Lilien, Gary Louis.

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OQI'V^WORKING PAPERALFRED P. SLOAN SCHOOL OF MANAGEMENTTHE ADVISOR PROJECT:A STUDY OF INDUSTRIAL MARKETING BUDGETING(non-technical overview)Gary L. LilienW. P. No. 1042-79 January 1979MASSACHUSETTSINSTITUTE OF TECHNOLOGY50 MEMORIAL DRIVECAMBRIDGE, MASSACHUSETTS 02139THE ADVISOR PROJECT:A STUDY OF INDUSTRIAL MARKETING BUDGETING(non-technical overview)Gary L, LilienW. P. No. 1042-79 January 1979AbstractThis paper provides an overview of the ADVISOR studies, aimed at themarketing mix problem for industrial marketers. After five years of work,covering nearly 200 producted-situations within 27 American companies,the results are available.The ADVISOR work provides a new form of situation-specific guidelinesfor setting advertising and marketing budgets, for allocating thosebudgets, for changing spending levels from one year to the next and fordetermining distribution-channel strategies.The results are available in the form of a computerized guidelinemodel, which can be generated from the answers to 19 questions about theproduct and its market. The uses of the results for product audits,budgetary planning and developing guidelines in new spending situationsis reviewed.n ?>(r.na:1. The ADVISOR Project Background and OverviewThis document reports the results of research on the ADVISORproject (ADvertising I^ndustrial products : S^tudy of Operating Relation-ships) , the goal of which is to provide guidance for setting the marketingbudgets for industrial products.Every company selling industrial products faces the marketing mixproblem: how should funds be allocated to such activities as directsales, customer service, and marketing communications (advertising and othercustomer-directed promotions)? Should a given product be advertised at all?What types of communications will best support current selling obiectives?Are there special requirements, in this market, at this time, that- indicatea need or opportunity for changes in marketing expenditures?Each company brings much experience and thought to setting budgetsand making plans for marketing communications. However, to a largedegree, these decisions are based on impressions rather than facts. Verylittle qualified intelligence exists on the relation of product and marketcharacteristics to marketing expenditures for industrial products. Onereason for this is that to conduct special studies for each individualproduct would be prohibitively expensive.There are at least three kinds of methods for allocating communicationsexpenditures:1) Guideline method (rules of thumb) . This includes suchsuggestions as "budget a constant percent of sales," "matchcompetition," etc.2) "Objectives" (task) method . This uses intermediate measuresof effectiveness for evaluating communications programs andestablishing cost constraints for various portions of totalexpense. It calls for explicit thought about various issuessuch as position in product life cycle, state of the marketingenvironment and corporate objectives.3) Explicit modeling and/or experimentation. This approachattempts to relate marketing actions to profit or otherobjectives via theory and direct measurement.None of these methods have been found to be cure-alls. Presentguideline methods fail to answer the hard questions like "What percent ofsales?" or "Why match competition — what makes us think they're right?"Task methods introduce intermediate variables but have difficulty relatingthem clearly to final measures of effectiveness. Explicit modeling andexperimentation are generally expensive. Basically, not enough is knownabout the sales response to industrial communications.Yet, on the positive side, it is obvious that a large number ofmarketers have been making decisions for a long time and that in some"survival of the fittest" sense they have been successful. This means thatin a pragmatic way they have learned enough to make good decisions "on theaverage". A careful study of current practice, therefore, offers the poss-ibility of uncovering a wealth of accumulated practical knowledge and puttingit in a form where it can be used.This is the basis of the ADVISOR studies. Begun in 1973 with thehelp of the Association of National Advertisers, the project has gonethrough two phases and involved 27 participating companies (."table 1) and197 products. These products represent over $1/2 billion in sellingexpense and over $9 billion in annual sales. There is a mixture of largeand small (under $1 million in sales) products; the data base matches upwell with the mix of products for almost any company.Table 2 compares some ADVISOR operating ratios from 1973 with thosein 1975. (Here marketing is defined as Advertising plus Personal Sellingplus Technical Service spending, direct plus overhead but not includingmanagement expense. Advertising includes all impersonal marketing commun-ications: trade and technical press, exhibitions and trade shows, salespromotions, etc.)Table 3 gives the principal product category, pointing to the diver-sity of the data.Thus, ADVISOR is based on a large set of data, from a diverse set ofcompanies.But how many left-handed widgets are there?, you might ask. And that'san important question, if one is a left-handed widget maker. Clearly, theADVISOR data base does not contain large numbers of