supplier based in
Germany, exemplifies the approach of a number of other excellent
marketers of standardized products. It exerts a strong control over the
customers purchasing experience by applying control instruments including appropriate contract design, effective training for sales people,
powerful argumentation support for front-line people, efficiently computerized order processing, and detailed rules for those business processes that can be designed and managed centrally, and tough monitoring of execution and customer satisfaction levels. Customers are served
exactly the way Braas wants them to be and keep coming back. Since
1990, the company has been growing from DM 790 million in revenues in 1988 to over DM 2.7 billion in 1998.
Figure 13 uses a client example from the electronics industry to
show how more successful companies concentrate on working with the
leading distribution partners in a region. They also spend over twice as
much, relative to turnover, on support for their distributors.
Rather than trying to decide on one right approach, be it a
direct sales force or other solution, it is far better to give internal and
external partners identical instructions and measure their performance
against the same targets so that the performance of good external dealers and good sales employees is essentially identical. To be sustainable,
it is best to combine top-down control over distribution with front-line
training and support programs to spread excellent execution at the
direct customer interface.
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Programming operational excellence
33
Programming operational excellence refers to the systematic transfer

of internal or external best practices throughout the distribution netConcentration on leading distribution partners
Distribution partners by regional market position
No distribution partner
Number >5
Number 5
4
16
6
13
1
8
Number 4
28
24
Number 3
16
Number 2
21
Number 1
Spending on
distributor support
Percent of turnover
48
100% = 300 regions

3
3
In 70% of the
regions the
successful company cooperates
with the regional
No. 1 or 2
distributor
Less successful
company
Successful
company
1.1%
2.6%
Source: McKinsey
work. The basic approach is probably best exemplified by McDonalds,

which offers customers the same quality, friendliness, and cleanness
worldwide and invests heavily in the roll-out of internal best practice.
Toyota in the US takes a similar approach upstream with suppliers, having set up the Bluegrass Association as a way of systematically transferring good ideas from individual suppliers to the group as
a whole. Downstream with dealers, Toyota also arranges meetings and
provides information via in-house magazines, one for its industrial equipment dealers and one for car dealers. Both publications summarize
media coverage of Toyota models for example, J. D. Powers scores
translated into punchy graphics that dealers can show customers; they
also disseminate best practices among dealers for example, the excellent call-centre operations of a dealership in the Pacific-Northwest.
Figure 13
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34
Approaches like these can be adapted to program your sales or

service network for consistent excellence. Adopting a programmed approach helped a country-wide service network with around 50 locations in Europe increase its profit contribution by some 15 percentage
points. The basic steps this company took are also transferable to sales
forces as well. First, every site was measured against a set of very specific
key performance indicators to obtain a company-internal ranking. Then
each location was given targets. One target for the best locations was to
collect and test new ideas from other countries and industries as the
basis for upgrading internal best practice. They worked on Internet pilot
projects and also visited international best-practice companies in other
industries. Below-average locations were told to shape up by applying
the internal best-practice concepts in all processes, for example, in handling customer reception and local promotional spending.
Smart programming directed from the centre but with considerable responsibility delegated to local managers and supported by relevant training modules helped even service locations in supposedly
bad regions become highly profitable centres with strong growth.
The momentum is being maintained by regular events to exchange
experience, systematic controlling, research into the effects of changes
made, and new, specific targets supported by appropriate incentives.
Sometimes all it takes to get started is a simple question that, typically, only the excellent business-to-business marketers can answer: What
is the spread between best-in-class sales people or outlets in the industry
as a whole and our average performers?
Entrepreneurial product management

If they are to pay off, heavy investments in the development of a new
product or product line, in new channel concepts, and in manufacturing processes and tooling obviously have to be based on a thorough
Operations
35
understanding of the features customers are willing to pay for. Yet,

for standardized products, customers are typically anonymous, and it
is often not obvious not even to the customers what features they
need. The potential impact of making the effort to get close to your
customers, so as to find out what they want is shown in Figure 14.
Overall, successful companies spend over twice as much time with their
customers as do less successful ones.
Product managers time with customers

Hours spent with customer by activity, in %
100%
100% = total hours spent with customer
18
Other activities
50
Discussion of
product/market
strategy
29
Sales support for

actual orders
33
10
x5
42
15
Troubleshooting
3
Less successful Successful
company
company
Source: McKinsey
In consumer goods companies, the task of managing customer

value from identifying it to getting it designed and produced and
communicating it to customers is performed by brand or product
managers. Dedicating an entrepreneurial individual to oversee product
management is how marketing-minded companies create and reinforce
the shared vision that guides people in a thousand different ways all
along business system from channel managers to R&D and production operations to consistently deliver superior value.
In many functionally organized industrial products companies,
Figure 14
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36
however, there is no one to manage these activities, as marketings job

