While discussion at the recent Erin Anderson B2B Research Conference at Wharton focused on cutting-edge research in the field of business-to-business relationships, participants also acknowledged the impact on marketers of the ongoing financial meltdown. Along those lines, three university professors and a moderator took part in a panel that analyzed the effect of the economic downturn on the B2B global marketplace. The Conference, co-sponsored by the Wharton INSEAD Alliance, was held in honor of Erin Anderson, a marketing professor at Wharton from 1981 to 1994, and at INSEAD from 1994 until her death in 2007.
The four participants were Adam Fein, panel moderator and president of Pembroke Consulting in Philadelphia; Gary L. Lilien, research professor of management science at Penn State University; Peter Fader, professor of marketing at Wharton; and Bart Weitz, professor of marketing at the University of Florida. The conference was co-chaired by Wharton legal studies and business ethics professor Diana Robertson and Sandy Jap, a marketing professor at Emory and a visiting professor at Wharton.
An edited version of the conversation follows.
Adam Fein: I’m Adam Fein, president of Pembroke Consulting, and I’m here with some of the luminaries in the business to business world to talk about what’s been going on in the economy, what’s been going on in the markets, and what it means for business to business executives. I’m pleased and honored to be with this group, and I’m going to let them each introduce themselves.
Gary Lilien: I’m Gary Lilien, professor at Penn State and research director of Penn State’s Institute for the Study of Business Markets.
Pete Fader: Pete Fader, professor of marketing at the Wharton School.
Bart Weitz: Bart Weitz, professor of marketing at the University of Florida.
Fein: Thanks very much for taking the time to do this. One of the things on the mind of every executive I talk to is where the economy [is headed]. We are in for what appears to be a very rough time. It looks like the economy’s going to be technically in a recession for the next few quarters. This happens frequently. We have cyclical economic downturns. How should the business to business marketing mix change as we go into this economic downturn? And how should executives start to prepare as we maybe get out of that downturn, some time late next year and 2010?
Lilien: I’ll take a crack at that. Everybody’s looking for a single answer to a question that actually has multiple answers. We actually did some research on a topic related to this, which is: Should firms increase spending during a recession? The answer to that, again, was: It does depend. The firms that have what I call “the skill, the will and the till”, should, in fact, increase their spending and focus on acquiring new customers while retaining existing customers. “The skill” means they have marketing expertise. “The will” means they have a culture to go against what seems to be a tough trend. And “the till” means that they have some resources to be able to invest. The analogy is, the best athletes often attack at the toughest times on a hill. What if you don’t have those assets? Now is the time to be focused on your core customers and retain existing customers. So I see diverse sets of strategies, depending upon the expertise and the resources of the firms.
Fein: Very interesting. I think we can see what’s been going on in the market, even in the financial markets — those banks that are not very exposed to some of these troubled credit markets and have some assets are acquiring. And those that aren’t are being acquired. Any other thoughts on this? Strategies for a recession?
Fader: One thing I like to do is avoid excessive generalities. It’s interesting how we just take it as truth that we are entering a recession, and that it’s going to go across the board and affect all sectors the same way. It’s interesting that when times are good, we don’t know that the good times are going to continue. We know that the bottom’s going to fall out at some point. So it becomes a self-fulfilling prophecy if we start battening down the hatches, and so on. There are growth opportunities out there. There are certainly some sectors that will continue to do well, or will do even better. Google just announced some really good financial results, and there’s plenty of others. So I think we just have to be careful, and maybe want to cater our answers or our strategies, depending on exactly which sector we’re in.
Weitz: But this actually goes back to what Gary said, [which] is that companies in the sectors that are growing aren’t going to be as affected. And ones that are in sectors that are in trouble need to batten down the hatches a bit more and be very selective in terms of where they make the investments. Another analogy to this is if you look at the consumer market. Maybe this is bad times for some people. But some people have money, and this is a great time to buy a car or buy a new house, because you get it for a pretty low price.
Fein: Yes, that’s true. I guess the entire podcast should be labeled, “Your mileage may vary.” But to pick up on that point, Pete, speaking of markets, if we look back over the last five years, exports have actually been a real bright spot for the U.S. economy and for business to business marketers. I went back, and by my calculations, exports have jumped from about 6% of GDP to about 9.5% of GDP. Without exports, we would technically be in a recession, as the economists would officially define it. And where are exports growing? Things like excavating machinery, electro-equipment, drilling and oil field equipment, core technology products that are all being sold into business to business markets overseas. And I’m wondering… how can U.S.-based companies best take advantage of some of these global B2B opportunities? And then the question reversed: How can some of our global listeners think about their strategies, vis a vis the U.S.?
