Organize around end-use markets

Organize Around End-Use Markets Mark MacPherson

V. H. Kirpalani

Companies

can gain by changing

ture toward a market centered

their organization

ganizations on marketing efficiency, and profitability.

struc-

one clustered around market

groups. An anal_ysis is made of the gains and certain trade-offs that occur. The recommended new organization structure is illustrated. A number of questions and areas that deserve in-depth concern are pinpointed.

INTRODUCTION Organizational change toward a market organization from another existing form is becoming more common. The impetus to such change has arisen from three interacting forces: 1. More competition in the market place stemming from a large variety of new products, spawned by improved technology, which can service the same needs. 2. Many customers have developed sophistication and prefer marketers who are more responsive to their needs. 3. Greater emphasis is being placed by business or-

Address Studies,

correspondence Faculty

@ Elseviar

North

to: Professor

of Commerce.

Holland,

Inc.,

V. H. Kirpalani,

Concordia

1979

University,

Industricrl

Chairman, Montreal,

Marketing

Graduate Canada.

Mmu,yemmt

productivity,

The purpose of this article is to provide an analysis of the gains, the problems involved in accurately measuring the gains, and to discuss certain trade-offs that occur when the crossover is made to a market centered organization. The trade-offs concern product manager efficiency, research and development (R & D) effectiveness, and the sales force. Also outlined in this article are the causal reasons for change toward a market centered organization and comments upon the gains from such a move and the measurement of these gains. The trade-offs, recommendations for a matrix organization, and further questions and areas which a company should study in depth, relative to trade-offs, are discussed.

CHANGE TO MARKET CENTERED ORGANIZATIONS The causal reasons for change toward a market centered organization sometimes emanate from an evolutionary process. In other cases the necessity to achieve the company’s strategic goals has dictated this alteration in its organizational structure. The impact of changes in 305

8, 305-3 12 (1979) 0019.8501/79/040305-08/$01.75

the marketplace, however, are probably the major reason triggering the initiation of the decision to cross over to a more market centered organization.

end-use markets like Men’s Wear, Home Furnishing, and Industrial [2]. Strategy and Organizational

The Evolutionary

Process of Market Focuses

Businesses are structured to carry out strategies in the markets they serve. It follows that as market conditions evolve strategies are reshaped in response; as customer end-use groups change in character an organization structure should change accordingly. Rapid organizational change characterizes fast growing companies. Business growth per se is one evolutionary reason for change. The organizational framework for handling a single proprietorshipa small company supplying one related line of products through a single channel of distribution to one market-will obviously be very different from that for a multiproduct, multimarket firm which becomes decentralized in products and management [ 11. Wide product variety and customer sophistication combined with needs proliferation has tended to make firms adapt their organizations. The first shift is from a geographic to a product focus. This latter is useful in instances where technology is advancing rapidly and customer knowledge, of the product and how it is used, is most essential to commercial success. Once the state of product maturity is reached, and when technical development of the product is not likely to affect market power drastically, competitive strengths tend to hinge on developing expertise in diverse end-use applications. The firm must deal effectively with customer groups which exhibit heterogeneous patterns and must organize accordingly. For example, E. I. DuPont’s Textile Fibers department moved from defining its markets solely in terms of products such as rayon, acetate, nylon, Orlon, and Dacron to organizing in terms of

DR. V. H. KIRPALANI is Professor of Marketing, Chairman of Graduate Studies Commerce and Administration, Concordia University, Montreal. Also he has wide business experience, is a known author and a consultant. His interests lie in International Marketing/Business and Marketing Management/Policy.

MARK F. MACPHERSON B.Sc (E E), B. Comm., MBA, is the General Manager, Phenolic Venture Group, Building Products of Canada Ltd. He has several years experience in the Electronics and Building Materials Industries. His is also a Lecturer in Industrial Marketing at Concordia University.