is defined narrowly, for example, in terms of organizing the companys
participation in trade fairs and writing press releases. If product management is in place at all, it is often driven by product technology, not
by customer value.
For an electrical appliances maker, we borrowed from consumer
goods companies the concept of strong product managers smart engineers with proven management skills who work closely with the CEO
as entrepreneurs (business builders) for distinct customer segments.
Their task is to resolve cross-functional conflicts into solutions that
provide superior customer value for their assigned segment.
Asking the right questions turned up surprising answers that pointed
the way to profitable growth. Previously, the company had been extremely proud of its reputation for exact fulfilment of customer specifications, but had seen its market share slip within three years from 21%
to 17%. A lost-order analysis showed that its highly customized products had lost ground mostly against cheaper off-the-shelf products.
At this point, the company contacted us for a fresh perspective. It
was decided to undertake a major market research effort, including
techniques such as focus groups and conjoint analyses. For top management, the results were completely counter-intuitive.
Technical features whether customized or standardized were
not a key buying factor at all. Furthermore, the market research techniques borrowed from consumer goods marketing showed that there
were actually two fairly distinct segments. The shrinking Segment A,
which contained many of the core customers, gave the highest ratings
to extended warranty and brand followed by specification support. Segment Z smaller but growing gave the highest ratings to
delivery within 2 hours and ease of installation. Thus, what the
company really needed to do was to differentiate not what it supplied
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but how. Without product management, there was simply no one there
to look at the links between plant logistics and customer value.
Some industrial companies are already meeting the two main challenges of successful mass-marketing: gathering and translating anonymous customer data into a vision of customer value and pushing this
vision consistently through the entire organization from channel managers to R&D and production operations. These are the companies that
are attracting and retaining talented people people who can interpret
market data in value-creating ways, have a feeling for business, and can
provide inspiring leadership.
System businesses: profiting from

integrated solutions over the whole
lifecycle
Otis, the US-based maker of elevators, is a pioneering system seller. It
evolved early on into a provider of integrated solutions over the total
life of its equipment, including engineering, intelligent monitoring systems, pre-emptive maintenance services, and trade-in and rebuilding of
used equipment. Management characterizes the transition as a shift in
corporate mind-set from manufacturing elevators to transporting
people. This shift has strengthened Otiss already dominant and profitable position. Of a total of 3 million elevators in service worldwide in
1995, 1.2 million were from Otis. More importantly, the company is
able to win service contracts where most of the profit is to be made
on 80% of its new installations, far above the industry average of 60%.
Like Otis, companies in the system business have typically integrated product-and-service business systems under one roof, and their
bundled offerings play an integral role in their customers business
systems. What system offerings have in common is that the initial equip-
37
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38
ment sale serves as an installed base for follow-on sales. Combinations

can range from hardware plus software (a solution), hardware, software, and services (a solution that works), to hardware, software,
services, and operations (a solution that works inside the customers
operations). In this context, hardware refers to the product or equipment elements, whereas software refers to items needed to operate the
system; that is, not only computer software in the strict sense, but also
supplies such as packaging materials in the case of Tetra Pak filling
lines in the food industry or chemical reagents for diagnostic analyzers
in the health care industry. Services includes spare parts supplies, maintenance, training and consulting.
To achieve sustainable profits that provide a return on the knowledge embedded in the complete system, system suppliers need to base
their marketing efforts on lifecycle economics the value that can be
extracted from the system throughout its working life. The crucial
marketing levers for system business suppliers are:
u Designing integrated solutions to address opportunities over the
entire lifecycle of the system

u Applying
value and transaction-based pricing together with risk
management concepts to optimize total lifecycle profits.
Designing integrated solutions

If suppliers of standardized products sell customers an off-the-shelf
value proposition, the proposition for systems suppliers is a tailored
fit over a series of transactions. Success for the supplier depends on
analyzing the customers business system in sufficient detail to identify
the points where the suppliers offering can make the biggest contributions to lowering the customers costs, increasing his revenue, or both.
This information is critical for assembling the parts of the system into
an integrated solution one that both gives the customer an invest-
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ment providing a superior net present value, and also generates an

adequate return for the supplier. This should be done by tailoring a
combination of standardized modules, rather than making changes to
the modules themselves. Ideally, providing the promised value over
time will lock in the customer and open doors for additional followon sales above and beyond the contents of the initial system bundle.
To grow, and as a hedge against the uncertainty over follow-on
sales, system suppliers must constantly revise the way they define their
products and expand them into packages for specific customer segments
or accounts. By doing this they will be able to develop increasingly
strong relationships with their customers. In selected cases, this will
extend to partnering, in which buyer and seller agree to change how
they do business, jointly control some part of their mutual business
system, and share in the benefit.
Adaptation and tailoring also underlie the process of recycling the
integrated solution through second-hand sales. Second-hand sales can
be a good way to get market intelligence and start developing relationships in emerging markets, laying the basis for new equipment sales. A
supplier of press systems for fruit-based beverages who is pursuing this
approach to expansion expects it to pay off in profitable new system
sales as the emerging markets mature, and is already earning a slight
profit on the second-hand business. The process is shown diagramatically
in Figure 15. By moving second-hand equipment into an emerging market, not only does the supplier create room for new sales in the mature
market; he also gains a foothold in the emerging market, which would
be impossible with new products. He is thus well placed to build relationships as the market matures, until the point at which he can start
selling new equipment into it.
Services play a preeminent role within the system suppliers offering and are the strongest lever for growth and profitability. For system
39
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Second-hand business
Market maturity
New sales
New
sales
Mature markets
Emerging markets
Second-hand sales
Figure 15
Phase 1
Sale of second-hand Customer acquisition
equipment to
and establishment of
emerging markets
relationships in emerging
New sales in mature markets
markets
Support for market
development
Source: McKinsey
Time
Phase 2
New sales in emerging
markets
New markets for new sales
Good competitive position
on account of existing
customer relationship
suppliers, services normally account for 20% to 40% of total revenue,

and a much larger share of total profit. Over the lifetime of the equipment, services can generate revenue of three times the original purchase price. In a survey of industrial companies in Germany, we found
that the service-minded companies have been able to grow their service businesses by more than 5% a year, earning a return on service sales
of up to 40%.
Growth in services is achieved by continually renewing this part of
the overall solution and adapting it to the needs of new and existing
customers. It is made easier by the continuing trend among customers
to outsource non-strategic work. Successful ways of expanding the service range may thus include full-service modules and preventive maintenance contracts over the life of the original equipment and third-party
systems, scrapping of third-party machines, scheduled retrofits or upgrade releases, overall project management and systems integration.
They may also go beyond the system itself, to include operator support
and training, advising on matters of design (e.g., food packaging or
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drive-train layout) or business administration, and even operating

