Analyzing Business Chapter 4 Notes
The Organizational Buying Process
Organizational buying is the decision-making process by which formal
organizational establishes the need for purchase products and services and by
which they identify, evaluate, and choose among alternative brands and suppliers.
Understanding Business Markets
Business Markets
o All the organizations that acquire goods and services used in the
production of the other products or services that are sold, rented, or
supplied to others
Any firm that supplies components for products is in the business-
to- business (B2B) marketplace
Biggest enemy to marketers here is commoditization,
whereby customer perceive products from different
companies as offering identical benefits
Overcome only if target customers are convinced that
meaningful differences exist among the products and
unique benefits of the firm offering are worth the
additional cost.
Critical step in B2B is to create and communicate relevant
differentiation from competitors
o (3) biggest hurdle in B2B marketing involve
integrating sales and marketing departments
managing innovation
gathering and utilizing customer and marketing insights
o Business markets contrast sharply with consumer markets in some ways,
however. They have
Fewer but larger buyers
Ex: Aircraft and Defense industries
Close supplier-customer relationships
Professional Purchasing
Business marketers must provide more technical data about
their product and its competitive advantages
Multiple buying influences
More people typically influence business-buying decisions
Business marketers need to send well-trained sales
representatives and teams to deal with these equally well-
trained buyers
Derived demand
Demand for business goods is derived from the demand for
consumer goods
Must closely monitor the buying patterns of end users
Inelastic demand
Business goods and services are inelastic---it not much
affected by price changes
Demand is especially inelastic in the short run because
producers cannot make quick changes in production
methods
Also inelastic for business goods that represent a small
percentage of the item’s total cost
Fluctuating demand
Demand for business goods and services tend to be more
volatile than the demand for consumer goods and services
Geographically concentrated buyers
Direct purchasing
Business buyer often buy directly from manufacturers
rather than through intermediaries, especially items that are
technically complex or expensive
Type of Buying Decisions
(3) Types of business-buying situations
o Straight rebuy
Purchasing department reorders items like office supplies and bulk
chemicals on a routine basis and chooses from suppliers on an approved
list
Goal is to get a small order and then enlarge their purchase share over time
Business buyers make the fewest decision here
o Modified rebuy
The buyer in a modified rebuy wants to change product specifications,
prices, delivery requirements, or other terms
o New buy
A new-buy purchaser faces some risk when acquiring a product or service
for the first time
Greater the risk or cost = larger the # of buying decision
participants = greater their information gathering
Business buyers make the most decisions here
Marketers’ greatest opportunity and challenge
Passes through several stages
o Awareness
Mass media most important in this stage
o Interest
Salespeople most important in this stage
o Evaluation
Technical sources most important in this stage
o Trial
o Adoption
The Buying Center
Purchasing Agents are influential in straight-rebuy and modified-rebuy
situations
o Dominate in selecting suppliers
Employees are more influential in new-buy
o Engineers in selecting products components
The Composition of The Buying Center
The buying center: the decision-making unit of a buying organization
o All those individuals and groups who participate in the purchasing decision-
making process, who share common goals and the risks arising from the decisions
o Play one or more of (7) roles in the purchase decision process
Initiators
User or other in organization who request that something be
purchased
Users
Those who will use the product or service
The user initiates the buying proposal and help define the product
requirements
Influencers
Help to define specifications and providing information for
evaluating alternatives
Technical people are particularly important influencers
Deciders
Decide on product requirements or on suppliers
Approvers
People who authorize the proposed action of decider or buyer
Buyers
Have formal authority to select the supplier and arrange the
purchasing terms
To select vendors and negotiate terms and prices
In more complex purchases, includes high-level managers
Gatekeepers
Prevent sellers or information from reaching members of the
buying center
o Several people can occupy a given role such as user or influencer, and one person
may play multiple roles
The Role of The Buying Center in The Organization
The upgrading of the purchasing department means business marketers must upgrade
their sales staff to match the higher caliber of today’s business buyer
Buying Center Dynamics
Includes participants with different interests, authority, status, and susceptibility to
persuasion
Purchasing decisions are ultimately made by individuals, not organizations
Buying solutions to (2) problems