306

Women’s

Wear,

Structure

Keeping managerial arrangements in line with strategy plays a vital role in the enterprise’s survival and growth. Strategy sets the basic purposes of an enterprise in terms of the services it will render and the way it will create these services. It specifically involves choosing market segments that look promising. Also the necessary inputs have to be selected and segments and inputs have to be considered together to obtain synergistic effects. The resulting plans must be expressed in terms of targets. Finally, the sequence and timing of steps to reach the priority targets must reflect the firm’s capabilities and external conditions. The firm’s market strategy will become most effective only when it is linked to a supporting management design. The term management design covers more than just organizational structure. It also encompasses the nature of the planning process, the leadership style, and the form and location of control mechanisms [3]. This article focuses on the organization structure. Organization structure is a tool for implementing strategy. But given a strategy, there are four different starting points that a management can adopt for conceptualizing change in structural design [4]. One starting point emphasizes the importance of people. Organization design must fit the existing manpower resources, or at most require a minimum amount of shifting, hiring, and changing of people. Another principle of organization design holds that information flows should be the major focus since it is critical to have the right information flowing between the right people and levels. A third approach is based on reporting relationships, and planning and control systems, to check progress against plan. The fourth point is to zero in on the task to be done as the vital design element. Here an attempt is made to match up the external environment with the technology and resources available to the firm. In this article the last view, the task to be done, is considered. The concern here is with a company in which new product flows do not necessitate unprecedented change but the organization structure responding to customer needs is of prime importance. The indicated approach to organization structure of the company should then be to concentrate on reorganizing toward a market centered structure to meet customer needs while at the same time maintaining as much flexibility in the business as possible to meet change in the future.

Impact of Changes in the Marketplace Increased competition in the marketplace, as a result of technology stepping up the pace of new product introduction, and affluence which permits the customer more choice, has made market orientation a dominant business concept since the early 1960s. Despite this, in most industrial companies the divisional structures are still traditionally determined by regions, organized around products, or structured to commercialize a process technology. Only recently have a relatively small number of companies come to realize that market orientation is a useful aid to profitable growth. Furthermore the only way to ensure being continuously market oriented is to place a company’s organizational structure on a market centered basis. This means that its major markets become the centers around which the company’s divisions are built.

Examples of the Shift to Market Centering IBM’s data processing operations are segmented organizationally according to key markets. Xerox informa-

knowledge of new product needs, and more rapid company response capability, are easier to recognize but still hard to assess accurately. Moreover, the method of measurement is unlikely to be a standard one and complete results are not usually publicly available. With reference to the DuPont example given earlier, it has been reported that the new organization provides a better framework for planning. It facilitated the focusing of demand forecasts on end-use markets, making it possible to identify and appraise the factors affecting demand. Moreover forecasts by market could be cross checked with forecasts by products which would tend to lessen any bias [6].

When Gains are Easier to Assess Gains are easier to assess when the crossover to a market centered system was made because the company had met with problems. In such cases the situation prior to the crossover has been documented and following the crossover gains arise if there is an evident improvement in results. The problems which could lead management

first shift is from a geographic to product focus tion systems group, which sells copiers and duplicators, has converted from geographical selling to vertical selling by industry. PPG Industries has been examining the benefits of redirecting the marketing of its paint, ceramics, and glass divisions through a home environment profit center. Monsanto has organized a fire safety center that consolidates fire safety products from every sector of the company and groups them according to the market they serve: building and construction, transportation, apparel, or furnishings [5]. This leads to a consideration of the gains and trade-offs from structuring toward a market centered system.

GAINS FROM A MARKET CENTERED ORGANIZATION The Measurement Problem Quantitative dollar gains from an organization structure which is market centered are difficult to measure directly since other factors, both internal and external, cannot be held constant and may well interact to bias the measurement. Other gains that may result, such as improved forecasting, better marketing feedback, earlier

to make the crossover are as follows: l

l

l

l

Loss of market share or experiencing falling prices due to marketing efforts of powerful competitors. Customers needs, for more service and greater product diversity, that are being met by competitors. R & D and new product development floundering because of inadequate feedback on market direction. Inferior range and quality of marketing intelligence being received by the company, which has lowered the quality of planning and forecasts.

The new organization structure, in such a case, should be able to achieve a more systematic market development since it interfaces with more homogenous end-use markets.