equipment on behalf of the customer. Waste treatment, for example,
has evolved into just such a make-and-operate business.
Improving service performance offers further possibilities for expanding and tailoring a distinctive systems offering. Traditional service
approaches, which often have local service technicians and service stations responsible for assigned regions, can be supplemented, streamlined, or even completely replaced by solutions based on mobile service crews for optimum customer support, remote diagnosis via phone
lines or satellite, expert systems for diagnosis by machine users, or
maintenance initiated by early-warning systems. For example, Otis has
developed sophisticated equipment to track elevator usage on an actual operational basis by measuring operations instead of using calendar-based record keeping, as this is a more accurate predictor of service requirements and cost.
Optimizing lifecycle profits

For industrial businesses, we have found that a 1% price increase results, on average, in a 12% improvement in a companys operating margin. This is four times as powerful as a 1% increase in sales volume.
Not surprisingly, industrial companies that excel at pricing have been
able to increase their return on sales by 37%.
The pricing challenge for system suppliers lies in setting a profitable price for a multi-stage moving target. Because utilization rates
and inherent business risks differ, potential lifecycle profits will vary
among customers, even for similar systems. The marketing task here is
to first understand customer potential measured in expected lifecycle
profits (calculated as net present value) and then to develop and communicate integrated pricing and risk management concepts that reflect
this potential.
41
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42
Applying value-based pricing

Because the customers initial purchase is only one source of the total
value that the system is expected to produce over its lifetime, systems
pricing is also bundled, that is, it has to reflect not only the original
equipment sales, but also the net present value of all subsequent services over the lifecycle of the system. The cost involved in getting an
installed base into place is often subsidized by the margins on the follow-on sales, in order to achieve an overall package price that is attractive to the customer. Figure 16 shows a sample lifecycle profit calculation for a company operating in the assembly sector.
The value to the customer (which equals perceived benefits minus
perceived price) and the target margins obtainable are determined by
comparing the offerings strong and weak points with competitors, taking into account competitors pricing, and alternatives in the product
segment. For example, a company in the packaging industry succeeded
in beating the market leaders ink jet technology with its laser marking
system (despite the competitors lower initial price tag) because the
sales staff were able to communicate effectively that the laser system
allowed higher packaging speed with lower failure rates and thus less
downtime and lower lifetime running costs for the customer.
Value-based pricing is also relevant for spare parts. Through computer modelling of customer preferences and the effects of the suppliers own and competing products on customer economics, a supplier of
electronic systems saw that its approach to pricing spare parts was leaving money on the table. It now determines the value of spare parts to the
customer by looking at two key dimensions. As shown in Figure 17, the
company calculates the cost of failure for the customer due to stockouts. Failure costs are identified as loss of production, loss of products,
additional labour costs, and rework costs. It also considers the alternative sources of supply available to the customer. As a consequence, it has
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Profit over life cycle

Net present value of discounted cash flows, US$ thousand
Equipment
Software (materials/
components)
180
650
Spare parts
170
Service contracts
210
Total profit
850
Source: McKinsey
reduced prices of certain commodity-like parts to prevent customers

from defecting to low-price third-party suppliers, and now charges higher
mark-ups on the complex components that are essential for continuous
operation.
Including a risk management component

In view of the uncertainty inherent in pricing today for performance
in the future, leading systems suppliers are including risk management elements throughout the entire lifecycle of their offering. Risk
management systems, including risk-based pricing and early-warning
systems, are used to monitor profitability, quality, timeliness, or other
relevant factors. For both customer and supplier, the negotiated price
must take into account the systems value versus the risk incurred over
its service life.
An illustration of how risk management can be built into the price/
performance equation is provided by a manufacturer of electronic chips.
Figure 16
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44
Value-based pricing of spare parts

Sales price as factor of production cost
Nubmer of alternative suppliers

Many
Some
Few/none
High price/margin
23
34
34
12
23
34
12
12
23
Low price/margin
Low
Medium
High
Consequences of failure at customer
Figure 17
Source: McKinsey
Its management was reluctant to invest in a particular production

line, despite the immediate benefits it offered, on account of concern
about increasing dependence on a single supplier. The supplier of the
production line agreed to provide a performance bond that guaranteed
that the system would continue to incorporate state-of-the-art technology; the chip maker was then able to commit to purchasing a specified
number of systems.
Proactive risk management on this pattern is becoming an important element in customer partnering strategies, creating win-win approaches to overcome common customer objections. Leading practitioners set and communicate prices with a risk management component to share, reduce, or provide insurance for the risk. Boeing has
recently begun designing multi-year, multi-unit contracts with several
major airlines as a way of reducing both parties financial risks. In this
way Boeing has secured a more predictable revenue stream, which
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enables more accurate planning of its enormous capital outlays. In

return, the airlines receive a price discount and service advantages,
both useful in the highly competitive market for air travel.
Reducing hidden transaction costs

