978-0134058498 Chapter 7 Lecture Notes

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LEARNING OBJECTIVES

In this chapter, we will address the following questions:

1. What is organizational buying?

2. What buying situations do business buyers face?

3. Who participates in the business-to-business buying process?

4. How do business buyers make their decisions?

5. In what ways can business-to-business companies develop effective marketing programs?

6. How can companies build strong loyalty relationships with business customers?

7. How do institutional buyers and government agencies do their buying?

CHAPTER SUMMARY

1. Organizational buying is the decision-making process by which formal organizations establish

the need for purchased products and services, then identify, evaluate, and choose among

alternative brands and suppliers. The business market consists of all the organizations that

acquire goods and services used in the production of other products or services that are sold,

rented, or supplied to others.

2. Compared with consumer markets, business markets generally have fewer and larger buyers, a

closer customer supplier relationship, and more geographically concentrated buyers. Demand

in the business market is derived from demand in the consumer market and fluctuates with the

business cycle. Nonetheless, the total demand for many business goods and services is quite

price inelastic. Business marketers need to be aware of the role of professional purchasers and

their influencers, the need for multiple sales calls, and the importance of direct purchasing,

reciprocity, and leasing.

3. The buying center is the decision-making unit of a buying organization. It consists of

initiators, users, influencers, deciders, approvers, buyers, and gatekeepers. To influence these

parties, marketers must consider environmental, organizational, interpersonal, and individual

factors.

4. The buying process consists of eight stages called buyphases: (1) problem recognition, (2)

general need description, (3) product specification, (4) supplier search, (5) proposal

solicitation, (6) supplier selection, (7) order-routine specification, and (8) performance review.

5. Business marketers are strengthening their brands and using technology and other

communication tools to develop effective marketing programs. They are also using systems

selling and adding services to provide customers added value.

6. Business marketers must form strong bonds and relationships with their customers. Some

customers, however, may prefer a transactional relationship.

7. The institutional market consists of schools, hospitals, nursing homes, prisons, and other

institutions that provide goods and services to people in their care. Buyers for government

C H A P T E

R 7ANALYZING BUSINESS

MARKETS

organizations tend to require a great deal of paperwork from their vendors and to favor open

bidding and domestic companies. Suppliers must be prepared to adapt their offers to the

special needs and procedures found in institutional and government markets.

OPENING THOUGHT

Students unfamiliar with business and business operations will have a difficult time

understanding the concept of organizational buying. The major differences between the consumer

market and the B2B market lie in the complexity of the decision process and the amount of

people involved in the final purchasing decision.

Instructors can best serve their student audiences by incorporating guest speakers from the

business community who are responsible for purchasing products and/or services to help students

understand the complexity in the buying process for businesses. Salespeople, who sell to

businesses, are also good resources to have as guest speakers when covering this chapter.

Instructors can also use university situations or other common business examples to get across the

concept of organizational buying to their students.

TEACHING STRATEGY AND CLASS ORGANIZATION

PROJECTS

1. At this point in the semester-long marketing project, no presentations are necessary unless the

instructor has approved a business-to-business product or service.

2. Students should compare and contrast the complexity of that buying process to the ones noted

in Chapter 6—Analyzing Consumer Markets. How and where are the major points of differences

between the two markets in their purchase intensions? Can a firm market its products to both the

industrial and consumer markets with one strategy? Are there sufficient differences between

markets for different products and strategies to be developed?

3. Sonic Smartphone Marketing Plan: Business-to-business marketers have to understand their

markets and the behavior of members of the buying center in order to develop appropriate

marketing plans. Jane Melody has defined the business market at Sonic as mid- to large-sized

corporations that need to help their workforces stay in touch and input or access important data

from any location. She has asked you to find out:

What specific types of businesses appear to fit the business market definition used at Sonic?

What needs could Sonic’s Smartphone address for these businesses?

Who would participate in and influence the purchase of Smartphoness for use in these

businesses?

Which environmental, interpersonal, and individual influences are likely to be most important

to business buyers of Smartphone products, and why?

Report your findings and conclusions in a written marketing plan or type them into the Market

Demographics and Target Markets sections of Marketing Plan Pro.

ASSIGNMENTS

Ad Age recently reported on a study done by B2B which talks about how much of the

decision-making process occurs in business buying before salespeople are involved:

http://adage.com/article/btob/branding-key-filling-sales-pipeline/288911/?btob=1 . In small

groups or individually, ask the students to interview local business managers/ owners to see: a)

How they reach the right customers at the right time and b) How they build awareness.

Have each of the students read Bob Donath’s “Emotions Play Key Role in Biz Brand Appeal,”

Marketing News, June 1, 2006, p. 7 and comment on their perception of how effective “biz” is in

their lives and in their purchasing of products.

Contact your local Pearson Higher Education sales representative and ask him/her to make a

presentation to the class on how he/she sells to your college or university.

In small groups (five students suggested as the maximum), have the students visit your college or

university’s Central Purchasing or Procurement department (you may have to clear this with your

administration before assigning). Have the students conduct interviews with purchasing personnel

on how they buy, who is involved in a purchase decision, and what characteristics do the best

salespeople who call on them share. Students should format their questions to the key concepts

contained in this chapter. Student reports should also characterize the differences found between

government or institutional buying, business-to-business buying, and consumer purchasing.