TRADE-OFFS FROM CROSSOVER TO MARKET CENTERED ORGANIZATION A major theme that emerges from a study of organization structure is that effective organization is a matter of balance. A balance must be achieved in the extent to which organizational units are specialized or generalized 307

by purpose. The end-use market specialist handling a number of products is probably a generalist as regards each product. Thus there are trade-offs to be made when one crosses over from one structure to another. Some of these trade-offs are discussed below. Product Management

Trade-Off

Problems

The industrial product manager’s task often is to concentrate on selling his products rather than on determining what it takes to serve his end-use markets more effectively. In so doing there is the possibility that important opportunities in related products and services may be missed. Alternatively after the crossover, market managers will tend to focus on end-use market needs and may be prone to neglect the company’s ability to properly meet the needs of other market areas with any given product line. The above problem constitutes a trade-off which must be kept in reasonable bounds. Some companies are reported to have tried the solution of letting both types of managers work parallel to each other. However, this creates a conflict situtation with its own management dilemna. The DuPont solution after the crossover was the creation of Sales Program Managers to counteract the potential loss for each product of close working relationships among manufacturing, sales and research. Each of these managers was charged with the responsibility for looking after a particular fiber but was junior in the structure to the business manager of the market group [7]. R & D and New Product Development After the cross-over, R & D and new product development resource allocation and direction should benefit from greater feedback as to end-use market needs. Sometimes without feedback from the market group, however, R 6t D may bring out a new product on its own which could be competitive with existing company products. If the new product is given to the market centered business division, which is judged on sales and profitability, there could be a tendency to neglect its development. The DuPont Sales Program Manager appointment may well be the answer to this problem, as he is responsible for coordination and stewardship of new product additions to his product line. Sourcing

Multi-Product

Sales Force

The salesforce in the new business division catering to ;nd-use markets may well have to handle a variety of products. On the average, these salespersons are unlikely to have mastered as much technical knowledge about all their products as sales personnel in a single product or product line sales force. A number of solutions to strengthen salesforce capability in the business division are possible. One is to provide a technical back-up service through a group of product specialists. Another is to invest in appropriate training of salespersons. The third is to recruit more qualified salespersons when existing salespersons retire or resign. Some combination of these suggestions should provide an optimal solution. RECOMMENDATIONS The central recommendation of this article is that companies do an in-depth study directed toward shifting to a market centered organization structure comprised of one or more market groups responding to a Senior Vice President Marketing. Each market group will serve a market segment of buyers who have similar or closely related needs. Outlined below are preliminary suggested organization structures for the links between the market groups and the function departments, the formal organization for the Senior Vice President Marketing, and a typical Market Group. Finally there are a series of questions and areas the Company should investigate in an in-depth study.

Suppliers from Outside

After the crossover, the responsibility for realizing profit through servicing end-use market needs implies that the newly created business divisions should be permitted to source efficiently. Sourcing for supplies which 308

the company does not make but that end-users require adds to company marketing service effectiveness. A trade-off arises, however, when the business division finds it more advantageous to source outside for supplies which the company manufactures. In such a case, reduced demand for the company-made products may decrease overall company profitability. The resolution of this problem may only be by a corporate policy decision which limits the scope of outside sourcing. In this context it might be of interest to note than Sun Oil is reported to be trying out a profit center approach for its marketing divisions wherein the divisions will be free to purchase outside supplies to cope with competitive supply and price situations [8].

Organization

by Market Groups

A proposed matrix arrangement for the suggested organization form of a Marketing Division consisting of Market Groups is shown in Figure 1. The exact definition

MARKETING MANUFACTURING

I

I

I

I

MANUFACTURING

BUSINESS OPERATIONS

PLANTS

MARKET GROUPS MANAGERS

TECHNOLOGY

PISTRIBUTION MANAGER

FIGURE 1.