Due to the more complex and long-term nature of system businesses, hidden transaction costs significantly influence the attractiveness of individual transactions. We estimate that up to 30% of revenue
is lost between the official list price and the suppliers pocket price, the
money that the company retains. Top system suppliers prevent such
revenue leaks from destroying their profit margins with the help of
pocket price analysis and marketing information systems designed to
report both on and off-invoice discounts.
The identification of transaction pricing opportunities begins with
an extended pricing and profitability analysis that includes all discounts
and costs incurred by an account. For a metal treatment systems manufacturer, for example, as shown in Figure 18, the pocket price waterfall was a cascade of harmless-looking on-invoice elements (standard
channel and order size discounts) and off-invoice elements (acceptance
testing, adaptation, equipment give-aways, performance guarantees, warranty extensions). Their full impact was significant: the final pocket
price was 31% off the list price.
To improve profitability, the largest sources of differences must
be identified (such as discount elements and service and distribution
costs), and the dimensions along which the difference is most relevant
(such as account size, industry segment, or type of selling arrangement).
For example, a surface coating equipment provider was surprised to
find that it was incurring significant costs due to a large customer who
systematically exploited the companys lack of management in the ar-
45
Operations
46
eas of contract formulation and advisory services. These items were

not specifically defined or priced, but were being over-utilized by the
customer.
Figure 18
Pocket price waterfall

List price
100
Competitive discount
Unbilled freight cost
Invoice price
92
Production-driven changes
Customer-driven changes
Handling for small orders
Forex losses
Pocket price
8
69
31%
Source: McKinsey
Project-based businesses:
providing economic value to the customer
Since 1993, Ericsson Australia, a local subsidiary of the leading Swedish telecommunications equipment supplier, has transformed itself into
a world-class benchmark for customer partnerships based on providing
real economic value to the customer. This change has meant a shift in
focus and accountabilities from products and tasks to customers and
end users in other words, to creating value that adds to customer
success. The old functional silos have been replaced with teams defined by business and customer value, and people policies are marked
by a high level of trust and empowerment.
Operations
What triggered this fundamental transformation? Obviously, a

fierce desire to stay competitive in a rapidly changing industry
environment a challenge that also faces other project-based
businesses, such as plant engineering or heavy machinery construction.
They all look back on a very stable and profitable past, in which they
needed to maintain a high level of technological expertise, but did not
necessarily focus on economic value to the customer.
Much of this has changed. Deregulation and privatization force
existing customers to invest more cautiously while new customers from
the private sector focus on the economic bottom line from Day One.
Technological change generates new business opportunities, but in turn
it also opens once-protected market segments to new competitors. Domestic markets are increasingly saturated; emerging markets in Asia
and Latin America are hotly contested.
These changes have dramatic consequences. Seemingly overnight,
profitable core businesses are at risk, familiar sales processes fail to
work, traditional organizational structures crack with age. To respond
to these challenges, suppliers have to fundamentally refocus their marketing and sales approach towards consistently providing economic value
to the customer. In our experience, two skills are critical factors for
success:
u Mastery
of flexible processes that will enable a company to sys-
tematically discover and develop new business opportunities

jointly with leading customers
u Mastery
of communication skills and methods that will enable
it to communicate the value to the customer effectively.
Joint development of new business opportunities

Dynamic industry environments offer many growth opportunities
shrouded in much uncertainty about which ones are worth developing.
47
Operations
48
Trying to make more accurate forecasts of the future seldom helps

more often than not, the figures turn out to be wrong. A more promising approach is to work with key stakeholders in the industry to develop a common understanding of the major trends in technology and
consumer behaviour. The result is often a joint strategy based on shared
and thus robust hypotheses. Cooperation spreads the risk of big bet
investments and strengthens both parties ability to actively shape their
future.
An example of this is provided by a mobile communications network supplier in a western European country. Two years before government authorities issued any licenses, the supplier diagnosed untapped opportunities for an electric utility to leverage its existing infrastructure. Instead of waiting for an invitation to tender, this supplier
had an account manager who contacted decision makers at the utility.
After getting them interested in mobile communications, the account
manager arranged a day-long workshop to explore setting up such a
business. The supplier went on to assist the utility in analyzing the size
of the opportunity and designing a market entry strategy. It now has a
business relationship worth several million US dollars a year.
As shown in this example, marketing and sales people can play a
unique role in business development. They are natural intermediaries
between key industry stakeholders and can act as market makers by
matching the technology offered with the demands of customers and
end users. What it takes to succeed is a mastery of flexible processes
that enable a company to systematically discover and develop new business opportunities together with leading customers. This is no simple
task. Many different perspectives and skills have to be integrated into
the process. You have to create headroom for creativity, and the
willingness to question all assumptions. And you need to set and maintain a clear course towards realistic and implementable business ideas.
Operations
A flexible business development process starts with a clear-cut

hypothesis on a prospective new business. No company can steer a
course to success on the basis of vague coordinates such as Look for
ways to sell product line X or Find out if we can do business in
country Z. The hypothesis has to be thought through with stringent
logic, starting from the value to the end users and working backwards
towards implications for the customer and supplier. Following this
track, it must become readily apparent what knowledge and which
decision-makers have to be part of the process in order to arrive at an
answer. At successful companies, sales and marketing executives are
guided by an inner compass to develop hypotheses of this calibre from
their daily interaction with customers, market researchers, and R&D.
The second major phase is then to validate the hypothesis. This
can be done by a project team or for very complex and critical topics
by holding a search conference together with a leading customer.
In either case, the participants begin by developing a common understanding of the forces at work in the industry relevant to the prospective new business. They share information about trends among end
users, the likely development of the technology, competitive behaviour,
and so on. The points where market needs match up with technology
offerings (present or future) are tallied, with the aim of finding a winning combination. The best solutions are refined in discussion by considering their economic attractiveness, technical feasibility, and time
horizon in the eyes of all stakeholders: end users, the customer, and
the supplier. Figure 19, an example from the power industry, maps the
relative attractiveness of opportunities on a win-win matrix that considers the opportunitys economic benefits for both supplier and customer.
Disputed or doubtful issues are recorded for further study. Potentially winning solutions, which look economically attractive for all those
involved (end user, customer, supplier), are then subjected to a de-
49
Operations
50
2
10
3
8
7
5
Low
Projects economic
value to the
customer
End-user
requirements
Customer
requirements
Customer
business case
High
Exploring win-win opportunities
6
Low
4
9
Win-win
opportunities
subject to further
action planning:
No.
2
3
8
10
Project title
1.2 GW coal
800 MW coal
400 MW coal
600 MW gas
High
Projects economic value to the supplier