Lilien: I’ve thought about this quite a bit. One of the things that has driven the export business for the B2B firms that I’m familiar with has been the fluctuations in currency. For example, if one of the outputs of this is, for example, some fluctuations in the values of currency in China, I think we’re going to see some of the rules of the game change. I think the answer to this is, once again, as we said before: It depends. If you’ve got a scenario where you think that you’re still going to have a competitive advantage in a particular sector in a particular region … you should be prepared to invest there. My sense here is that we don’t know what’s going to happen. Hedge your bets.
Fein: The dollar has dropped about 45% in the last six years. The U.S. has become a low-cost source of manufacturing for a lot of B2B companies. I don’t think any of us can predict the currency markets, for sure.
Lilien: I think China’s going to be a much better customer for us in the future than it has been in the past.
Fein: Interesting. What makes you say that, Gary?
Lilien: As their currency rises, they’re going to be able to buy an awful lot more of that heavy equipment that you were talking about.
Fein: They’re building up their infrastructure, sure. What else?
Weitz: Also, in China, their labor costs are starting to increase now, too. They are being threatened by lower-cost labor that you might get in places like Vietnam…. What you don’t want to do as the economy turns down is you don’t want to spread your resources too thin. So you don’t want to enter any export market; you want to emphasize your investments behind export markets where you really are doing well and have a competitive advantage, have a good way of entering the market, or a good way of building on some assets that you’ve already built in the market.
Lilien: Let me add one thing. I spoke to a CMO of one of the ISBM member companies. He said something I thought was really very wise. He said, “Listen to what your customers are not telling you.”
Fein: What does that mean?
Lilien: I had asked him that. He said, for example, they had a very high value offering for one of their top customers. Very high value. They’re also in the mining machinery business. According to all their calculations, this customer should have bought. The customer said, “We love your product.” They didn’t buy it. After they debriefed, they realized that the customer should have bought it. But they didn’t have the cash. So what they needed was the financing. He said, “If we had known up front that they needed financing in order to get our product, then we would have gone in with a different offer.” So I think that what you’re going to see in this recession is very dramatic change in customer needs. So pay very close attention to what your customers are not telling you.
Fader: Which — to take a tangent off of Gary’s point — is to talk about just the role of listening to customers, the role of market research, the role of marketing metrics and analytics. It’s interesting that those are seen as one of the first things that we can cut. Times are tough. We don’t need to worry about all that “nice to know” stuff. But I think a lot of those analytics — which are getting increasingly sophisticated — are a great source of efficiency for companies that really can read the market and allocate their resources appropriately. So it’s a shame to see companies cut from there, when that could be exactly the thing they need to do in order to weather the storm.
Fein: Can you give us an example of a best practice metric, from either consumer or industrial markets, that we can think through?
Fader: It’s becoming increasingly easy to track customers and specific transactions over time. So instead of being very transaction-oriented — “we just want to sell stuff now” — start thinking about relationships with customers. It’s something that’s existed — the concept — in B2B markets for a long time, but the ability to actually anticipate what their needs are going to be, and what they’re willing to pay, and what other offerings you want to wrap around with that particular product — those capabilities are better than ever before. Companies really ought to be investing in those capabilities instead of saying, “We can do without that stuff until the good times come around.”
Weitz: To build on that point: In these difficult times, it becomes even more important to focus on the best customers you have — the ones you have a good long-term relationship with, that you’re going to work together with on a partnering basis, and to even increase the ties that you have with those customers. Then, with the customers that aren’t very profitable or you don’t have a good relationship with — if you have to cut back, cut back on those.
Fader: That’s the conventional wisdom, and it’s actually what Gary said earlier — when you go into defensive mode, just focus on the good ones. It’s hard to argue with that logic overall. But I believe that today, with a better ability to track and anticipate, you are in a better position to be able to go after some of those harder-to-reach and harder-to-predict customers than before. I’m hoping that some companies will be willing to attempt that reach, rather than just giving up on them and staying close to home.
Lilien: A cautionary tale here. Firms are going to hear the market screaming for price decreases. And one of the things that we’ve learned over years and years and years — and we shouldn’t forget what we’ve learned — is that it’s much easier to lower price than to raise price. So if you set a low price with a particular customer when times are bad, it’s going to be hell to try to bring that price back up. So, again, a cautionary tale. In times like this, we have found in past recessions that firms lock themselves into pricing well below value, because of the exigencies of “making the numbers” for that quarter.