products in every narrowlydefined industry. A key ADVISOR finding is that it is not the specificcharacteristics of the physical product (size, weight, number of switches,wiring details, etc.) but more general product characteristics that relate tobudgeting practice.For example, consider the advertising budget for sulfuric acid. Verylow in most companies we know because: it is late in its life cycle , sellingmargins are low, there are a small number of potential customers whose salesTable 1: ADVISOR PARTICIPANTSAT & T Long LinesChase ManhattanCollins & AikmanContinental CanDupontEmery IndustriesGEGoodyearHarris SemiconductorInland SteelInternational HarvesterInternational PaperIT & TJoslyn Manufacturing3MMonsantoNordsonPhotomakerOlin CorporationOwens CorningPittsburgh CorningSCMSiliconixSingerUnion CarbideU.S. SteelTable 2: ADVISOR OPERATING RATIOS1973 ADVISOR DataADVERTISINGSALES0.7%ADVERTISINGMARKETING9.9%MARKETINGSALES6.9%SAMPLESIZE661975 ADVISOR Data 0.7% 10.0% 7.0% 131Table 3: ADVISOR PRINCIPAL PRODUCT CATEGORYMachinery and Equipment 21.1%Raw Material 3.3%Fabricated Material 39.0%Component Part 17.1%Partially Processed Material 6.5%Chemical 11.4%Other 1.6%are concentrated , etc. A new piece of farm machinery would have theopposite story to tell — early in the life cycle, etc. and would spend morein advertising.The result is that the product and market characteristics we havestudied are the main ones used in determining advertising and marketingbudgets. And the nearly 200 products studied in ADVISOR probably includemany like almost any product outside the data base. The data base includes51 products in the category of fabricated material, 79 products in the maturestage of the life cycle, 54 products that sell 90% or more of their productdirect to users, etc.There may not be a product that is physically like any outside product.But among our 200 products, there are surely several that have product andmarket profiles that are close to almost any product one can name.2. ADVISOR Results2.1. Industrial advertising effectsA careful review of studies of industrial advertising (Lilien etal [2] ) shows that most suffer from serious methodological weakness.Nevertheless, certain themes emerge from their accumulated bulk:1) Industrial advertising and personal selling often performcomplementary and/or synergetic roles.2) Increasing the share of total selling expense on advertisingmay be associated with lower selling costs relative to sales.3) Economies of scale may exist for Industrial advertising.ADVISOR has identified key product-market and environmental factorsassociated with budgeting practice; these results are generally consistentwith analyses performed on the PIMS data base. (Buzzell and Farris [1])2.2 Norm modelsThe level of advertising and marketing expenditures and the splitof marketing expenditures into advertising and personal selling aredetermined by a few key market characteristics. (See Lilien [3] forcomplete details.) The primary influencing factors are product saleslevels and numbers of customers. Other factors of key (but lesser) impor-tance are:- stage in the life cycle- customer sales concentration- fraction of product sales which are made-to-order- company plans for the product- technical complexity of the product- perceptions of product quality- distribution channel strategy.Analysis shows that it is fruitful to study advertising budgeting as atwo step process, i.e. a marketing budget is set and then a split of thatbudget into personal and impersonal communications is made. This two-stageview clarifies the role of different product and market characteristics. Allthe variables above affect the marketing budget.The advertising budget is affected by sales, number of users, concen-tration, fraction of made-to-order sales, stage in the life cycle andproduct plans. The split of marketing (the advertising/marketing ratio)is affected by sales, product complexity, product perceptions and thefraction of sales direct to users.The advertising budget can be split into personal media (those mostclosely associated with personal communication: sales promotion, tradeshows and films) and impersonal media. No variables were significant herebeyond those found significant for advertising. Overall, the level ofexpenditure in personal media varies more with product and market character-istics.2.3. Change modelsThe norm models develop long-term targets for budgets: budgetschange on a year-to-year basis in response to changes in the environment,modified by the level of certain key characteristics. In particular, thevariables that were found to be related to year-to-year changes in adver-tising, advertising allocation and marketing were:- change in the number of competitors- change in the market share- change in product plans- stage in the life cycler customer concentration- number of customers- salesforce level.Changes in advertising are affected by changes in market share,changes in the number of competitors, changes in product plans, thenumber of customers and customer concentration. Changes in marketingfollow changes in advertising, which is the main tactical component ofthe marketing budget.The other variables noted above influence whether the personal orImpersonal portion of the advertising budget is most strongly affected.Early in the life cycle, the impersonal portion