Technical feasibility
Time horizon
Supplier business case
Figure 19
Source: McKinsey
tailed review in the third and final phase of the business development
process. Disputes are resolved, remaining questions answered, detailed
business cases calculated, and feasibility studies completed. In most
instances, action planning for the top-ranked ideas also begins in this
phase. Turning a new idea into reality may involve changes in product
line planning, a memorandum of understanding on a joint project with
a lead customer, or on the customer side initial marketing activities
to inform and attract end users. The result is a solid business concept
and clear next steps.
Only a few companies today have really institutionalized a flexible
business development process. Those that have are building a sustainable competitive advantage that will keep them growing profitably in
dynamic industry environments.
Effective communication of customer value

Effective communication of the customer value of an industrial project
is a key factor of success in winning orders. Take an example from the
Operations
telecommunications industry: two years ago, a software house developed a system that dramatically increased the transmission rate in data
networks. Despite the products undisputed technological superiority,
the market did not respond initially. It was only after the software
vendor created a new customer workshop format, and marketing materials that explicitly pointed out the economic value to the customer
that the new system finally took off.
This workshop approach helps suppliers to communicate the advantages of their product to the customer effectively. As shown in Figure 20, three major topics are on the agenda: describing customer
value, calculating customer value and capturing customer value. To set
the stage, the supplier describes the customer value by showing the
benefits of key product features to the customer and end user. At the
heart of the workshop is an interactive business model, programmed
to allow key parameters to be modified on-line for on-the-spot calculation of a projects cash flow under different customer-specific assumptions. To round off, actions for capturing the value by ensuring smooth
product integration and effective marketing to end users are recommended. By putting the accent on the mutual benefits of the solution
and thus opening up opportunities for a win-win outcome, the workshop offers a way to get beyond pure price discussions and promotes
trust-based relationships with customer decision makers.
Let us take a closer look at the workshop agenda. Describing customer value follows the pattern of traditional product descriptions,
though putting them into the context of a conclusive discussion of
customer and end user benefits. The purpose of this is to show that the
suppliers products can help the customer to satisfy the needs of his
customers. To do this, we start with end user scenarios. In the telecommunications example mentioned above, these might be the growing
demand of small and medium-sized companies for larger bandwidths,
51
Operations
52
the integration of voice and data services or more flexible tariff structures. Having thoroughly understood customer and end user requirements, the supplier can now talk technology: key product features, constraints on existing infrastructure at customer or end user premises,
evolution strategies, and so forth.
Calculating customer value requires a deep understanding of your
customers business logic, in order to get through to the real source of
Figure 20
Account workshop agenda
Describing customer value
Calculating
customer
value
Capturing customer value
Real examples demonstrating use

and benefits of new products/
services
Market introduction program with

specific recommendations for
marketing products/services to
consumers
Proposal for technical integration
with customers existing
infrastructure
Interactive business model

calculates the economic value
of an investment to the customer
Source: McKinsey
value in a project. The solution in our example enables the customer

a network operator to offer broadband access to subscribers and
thus tap additional revenue potential. The size of the opportunity
depends on such factors as service penetration, tariff structure, and
the possibility of replacing other services. On the other side of the
ledger, the new solution will also cause additional costs: one-time
expenditure on purchasing and installing equipment, recurrent
operation and maintenance costs both of which will reflect the
suppliers price structure and the customers cost structure.
Operations
53
All these factors can be represented as input parameters in a

simple Excel model, as shown in Figure 21. With these inputs and a
set of formulae reflecting the business logic, the desired financial
indicators will be automatically generated as outputs. Plausible initial
values for the parameters as a starting point for discussion with the
customer are found with the help of market research or targeted
interviews. If the values of the input parameters are highly uncertain,
Interactive business model
Figure 16
Describing customer
Calculating
customer
value
Capturing customer value
Source: McKinsey
it is a simple matter to generate different scenarios illustrating the

sensitivity of the results under reasonable variations of the basic
assumptions. To give the model sales appeal, an appropriate user
interface can be programmed without much extra effort. The actual
power of the model, however, lies in the sense of fairness and
ownership generated by jointly developing various input scenarios
and tracking their bottom line impact.
Finally, to help actually capture the value that has been described
and calculated, the supplier really has to walk in his customers shoes.
Operations
54
The objective is to sketch key elements of a superior product/market

strategy. This process starts with very specific questions from market
research, such as what criteria can be used to segment the end user
market for broadband access? Which end user segments are economically attractive for the customer? Supplier experiences from other
projects can then be a valuable source in developing a differentiated
marketing campaign for selected end user segments. Recommendations
should embrace possible service packages, tariff structures, advertising
media and distribution channels. To round off the discussion, the workshop should touch on operational issues regarding project implementation and the next steps to be taken.
Customers reactions were extremely positive. Before the workshop, scepticism prevailed about the suppliers ability to work out a
valid model for the customers complex business. Afterwards, the customer was clearly impressed by the suppliers in-depth knowledge and
the transparency with which the economic value of the proposed project
had been presented. The joint effort had catapulted the discussion far
beyond pure product and price negotiations.
British Airways is one of todays most successful airlines, with a very