Proposed matrix organization

of the market segments facing the market groups has to be the subject of in-depth study because this definition becomes the key to effectively organizing each market group and it determines the product slate each must carry. Nevertheless the titles shown in the figure will suffice to allow the matrix concept to be discussed. To favorably effect the trade-off associated with product management, the responsibility for supply of product to the business covered by the market group falls on the Group Operations Manager, whose function is denoted by a series of organization boxes at the top right of Figure 1. This shows the interrelationship between the Operations Manager and a number of Product Coordinators. Each product Coordinator corresponds to a product manufactured by the company, except for one who is assigned the responsibility for products bought for resale. The key working interfaces are shown in a series of interrelated matrices. In addition to these interfaces, Figure 1 shows a portion of the formal reporting relationships for the key parts of the Company Operations, which appears at the top right of the figure, and Marketing, which can be found at the bottom center. The fact that these two functions report to a common Business Manager is denoted outside the organization boxes.

Technology

(X-interface).

Specialists

It can be seen that the R & D and new product development trade-off noted before is also reconciled in this structure by the interface between the Operation Manager and the Product Technology Specialists who are the technical contact for each product. Technology Specialists have several roles. They must translate marketing product requirements into technical product specifications. They gather new product ideas that may apply to one or more businesses and presents them to the marketing people for possible commercialization. They must define and monitor the technical program related to a product group. They must also gather and coordinate resources for technical service to customers, as requested by the business groups. The matrix organization described in Figure 1 not only indicates lines of responsibility and authority for existing products and businesses but also allows for new products to be added and assigned to businesses facing the markets that require these products. Moreover it allows for new, as yet undefined, businesses to be established and fitted into the supply-technology interfaces. It is expected, however, that new products for entirely new markets would be handled by a venture group which would also 309

draw personnel from the matrix business product organization. A proposed formal organization of the Marketing Division is shown in Figure 2, where the top level of the Marketing Organization will appear. Part of this organizational structure was indicated in the matrix of Figure 1. The marketing skill centers that cannot be economically maintained in each marketing group are shown. Three central marketing skill areas described below have been identified and grouped under a Marketing Services organization.

partment will also provide analyses to the marketing Senior Vice President. 3. New Products. This function will be established to search for new product ideas both externally and to coordinate the flow of new product information flowing from the businesses and the Technology Department. The purpose of this function is to ensure that innovations are made available to all the Business Groups which can utilize them in the development of their markets.

1. Advertising und Sales Promotion. This function will coordinate the needs of the businesses for the advertising and sales promotion component of the marketing mix. This part of the marketing service organization may be thought of as another matrix which connects the Business Marketing Managers with the advertising skill center, which in turn will be interfacing with all of the businesses. 2. Planning and Analysis. This function assists the Business Managers with their market planning, coordinates the sourcing of market information acquisition, and assists with the analysis of financial results and microeconomic data. The Planning De-

In addition to the Marketing Services organization, the Transportation Department which reports to Distribution is available to perform traffic studies for the businesses to minimize their transportation costs. It will be noted that venture groups, when they are identified and established, would report to the Marketing Senior Vice President. As mentioned previously, these groups will be established when a new product which fits the corporate mission but not its current markets is identified. Another reason for establishing a venture group would be in the case where a new product fits with existing markets but its introduction would detract from the current effort or organization focus so as to reduce the profitability of the concerned market groups by a significant degree.

MARKETING EXECUTIVE

BUSINESS

GROUPS

MARKET

I 2

1

1

c

I

I NEW PRODUCT

3

I

I

PRODUCT COORDINATORS

DISTRIBUTION MANAGER

(3) PLANNING AND ANALYSIS

ADVERTISING AND PROMOTION

DISTRIBUTION LOCATIONS

TRANSPORTATION

(2)

FIGURE 2.

310

Proposed formal line organization

for marketing

division.

the others and are sufficiently large to warrant the Company establishing a Market Group to service them? 2.1 To what extent should the Market Group be held responsible for profits? 2.2 What internal inputs that influence profits should be under the control of each Market Groups? 3.1 What are the decision areas/levels, responsibility, and staff services that the Corporate Head Office should retain versus the Marekt Groups? 3.2 How would the strategy, planning, forecasting, and budgeting responsibility be divided between Corporate Office and the Market Groups? 4. What and how company resources should be allo:ated to each Market Group? 5. Should there be guidelines delimiting the discretion of Market Groups in sourcing, from outside, supplies and services available within the Com1pany? 6. What are the possible problems that could arise, and their solutions, in the matrix structure where Market Groups have primary responsibility for the 1ousiness and technical product specialists are in a supporting role? 7. To what extent would Company Salespersons allo;ated to Market Groups have to be retrained? 8. Would the cost of the Market Group organization 1be significantly different from those in the existing structure?