o The organization’s economic and strategic problem
o Their own personal need for achievement and reward
Selling To Buying Centers
B2B marketing requires that marketers determine not only the types of companies on
which to focus their selling efforts, but also whom to concentrate on within the buying
centers in those organizations
o They must then decide how best to sell these businesses
Small sellers concentrate on reaching the key buying influencers
Larger sellers often go for in-depth selling to reach as many participants as possible
Business marketers must periodically review their assumptions about buying center
participants
o Insights into customers and buying center are critical
o Ethnographic research also can be very useful in developing markets, especially
in far-flung rural areas where marketers often do not know the consumers well
In developing selling efforts, business marketers can also consider their customer’s
customers, or end users, if appropriate
Understanding the Buying Process
Stages in the Business-Buying Process
o Problem Recognition Need description Product specification Supplier
search Proposal solicitation Supplier selection Contract negotiation
Performance review
Problem Recognition
o The buying process begins when someone in the company recognizes a
problem or need that can be met by acquiring a good or service
o Triggered by internal or external stimuli
Internal stimulus might be a decision to develop a new product that
requires new equipment and materials, or it might be a machine that
breaks down and requires new parts
External stimulus might be the buyer may get a new idea at a trade show,
see an ad, receive an e-mail, read a blog, or take a call from a sales
representative who offers a better product or lower price
o Business marketers can stimulate problem recognition by direct marketing in
many different ways
Need Description
o Next, the buyer determines the needed item’s general characteristics and the
required quantity
o Goal here is to identify the specific need(s) that the company aims to fulfill and
the benefits it seeks to receive from the offering
Standard items, this is simple
Complex items, the buyer will work with others
o Business marketers can help by describing how their products meet or even
exceed the buyer’s need
Product Specification
o The buying organization now develops the item’s technical specifications
o Will assign a product-value analysis engineering team to the project
Product Value Analysis is the assessment of a product’s value by
examining ways components or processes can be modified to reduce costs
without adversely affecting product performance
Will identify overdesigned components
Supplier Search
o The buyer next tried to identify the most appropriate suppliers through trade
directories, contacts with other companies, trade advertisements, trade shows, and
the internet.
o Companies that purchase online utilize electronic marketplaces in several forms:
Catalog sites
Vertical Markets
“Pure Play” auction company
Spot (or exchange) markets
Prices change by the minutes in this market
Private exchanges
o Online business buying can be organized around e-hubs including
Vertical hubs centered on industries (plastics, steel, chemicals, paper)
Functional hubs (logistics, media buying, advertising, energy
management)
o Online business buying offers several advantages:
Shave transaction cost for both buyers and suppliers
Reduce times between order and delivery
Consolidates purchasing systems
Forges more direct relationships between partners and buyers
o Online business disadvantages:
May tend to erode supplier-buyer loyalty
Create potential security problems
Proposal solicitation
o The buyer next invites qualified suppliers to submit written proposals
o After evaluating these proposals, the buyer will invite a few suppliers to make
formal presentation
o Proposals and selling efforts are often team efforts that leverage the knowledge
and expertise of coworkers
Supplier selection
o The attributes that buyers commonly use to evaluate vendors include
Price
Reputation
Reliability
Agility
o Before selecting a supplier, the buying center often uses a supplier-evaluation
model to rate supplier based on their performance on the attributes valued
by the buyer
o Clearly identifying a company’s priorities when choosing a supplier and
identifying suppliers that meet these criteria are key to market success
o Companies are increasingly reducing the number of their suppliers
Contract negotiation
o After selecting suppliers, the buyer negotiates the final order, which includes
Technical specifications
The quantity needed
The expected time of delivery
Return policies
Warranties
o Many industrial buyers lease rather than buy heavy equipment such as machinery
and trucks
The lessee gains a number of advantages:
The latest products
Beter service
Conservation of capital
Some tax advantages
Lessor often ends up with a larger net income and the change to serve
customers that could not afford outright purchase
o For maintenance, repair, and operating items, buyers are moving toward blanket
contracts rather than periodic purchase orders
A blanket contract establishes a long-term relationship in which the
supplier promises to resupply the buyer as needed, as agreed-upon price,
over a specified period of time.