strong customer focus and excellent marketing skills. Its success did
not happen overnight. It was the result of a long-term change effort,
driven by top management. Another example is Compaq. After running
into difficulties with its technological focus on supplying the best machines at rather high prices, it was turned around in two years with a
marketing-driven change program led by a new CEO. Here, too, strong
leadership combined with a market-focused approach initiated the cultural change. IBM also appears to be a return-to-success story of lost
competitiveness regained through strong, market-focused leadership.
The story at Intel, on the other hand, is one of sustained success
despite some bumps in the road thanks to a constant focus on marketing. Intel managers are known for looking at their work from a different perspective to most people in industrial companies probably
best expressed in a comment attributed to CEO Andrew Grove: Were in
the fashion business.
Gradual transformation, fast turnaround, or sustained marketing
excellence are there any common denominators to point the way?
There is, in fact, hard evidence that successful companies are those
companies that not only restructure themselves but also grow.
Organization
Organization
Organization:
Capturing the
opportunities
55
Organization
56
While there is no simple answer, our experience indicates that

successful marketing change programs include the following three steps:
u Building an attractive platform. This involves defining and com-
municating an ambitious market-driven performance improvement target, preparing a roadmap for reaching the target, and
forming a dedicated project team with full leadership backing
u Implementing
a well-orchestrated set of initiatives. These will
include suitable pilots offering quick wins, and opportunities

for problem-solving and skill-building
u Ensuring
implementation and adjusting the organization to an-
chor and reinforce capability building.

These three steps, the activities they involve, and a rough estimate
of their likely duration, are shown in Figure 22.
Figure 22
Holistic change program
Build a platform
Execute an orchestrated set of initiatives
Implement and adjust
Activities
Set stretched targets
Communicate your
aspiration
Choose and introduce
23 clear signals for
change
Design program and
team
Secure early wins

Approach initiatives
systematically
Pick targets
Choose levers
Solve problems
Define controlling
processes and
responsibilities
Implement, review and

adjust measures
Adjust the organization/personnel
processes
Redesign incentive
systems
Typical timing
13 months
612 months
23 years
Designing and executing a program to enhance marketing performance is a major effort. The program must integrate activities concerned with achieving the companys business objectives, with bringing
Organization
about the required cultural change, and with raising skill levels in
the organization. A consultant can accelerate the process from the
start by contributing broad industry expertise and the necessary
analytical methods, for example, with an initial outside-in analysis
of the companys position in the marketplace. These can be
complemented by proven approaches for communicating the need for
action, followed up by assistance in defining, prioritizing, and
implementing the handful of key projects that will deliver short and
long-term operational improvements.
Building an attractive platform

Many industrial companies have operated for years on the technology
sells principle. Marketing tasks and the time allocated to marketing
have been second priority, and many business leaders have grown up in
this environment. What is needed, then, is a new mind-set starting at
the top, with the explicit intention of breaking with the past and shifting the organizations focus outwards to studying and satisfying customers and actively shaping the market. Often, this may be possible
only by replacing key executives with people who have a stronger and
broader marketing perspective. Leaders should send clear signals that
the old way of doing business will no longer be rewarded.
The leadership teams ambitious goals have to be transformed
into a platform that appeals to and is accepted by key people in the
organization. This is not a simple task, as stretch targets are often radically different from the past level of performance in industrial companies. When Eckhard Pfeiffer took over Compaq and introduced a new
market focus, he turned the traditional culture, which was focused on
technological excellence as the prime objective, upside down. In parallel with major cost containment efforts, his decisions on the marketing
57
Organization
58
and sales side signalled a new beginning. Pfeiffer changed distribution

strategy, introduced a new advertising concept, and launched new customer service centres.
Ambitious leadership implies more than a change in a companys
focus, new role models, and a rise in energy levels. It also means a
radical move towards a clear, quantitative assessment of current marketing performance and potential, and the setting of fact-based, stretch
targets, a key element often neglected by less successful marketers.
Sometimes it is obvious what actions are needed to move to a
superior marketing focus. Most of the time it is not. Then you need to
start with a phase of defining new goals on the basis of sound research
and analysis. This gives management an objective mirror of company
performance in terms of current (and probably future) best practice
and limits of performance. When this assessment of the need for action is combined with a rigorous appraisal of internal skills, the resulting profile of the gaps will indicate what sort of challenging yet
achievable goals should be set and pursued with specific initiatives.
A special initial effort must be made in such a major project to
communicate the objectives and approach not only rationally, but also
emotionally, to get the organization to back the effort. The communication plan should include a few, well-selected kick-off signals to build
momentum. Appropriate signals might be new people in key positions
to underline the importance of marketing, organizational changes such
as the formation of task forces to conduct pilots, and cross-functional
meetings to identify and overcome the formal and informal barriers to
change within the organization.
This phase can take one to three months, depending on the evaluations needed and the level of agreement on objectives among the top
team. A roadmap of carefully selected and prioritized initiatives should
Organization
be developed and committed teams formed as basis for a multi-year

change program to achieve the goals.
Executing a well-orchestrated
set of initiatives
Business-to-business marketing is a way of thinking, not a function. A
marketing department with a strong customer orientation can be a good
start, but it is not enough to win the customer. The value delivered by
R&D and Production must fulfil the promises made by Marketing and
Sales. The question is, what practical steps can be taken to motivate
everyone across the organization to share the values and behaviour of
a successful marketer?
No matter how urgently performance improvement is required, it
is usually a mistake to start immediately with a broad range of parallel
initiatives, for example, a sales performance improvement program
across the entire company, global reorganization of the sales force, or
a multi-year program to build a new marketing MIS (management information system). This approach consumes energy rather than liberating and channelling it.
We recommend focusing first on early wins and a few, very carefully selected pilot initiatives. For example, a project to determine account-specific profitability in the equipment business can be an important source of early wins. The results give the sales organization useful
information for capturing better returns immediately by focusing on
the most profitable customers. Each success creates an opportunity to
communicate the value and importance of focusing on customer needs
and profit potential, thereby maintaining the credibility of the program and boosting momentum.
59
Organization
60
In parallel with pursuing early wins, change program leaders