Business Market Group The final mirror of this proposed organization is one in which a Business Market Group is examined as an integrated whole. Figure 3 shows how the Group business organization will function in terms of internal control of the resources at its disposal. The Market Group Manager will be the Business Manager of the group, who will develop the business plan, set prices within the overall corporate guidelines, control costs, and be responsible for profits. The Operations Manager will interface with all the Support Systems, the latter being the Manufacturing Plants, the Distribution Locations, Procurement Personnel, and Technology. The Marketing Manager will be in charge of the Group sales force, the marketing promotion effort, make demand forecasts for the group target market segment, and interface with the customer service element of the Distribution function.

Further Areas Requiring Study A series of further questions are listed below which an in-depth study should investigate when a company is considering a crossover to a market centered organization. This list of questions does not claim to be exhaustive but represents some of the important areas not covered above. 1. What market segments can be identified that each have relatively homogenous needs distinct from

MARKET

GROUP

r--“---1

OPERATION

PLANNING i AND ANALYSIS

1

I

MARKETING MANAGER

L__----A I --L------

I--

I I

1 SALES FORCE

BOXES

----

EXTERNAL

INTERNAL

TO

TO

----

_-_-

1 PRODUCT TECHNOLOGY SPECIALISTS

PRODUCT COORDINATORS

AOVERTISING AND PROMOTION

1 STORAGE POINTS

GROUPS

GROUPS

FIGURE 3.

Typical business-market group. (Unbroken lines-boxes internal to groups; broken lines-boxes external to groups.) 311

9. What skills/qualities will the different jobs in the Market Centered Organization demand of Personnel? 10. What changes will be required in the Financial Reporting System to accommodate the Market Group? 11. What problems are expected to arise in the transition period until the new organization functions efficiently?

CONCLUSION The main message of this article is that industrial company should gain by shifting to a market centered organization comprising one or more market groups. Before a company ventures into such a shift, however, an in-depth study of gains, trade-offs, and a number of other related questions is required. The key areas to study have been brought out. The market groups would be profit centers servicing their customer needs with the required package of Company products plus their complements of auxiliaries not manufactured by the company. Each market group would purchase from the Company manufacturing plants at full cost. It would, however, source from outside, if full cost is higher than the market, or inhouse capacity is not sufficient to meet demand, and fill the product line with items not made by the company which are required by the customer segment.

312

The Company support functions of Distribution and Technology would aid the market groups as required, to maintain the competitive posture of each business. Product Technology Specialists would be located in the Technology Department, each responsible for the health of one or two product groups. These specialists would marshal technical resources in support of new product development and technical service to the customer. It is hoped that this article is thought provoking and will cause a number of companies to critically examine their organizations and to consider the possibility of a cross-over to a market centered form with the opportunity of improved profitability. REFERENCES 1. Katz, R., Crrws and Conc~epts in Corporcrtr Englewood Cliffs, NJ, 1970. 2. Corey,

StruteKy,

Prentice

Hall,

E. Raymond,

Marketing

and Star, Steven H., Orgcmixtiort Strcrtegy: A Division of Research, Graduate School of Business harvard University, 1971.

Approac,h.

Administration, 3. Newman,

William H., Strategy and Management 2, 56-66 (Autumn 1971).

Structure,

Jwrnccl

c!f

Columbia

Journcrl of

Business Polky

4.

Hutchisson,

John, Evolving Organizational 45-58 (Summer, 1976).

Form,

World Business,

5. Haman, Mack, Reorganize Bu.vines.s Reviews, 63-15

6.

Corey, E. Raymond

7. Ames, Businrss

B. Charles, Revirw.

Your Company Around Its Markets, (Nov/Dec, 1974).

Harwrd

and Star, Steven H.. Ref 2.

Dilemna of Product/Market 66-74 (March/April, 1971).

8. Profit Centers: Can Marketing New.\ 44-45 (March, 1976).

Management

Make It On Its Own? Nationtrl

Hurwrd

/‘mm/rum