Seller holds the stock, sometimes called Stockless Purchase Plans
Lock suppliers in tighter with buyer
o Vendor-managed inventory
Shifts the ordering responsibility to their suppliers
These suppliers are privy to the customer’s inventory levels and take
responsibility for continuous replenishment programs
Performance review
o The buyer periodically reviews the performance of the chosen supplier (s) using
(1) of (3) methods:
The buyer may contact end users and ask for their evaluations
Rate the suppliers on several criteria using a weighted-score method
Aggregate the cost of poor performance to come up with adjusted costs of
purchase
Including prices
o Lead the buyer to continue, modify, or end a supplier relationship
Developing Effective Business Marketing Programs
Transitioning From Products to Solutions
Buyers prefer to buy a total problem solution from one seller
o System buying the purchase of total solution to a business problem or need
form one company
Originated with government purchases of major weapons and
communication systems
Ex: Turnkey solution
One variant is system contracting
A single supplier provides the buyer with all its
maintenance, repair, and operating MRO requirements
Customer benefits from reduced procurement and
management cost
o As well as from price protection over the term of
the contract
Seller achieves lower operating cost thanks to steady
demands and reduce paperwork
o Sellers have adopted system selling as a marketing tool
System selling is a marketing approach to attract buyer that prefer
to buy entire systems from one company
A key industrial marketing strategy in bidding for large-scale
industrial projects such as
Construction of dams
Steel factories
Irrigation system
Sanitation Systems
Pipelines
Utilities
Even new towns
Enhancing Services
Services play an increasing strategic and financial role for many B2B firms that sell
primarily products
o Adding high-quality services to their product offering allows companies to
provide greater value and establish closer ties with customers
Building B2B Brand
Brand give managers peace of mind by ensuring product quality and thus make it easier
to justify the purchase of established brands to the company stakeholders
In B2B, the corporate brand is often critical because it is associated with so many of the
company’s products
Overcoming Price Pressures
Marketers can counter request for a lower price in a number of ways, including the use of
framing
Improving productivity helps alleviate price pressures
o Collaboration can further help alleviate price pressures
Lower the price and increasing benefits are not the only ways to overcome price
pressures, in some cases better communicating the benefits that the offering already
delivers to customers
o A popular approach to make the value of the offering more transparent to
customer is the economic value analysis
EVA is a tool that helps monetize the functional benefits of a company’s
offering, such as
Performance
Reliability
Warranty
Managing Communication
Companies need to inform business customers about the benefits of their offering as well
as coordinating their activities with collaborators
Some B2B marketers are adopting marketing practices form business-to-consumer
markets to build their brand
Managing B2B Relationships
Understanding the Buyer-supplier relationship
(4) relevant forces are
o Availability of alternatives
o Importance of supply
o Complexity of supply
o Supply market dynamism
Based on these forces, buyer supplier relationships can range from
o Basic buying and selling that involves simple
o Routine exchanges with moderate levels of cooperation and information
exchanges
o To collaborative relationship in which trust and commitment lead to true
partnerships
Closes relationships between customers and suppliers important with complex purchase
requirement and few alternative suppliers
Greater vertical coordination between buyer and seller through information exchange and
planning is usually necessary only when high environmental uncertainty exits, and
specific investments are modest
Managing Corporate Trust, Credibility, and Reputation
Trust is a firm’s willingness to rely on a business partners
o It depends on factors such as
Perceived competence
Integrity
Honesty
Benevolence
Firm is more likely to be seen as trustworthy when it provides full, honest information,
when employee incentives are aligned with customer needs
o Many firms use automated credit-checking applications and online trust services
to assess the creditworthiness of trading partners
Corporate credibility is the extent to which customers believe a firms can design and
deliver products and services that satisfy their needs and wants
o Depends on (3) factors:
Corporate expertise
Reflects the extent to which a company is seen as able to make and
sell products or conduct services
Corporate trustworthiness
Reflects the extent to which a company is seen as motivated be
honest, dependable, and sensitive to customer needs
Corporate liability
Reflects the extent to which a company is seen as likable,
attractive, and prestigious, and dynamic
Risks and Opportunism in Business Relationships
Vertical coordination can facilitate stronger customer-seller ties but may also increase the
risk to the customer’s and supplier’s specific investments
o Specific investment are those expenditures tailored to a particular company and
value-chain partner (investments in company-specific training, equipment, and
operating procedure or systems)
However, also entail considerable risk to both customer and supplier
Transaction theory from economics maintains that because initial
investment in specific investment can be high, firms can be locked into
particular relationships
Furth more, sensitive information on cost and processes may need
to be exchanged
Opportunism is a “form of cheating or undersupply relatives to an implicit or explicit
contract”
o A more passive form might be a refusal or unwillingness to adapt to changing
circumstances or negligence in satisfying contractual obligations
o A concern because firm must devote resources to control and monitoring that they
could otherwise allocate to more productive purposes
The presence of significant future time horizon and/ or strong solidarity norms typically
causes customers ad supplier to strive for joint benefits
o Their specific investment shift from expropriation (increased opportunities on the
receiver’s part) to bonding (reduced opportunism)
Managing Institutional Markets
The institutional market consists of schools, hospitals, nursing homes, prisons, and other
entities that provide goods and services to people in their care
o Characterized by low budgets and captive clienteles
In most countries, government organizations are a major buyer of goods and services
o Government organizations require considerable paperwork from supplier, who
often complain about
Bureaucracy
Regulations
Decision-making delays
Frequent shifts in procurement staff
o Governments provide would-be suppliers with detailed guidelines describing how
to sell to the government
Failure to follow guidelines creates a legal nightmare
Reforms place more emphasis on
o Buying off-the-shelf rather than customized items
o Communicating with vendors online to eliminate paperwork
o Debriefing losing vendors to improve their changes of winning the next time
around