should involve many members of the company in systematic, fact-based
problem-solving. This will involve building skills in these areas. Most
marketing and sales issues can be addressed more successfully in systematic and quantitative terms than with the soft touch often associated with marketing/sales. A fact-based approach typically builds on a
stretch target, an action plan, and learning labs or other safe havens
for experiments.
Stretch targets . An aggressive, quantified sales and margin target has to be set for each initiative. Selecting the right targets implies
a sound understanding of the total potential improvement attainable;
for example, how much you can increase the margin with existing
customers or how many new customers you can win in the next quarter.
The assessment carried out to define overall objectives is a helpful
first step, but often has to be supplemented when starting a specific
initiative. Ideally, such targets are specific, broad enough to trigger
new thinking, quantified, and measurable.
Action plans. Coordinated action plans have to be developed to
achieve the targets. To hit the target, choose your arrows from among
the relevant levers. For example, a stretch target such as increasing the
absolute margin in a defined customer group by 3040% could be hit
by better pricing, sales force productivity improvements, redesigned
channel management, up to an expansion of the business scope to include new services such as financing and risk management. Not all of
the arrows will be equally effective, however, nor is it feasible to
shoot them all simultaneously. Instead, pick the three or four that
offer the highest leverage and focus on them.
Applying proven marketing tools systematically can be a powerful
lever of change, and industrial companies can learn a lot from but
not copy the best consumer marketing companies. Nevertheless, the
Organization
best tools are only as good as the people who use them. For example, a
textile machinery supplier equipped its sales force with a computer model
for making pricing decisions. Unfortunately, most of the sales people
were afraid to use the computer. They finally pushed their objections
through and the system was ultimately scrapped much to the satisfaction of the suppliers more sophisticated competitor.
Learning labs. Targets and actions must be hammered out and
implemented in a manner that fosters learning, leading to continuous
and lasting improvement. The key to promoting learning is to marry
the set of basic problem-solving skills with the process of cultural change.
Analytical problem-solving is always necessary, but never enough on its
own. Companies that successfully achieve both one-time and continuous improvements address the issues of building skills and developing
change agents at an early stage when they define the project team for
each initiative. They also actively seek to teach as many people as possible the problem-solving approaches, so as to develop expertise and
make sure that the methods will be applied throughout the organization. As a reinforcing mechanism, one approach used by Cummins in
its marketing skill-building program is marketing accreditation for
individuals, based on an individualized skills matrix and including elements of peer pressure.
Depending on the type and the complexity of the initiatives, this
phase takes six to twelve months. The end product of each initiative
must be a clear-cut action plan with measurable expected improvements and responsibilities for implementation, broken down and tailored to different organizational levels, for example, corporate architect projects for top management, market and relationship development initiatives for middle management, and customer satisfaction and
productivity improvement projects for the front line.
61
Organization
62
Ensuring implementation and adjusting

the organization
A comprehensive controlling process should be installed to make sure
that the action plans are implemented on time and deliver the expected results, or else that corrective action is taken. Plans may be
broken down into smaller or larger steps: what counts is to quantify
targets as much as possible. Mead chairman and CEO Steven C. Mason,
who has overseen the introduction of high-performance teams throughout his company over the last five years, applies the familiar notion of
what-gets-measured-is-what-gets-done but with a unique accent on
the people behind Meads strong performance: If we can measure it,
we can accomplish it. If we can accomplish it, then we can reward those
who did it. 1
In addition to rigorous implementation control and course corrections to deal with unexpected successes or setbacks, making the transition to a truly market-focused company means adjusting the organization to foster capability building. While all generalizations are flawed,
we would suggest focusing on four organizational levers:
Coaching and supervision: teaching supervisors how to be effective coaches. In, for example, the area of sales where sales managers
have the pivotal job of linking marketing strategy to front line execution, building excellent coaching skills among managers/supervisors
can make a major impact on sales performance in most organizations.
While leverage points for coaching differ between simple and complex sales, the best sales forces in each case control just a few variables extremely well. For example, in simple sales (standardized prod1 Quoted in: PIMAs Papermaker, June 1997, in an article honouring Mead as the Paper
Industry Management Associations company of the year.
Organization
ucts, some systems), helping sales people improve face-to-face skills

and manage their call frequency better should be priorities.
In complex sales (systems, project-based businesses), account planning and follow-up, combined with enhanced face-to-face skills seem to
have the highest pay-off.
Recruiting and training: developing programs to build the necessary skills. As with the companys or business units performance gap
versus the market, the skill gap of the marketing/sales team must be
objectively analyzed and segmented to tailor an effective response. Key
questions to ask are:
u Basic
capability? Do all of our people have the intelligence,
education, and personal characteristics to be able to develop

demand for our value proposition? If not, this is where recruiting is absolutely essential.
u Knowledge?
Does the team have the necessary product and cus-
tomer knowledge?
u Application
expertise? Have the people in charge learned and
practised planning, questioning, and problem-solving processes

matched to our marketing/sales situation?
u Behaviour?
To what extent are good habits simply not being
put into practice?