Fein: You’re all bringing up a really interesting angle on something I hear a lot about, which is anticipation — the ability to anticipate where things are going to go, how customers are going to behave. As I look back, we’re pretty much coming out on the other side of what may be considered the biggest asset and credit bubble perhaps in history. Some markets have gone through enormous booms and busts, just in the last five years. I want to give you one example, and use that as a springboard for some conversations. One of the biggest business to business markets is building materials and construction. Look what happened. Residential construction was running at about $400 billion a year in 2003, spiked up to almost $700 billion a year in 2006 and today, 2008, is running at about $350 billion a year. So that’s basically a sharp up and a sharp down. During that run-up, there was, I’d say, irrational exuberance about the future prospect for these industries. So how can executives anticipate behavior when they’re caught up in this? How can they recognize these booms, and how can they anticipate the bust? And when’s the next boom coming? I’ll leave that question for another time. But let’s focus on the first one. How can they anticipate, using customer metrics, what’s going on?
Weitz: Maybe Pete will have a different view on this, but I actually feel that you probably can’t anticipate it. If we could have anticipated some of these things, they wouldn’t have happened. Some of these, you just don’t know when the bubble’s going to burst and when it’s not. So I think rather than trying to anticipate it, the important thing is to recognize when it’s happening, be adaptive … and change the approach that you’re taking. I don’t think it’s very easy to anticipate some of these things.
Fader: It’s certainly not easy to anticipate, but I think there’s some chance of being able to go below the surface. Too often, companies — Wall Street analysts — just look at macro patterns, the kinds of numbers that Adam was describing. They look at these sharp upward curves and these sharp downward curves without really looking below and saying, “How many of these were new customers just entering some of these markets? How much of it was repeat sales?” When you start decomposing these sales patterns and understanding how many are new adapters, or is it just the same group of people buying more and more and more — that becomes a bubble, then. So trying to get below, trying to link transactions together at a customer level, makes it a little bit more feasible to try to understand what’s going on — although it’s still a challenge to say when things are going to peak, and how high and how low they will go.
Fein: But that’s actually an interesting idea, Pete. Because what it suggests is that during this period of run-up, it wasn’t enough to just look at the total number of sales, as, let’s say, some of the home builders did, but to actually look at, what was the transactional velocity. Was it people buying to flip? Was it people buying new homes? I mean, what was going on? We were building roughly 40% more homes than traditional demand was going to absorb. What was going on there? Something was happening. And I guess that individual customer metrics might have given an important clue early on.
Fader: That’s exactly right. In many of these cases, when you see a bubble expanding very rapidly, it’s because there’s a rapid adoption of people jumping in. You’re always going to saturate the pool of people who eventually will buy this thing. The hope is that they will continue repeat purchasing at that same crazy rate. That just can’t happen. So, all these things will settle down. I really think it’s the very same dynamics, albeit with different players and issues, as the dot-com bubble eight years ago. We just don’t learn from these things. We keep thinking that each one is unique.
Weitz: Yes, but everybody wants to get out of it and sell at the top. You certainly know it’s not going to last forever, but it’s very hard to predict how long it’s going to last. Let’s say you had seen all of these people buying houses to flip them. And maybe you got out of the market, and you said, “Gosh, this market’s going to peter out after a while, and we’re going to have a big problem.” But the question is, do you get out two years early, or before it really hits the peak and miss out on all those sales? Or do you get out right when it hits the top, if you can? Or do you make an adjustment after it hits the top and you realize that it’s now happened?
Lilien: Well, you’re talking about greed. Maybe just a couple of comments to draw this back to the business to business side, particularly because you were talking about the housing market. The housing market draws so much from the business to business side. In other words — the business to business side is derived demand…. You anticipate, I think quite rightfully so, that the increase in housing building is not going to continue. So what does this mean to the suppliers into this industry, the business to business firms who are going to have to react to this? Let’s take a look at what they have done in the past. Many of these are capacity-driven firms — in other words, high fixed cost, low variable cost firms…. Plant utilization is a primary metric for determining the cost structure. High plant utilization, low average cost and very low incremental costs….We have done some research at the ISBM that takes a look at capacity and pricing cycles. There’s herd behavior. When a bunch of lemmings think the world is going to continue to increase, everybody adds capacity to more than meet that anticipated need. So again, let’s suppose that we have five firms, all of whom see a 20% increase. And it’s true, there’s going to be a 20% increase in final demand. But they all increase capacity by 10% so they can get more than their fair share. And then you eventually have an over-capacity cycle.
What happens then? Overcapacity. Now, how do you get your costs down? Cut capacity. Now what you have is a squeeze. So all of a sudden the next thing that happens is an undercapacity cycle, because you have this lemmings process. Bottom line on this? There’s going to be an overshoot. There’s going to be an undershoot. If you go back to advice for what some of these firms should be doing, your inclination is going to be to cut back capacity. Don’t cut as far back as your neighbors might. And you’re going to recover an awful lot faster than they will.
Fein: One of the things about business to business markets is that a lot of the customers of these manufacturers are distributors. So it’s interesting, the economic model for manufacturers is, maximize plant utilization for your economies. For a distributor, typically, one of the things you want to maximize is the economies of the customer relationship. You don’t want to just sell one product. You want to sell a basket of products across that….