of the advertising budgetIs most likely to change, for example.2. A Distribution Channel NormsIn line with our objectives of modeling the entire market mix, wehypothesize that the selection of a channel strategy is influenced byproduct and market factors. In particular, we model the decision aboutwhether a captive (Internal) or independent (external) means of distribu-tion should be used. The key variables affecting this decision are:- size of the firm- size of an average order- product complexity- stage in the life cycle- fraction of product sales produced to order- frequency of purchase decision- number of customersOur analysis provides norms on the likelihood of a captive versus anindependent channel of distribution.103. Using the results3.1. Computerized guidelines modelThe ADVISOR 2 results can be applied to specific products veryeasily by the use of a computerized guidelines model. A set of 19 questionsare answered and provide the necessary input for the models. The programproduces the typical level and common range of the following quantities:- advertising- personal/impersonal advertising- marketing- advertising change- personal/ impersonal change- marketing change- distribution channelsTable A gives one line of a typical PAR report.INDUSTRIAL SOLVENT 270ACTUALADVERTISING 105.850($ THOUSANDS)INDUSTRY NORMSCENTER RANGE357.228 245.062 - 520.733TABLE 4. PORTION OF PAR REPORT11The advertising-to-sales ratio for this product is 105,000/14,500,000or 0.7%. This is precisely the median level of the many products studiedin ADVISOR. However , the industry norm for this product is $357,000, morethan 3 times that much. This product is in the growth stage of its lifecycle, and it has a large number of customers, no one of whom is significantlylarge. Also, it is primarily a stock, item and the company is taking a positiveposture toward promotion.Hence, ADVISOR' s recommendation is an advertising level significantlyabove the median industry amount.Budgeting levels do vary, even for similar product and market situa-tions. The "range" in Table 4 gives a measure of the variability in budgetingpractice. About 3/4 of ADVISOR firms find themselves within "range". Beingoutside the range means you are significantly different from the norm.3.2. ApplicationsThe computer program allows industrial marketers to generate normsfor their products. The program can be of aid to:- checking existing practices and possible future strategiesagainst norms determined by the analysis.- develop possible spending levels for products not currentlyusing marketing communications.- provide new input and rationale for recommending budget levelsto product-marketing people.Furthermore, the results of the project can be of direct use forthe product or advertising manager in the following ways:- as changes take place in marketing goals or in the marketingenvironment, guidelines are available to adjust budgets.- a list of variables has been identified and is availablethat includes the most important factors affecting budgets.Today many product managers do not collect data on all thesignificant factors.- magnitude as well as the direction of change are provided.- a norm can be produced for a product or, alternatively, aset of adjustments to an existing budget necessitated bymarket or product changes, can be produced.- the effects of several, simultaneous changes can be assembledseperately or jointly.For the general manager, comparative norms can be obtained for the budgetallocation across the products for which he is responsible.A. ConclusionThe ADVISOR approach has provided new guidelines against which currentindustrial marketing decision-making can be checked. It is significant thatthese norms are both quantitative and situation-specific — that is, theyrecognize the key underlying product and market characteristics, the under-standing of which facilitates sensible budgeting practice.An important follow-up area of study has been M.I.T.'s project on"Multiple Situation Analysis" (Lilien [4] ) aimed not at finding what indus-trial marketers are doing, but determining what they should do.13An exciting early result of that study is that product profitabilityis less the farther spending varies (either more or less) from the ADVISORnorm! This provides important confirmation of the validity and value ofthe ADVISOR approach.In sum, then, the ADVISOR results are providing an important firststep in the development of quantitive tools to support the industrialmarketing budget-setting process.14REFERENCES1. Buzzell, Robert D. and Paul W. Farris, "Industrial Marketing Costs",working paper. Marketing Science Institute, December 1976.2. Lilien, Gary L. and Alvin J. Silk, Jean Marie Choffray and Murlidhar Rao,"Industrial Advertising Effects and Budgeting Practices", Journal ofMarketing,Vol. 40 (January 1976).3. Lilien, Gary L. , "ADVISOR 2: Modeling the Marketing Mix Decision forIndustrial Products", Management Science , forthcoming.4. Lilien, Gary L. "ADVISOR 2: Multiple Situation Analysis", M.I.T. SloanSchool Working Paper, forthcoming.

The advisor project : a study of industrial marketing budgeting : non-technical overview

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The advisor project : a study of industrial marketing budgeting : non-technical overview

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