Providing information resources and systems: enabling sales and
marketing staff to understand needs and deliver value. This is, in other
words, translating overarching marketing objectives into day-to-day routines. As many of the examples cited indicate, meeting the information
needs of the front line, as well as those of management, can be a key
competitive advantage by helping to develop distinctive value propositions and codify best practices.
Information technology can play a leading role in developing the
63
Organization
64
value proposition: internally by expanding Sales and Marketings access

to information and externally by enabling forms of virtual integration with customers. Successful systems development programs, such
as for implementation controlling, can help keep things simple and
moving forward.
Motivation and compensation: designing appropriate compensation and incentive packages to guide individual efforts. When
redesigning incentive systems to encourage marketing mindedness,
some key points to bear in mind are:
u Motivation
is seldom the decisive performance constraint, and
compensation changes will frustrate people if they lack the skills

or the support to act as desired.
u Rewards
should be linked to strategy; for example, tied to prof-
its rather than volume. There may also be some disincentives,

for example to discourage sales not in the customers best interest.
The most effective compensation systems base rewards on variables that individuals can realistically be expected to influence. Again:
measuring the right things will itself help people focus on activities
with the desired impact. Some level of incentive should be achievable
for most people in the group, and managers should be rewarded for
improvements in the performance of their direct reports. The system
should be designed with room for spectacular achievements; their
impact can be dramatic. For example, an industrial equipment company in the US radically changed the incentive system for its sales people, permitting the best performers to earn a higher salary than the
CEO. This led to dramatic increases in sales and profit within a very
short period and to a quadrupling of salaries for the top sales representatives.
Organization
65
Executing a program of this kind is a major undertaking. It requires vision, courage, skills, time, persistence and a good deal of intuition. However, if the program is well executed, the potential is ex-
Marketing profile of leading companies

Marketing is permanent, customer-oriented action, not just a function
Intimate customer knowledge is fundamental to growth
Marketing approach is institutionalized and systematic
Markets are clearly segmented according to potential for profitable growth
Value proposition is explicit, superior, and understood
Organization is actually able to deliver the value proposition to target segments
Skill building in marketing is a sustained effort led by top managers
Marketing is a complementary skill to strong operational skills in R&D and
production
Source: McKinsey
tremely high. Our experience in supporting companies during such

change programs shows that, with the right approach and leadership, a
company can, within a two-year period, become a profitably growing
market-driven success story. The resulting marketing profile should
resemble that developed by leading companies. It is shown in checklist
form in Figure 23.
Figure 23
Five key marketing questions

Could you sell your customers products
to their customers?
Do you have a list of customers you dont want

to serve?
Are customers convinced that your offering

is distinctive in the way you intended?
Do you know why customers are paying a

competitor higher prices for products with
fewer features than yours?
Do you know how much you could earn
by giving customers your equipment for free?
?
Leaders of McKinseys European

Business-to-Business Marketing Practice:
Johan Ahlberg, principal in the Stockholm office
Dr. Thomas Baumgartner, principal in McKinseys Vienna Office
Alex Bhrer, principal in the Zurich office
Peter Dahlstrm, principal in the Copenhagen office
Anthony Freeling, director in McKinseys London office
Steffen Karlsson, senior engagement manager in the Stockholm office
Tomas Nauclr, principal in the Stockholm office
Walter Oblin, senior engagement manager in the Vienna office
Hajo Riesenbeck, director in the Dusseldorf office

McKinsey Marketing

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McKinsey Marketing

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Thomas Baumgartner

McKinsey & Company, Inc.

McKinsey & Company, Inc.

Printed by Frhlich Druck AG, Zollikon

McKinsey & Company, Inc.

Strategy: Setting the stage

Understanding customers and market

Pinpointing the right segments and customers

Defining a distinctive value proposition

Operations: Putting the system in place

learning from consumer goods

profiting from integrated solutions over the whole lifecycle

providing economic value to the customer

Organization: Capturing the opportunities 55

Executing a well-orchestrated set of initiatives

Ensuring implementation and adjusting the organization

With this brochure we would like to summarize the great benefits

As an introduction to excellent business-to-business marketing, here

harder it is for competitors to copy. It also deflects competitive attacks

Marketing makes the difference

Putting marketing to work

Restructuring and growth by successful companies

Cost due Cost

* New products, new customers, new regions

Restructuring and growth by less successful companies

* New products, new customers, new regions

Cost due Cost

ideas gathered here are applicable to business-to-business marketing

customers and the market to know what products and serv-

ices will create economic value

a segmentation that also reflects customers economic

attractiveness for you

up with a distinctive value proposition for each segment.

Many managers believe that their companies already have a solid

Achieving excellence in marketing

Key factors for success

Expansive mindset (broad

High market share in chosen

Leaving some white space

Manage access to Tailoring supply channels to

Evolutionary build-up of branded

New workshop formats

Understanding customers and market

tions. Marketing-minded industrial companies succeed by paying extra

Walk in your customers shoes

diate customers to create win-win solutions. US-based Mead Packaging

Look for new value horizons

tenance, financing, and advice on processing) or, as another example,

Pinpointing the right segments

a marketing perspective, a good segmentation passes the

a business perspective, a good segmentation: (1) Contains

more than one segment offering a sizeable profit potential and

account, in terms of mutual customer-supplier attractiveness. This

Importance of buying factors

Relative importance to customer, points

low price. The analysis helped managers recognize a latent strength

Performance breakpoints concept

Micro-segmentation: evaluating each major account

Attractive existing customers

Attractiveness of customer to supplier

the profitability of marginal customers, using a combi-

nation of sales force productivity levers, channel management,

the profitability and retention of attractive custom-

the value proposition to high-potential customers