You’ve built that relationship. You want to put a lot through that relationship. So, how do you think those relationships are going to be changing as we go into this economic downturn? Is there any advice you could offer to either side — manufacturers or distributors — as [they] go into this downturn as to how, for example, the nature of those relationships will be either stressed or possibly improved?
Weitz: There’s going to be a lot of stress on these relationships. But again, I think that the good relationships you have will work together to solve these problems. Those are the ones that you ought to really put a lot of emphasis behind. So you’ve developed sort of partnering relationships that are very effective with some distributors or some retailers, and you’ll work together to figure out how to solve these problems. With other people who might hound you to drop your prices — it’s just not advantageous for you to treat them as a partner any more.
Fader: I think there’s one silver lining here, because we keep equating this to a typical boom-bust cycle — and this is not a typical one — because there’s all this financial weirdness going on, which in some sense is related to the cycle, but is exaggerating the effects that we’re seeing today. And if — or should I say “when” — the financial weirdness settles down and people are willing to lend money, and so on, I don’t think that the overall economic situation is as bad as people think. There’s just this artificial wrench that’s been thrown into the works that is keeping companies from spending and investing and so on. It’s not simply the usual derived demand going up and down. It’s companies restraining themselves in a way that we just haven’t seen for decades. So if confidence can be restored, and the right financial fixes can be put in place, I think that this cycle will fix itself relatively quickly compared to previous ones.
Fein: I’m going to take a little bit of a different position there, Pete, because I think what we’re going through now is actually on the other side of a credit bubble and really pulling back credit. So banks are not financing. The cost of money has gone up. The cost of short-term financing from major industrial conglomerates has doubled or tripled. That’s essentially the earnings-per-share gone because of increases in some of these short-term interest rates. So I wonder how much that lubricant of the economy, the lubricant of sales, ofcredit, is going to start slowing down activity. And it might take a little while to build back up.
Fader: I do agree with you, but the point is, it’s the lubricant of sales that has been changing, as opposed to the inherent demand out there. And that’s what makes this thing different. That’s a really important factor and a tough thing to fix. But I think the demand is in place. If we can figure out how to relubricate, then things could get back on track.
Weitz: I also think that in a capitalist economy, you’re going to have some sort of survival of the fittest. What this is going to do is, it’s not going to affect companies that are very successful, very well-run and very well-managed, as much as it’s going to affect companies that are sort of marginal. To some extent, when you come out of this, maybe you’ll have stripped off a lot of the fat in the economy and even within your own company, and you’ll come out of it stronger.
Lilien: That’s a very good point. I would advise companies, as a way to come out of this — now is a great time to think about the major source of innovation that we’ve seen over the last 10 years. Everybody thinks about products. That’s not where the major innovations have come from. There have been innovations in business models. Now is the time for firms to think about doing business differently, because the rules of the game have changed. If you use the old business model, you’re not nearly as likely to succeed coming out of this as if you begin questioning the fundamental business model — the way you do business, the offerings, how you go to market, etc. — coming out of this situation.
Fein: Gary, you just anticipated my next question, because we, unfortunately, are going to run out of time. But I was going to say, what is that one piece of advice you’d offer executives? I think, Gary, you gave it. Pete and Bart: What piece of advice would you offer business to business companies today?
Fader: I have to agree with Gary. I think you have to experiment in situations like this, whether it’s business models or other aspects of your operations. Unfortunately, that’s the first thing to go. Times are tough, we have too much at stake, we can’t afford to experiment now. We can only do that when we have excess margins in demand. But I think it’s as important as ever. You just have to be smarter about what experiments you run, how quickly you run them, how you read the results and act on them. It could be a great time for what we all like to call “marketing science,” instead of the business as usual that tends to operate in most industries today.
Weitz: Another thing that companies need to do … this places a much greater emphasis on being strategic, thinking strategically. You have a limited amount of resources to invest and you have to be very careful where you make those investments. It’s like the difference between cutting back across the board or using a scalpel to cut out particular activities that you’re not doing very well, and investing in activities that you’re doing well…. [Also], it’s [important] to invest in the people you have right now. Even though it’s going to be a little bit painful, you might want to do more training of people who are not fully engaged right now, so that when you come out of this, you have an even better work force than before.
Fein: I’ll add one final thought, to pick up on some themes that have been here. I would boil it down and say companies with very strong balance sheets, and good solid platforms, are going to have a real nice opportunity to do two things. Number one, acquire customers from weaker competitors. And number two, acquire people. Upgrade the talent of your work force while others are in distress. We’re seeing that play out in some of the financial industries. But I see it playing out in business to business industrial industries.
Gentlemen, thank you very much for your time today. I really enjoyed being with you.