To improve effectiveness and efficiency, business suppliers and customers are exploring different

ways to manage their relationships. Have the students visit each of the company’s Web sites

mentioned throughout the chapter. Which one(s) do the students feel most effectively and

efficiently addresses the needs of the corporate buyer? Which Web sites do not? Why and what in

their opinion is missing from the least effective Web sites? How can the firm do better in its

execution?

Have the students visit GE‘s Medical Systems® Web site (www.gehealthcare.com/). In context to

the major points of this chapter, have the students define how GE is addressing the needs of their

hospital customers by the design of this Web site? Where and what is GE doing right, what is GE

doing wrong, and where can GE improve?

Small businesses have been described as the “lifeblood” of the economy. Students, who have after

school jobs in small business, should be assigned to interview their employers, managers, or

purchasing departments to understand how small businesses purchase goods and services. How

many of the concepts in this chapter do small business owners actually employ (for example, is

the purchasing habits of the student’s small business owner organized, how many decision makers

are involved in purchasing, how important is the customer-supplier relationship to them, is their

purchasing just transactional, etc.)? Students should prepare to present their findings to the class

in either an oral or a written report. Students not employed should be prepared to question the

presenting students as to their understanding of the “whys” for such actions.

DETAILED CHAPTER OUTLINE

Opening vignette: Business organizations sell and they buy vast quantities of raw materials,

manufactured components, plant and equipment, supplies, and business services. To create and

capture value, sellers such as Cisco must understand organizations’ needs, resources, policies, and

buying procedures. Some of the world’s most valuable brands belong to business marketers:

ABB, Caterpillar, DuPont, FedEx, GE, Hewlett-Packard, IBM, Intel, and Siemens, to name a few.

They face some unique considerations in selling to other businesses.

I. What Is Organizational Buying?

A. Organizational buying is the decision-making process by which formal organizations

establish the need for purchased products and services and identify, evaluate, and

choose among alternative brands and suppliers

B. The Business Market versus the Consumer Market

i. The business market consists of all the organizations that acquire goods and

services used in the production of other products or services that are sold,

rented, or supplied to others

ii. Some of the major industries making up the business market are aerospace;

agriculture, forestry, and fisheries; chemical; computer; construction;

defense; energy; mining; manufacturing; construction; transportation;

communication; public utilities; banking, finance, and insurance;

distribution; and services

iii. More dollars and items change hands in sales to business buyers than to

consumers

iv. The biggest enemy to business-to-business marketers is commoditization

1. Commoditization eats away margins and weakens customer loyalty

2. Commoditization can be overcome only if target customers are

convinced that meaningful differences exist in the marketplace and

that the unique benefits of the firm’s offerings are worth the added

expense

3. A critical step in business-to-business marketing is to create and

communicate relevant differentiation from competitors.

v. Business marketers face many of the same challenges as consumer

marketers, especially understanding their customers and what they value

vi. Three biggest hurdles for B-to-B marketing are:

1. building stronger interfaces between marketing and sales

2. building stronger innovation-marketing interfaces

3. extracting and leveraging more granular customer and market

knowledge

vii. Four additional imperatives are:

1. demonstrating marketing’s contribution to business performance

2. engaging more deeply with customers and customers’ customers

3. finding the right mix of centralized versus decentralized marketing

activities

4. finding and grooming marketing talent and competencies

viii. Business marketers contrast sharply with consumer markets in some ways,

however. They have:

1. Fewer, larger buyers

2. Close supplier–customer relationships

3. Professional purchasing

4. Multiple buying influences

5. Multiple sales calls

6. Derived demand

7. Inelastic demand

8. Fluctuating demand

9. Geographically concentrated buyers

10. Direct purchasing

II. Buying Situations

A. The number of decisions faced by a business buyer depends on the complexity of the

problem being solved, newness of the buying requirement, number of people

involved, and time required.

B. Three types of buying situations are the straight rebuy, modified rebuy, and new task

i. Straight rebuy: the purchasing department reorders items like office supplies

and bulk chemicals on a routine basis and chooses from suppliers on an

approved list

ii. Modified rebuy: the buyer in a modified rebuy wants to change product

specifications, prices, delivery requirements, or other terms. This usually

requires additional participants on both sides.

iii. New task: A new-task purchaser buys a product or service for the first time

(an office building, a new security system). The greater the cost or risk, the

larger the number of participants, and the greater their information gathering

—the longer the time to a decision

iv. The business buyer makes the fewest decisions in the straight rebuy situation

and the most in the new-task situation

C. The buying process passes through several stages: awareness, interest, evaluation,

trial, and adoption

i. Mass media can be most important during the initial awareness stage

ii. Salespeople often have their greatest impact at the interest stage

iii. Technical sources can be most important during evaluation

iv. Online selling efforts may be useful at all stages

D. In the new-task situation, the buyer must determine product specifications, price

limits, delivery terms and times, service terms, payment terms, order quantities,

acceptable suppliers, and the selected supplier.

i. Many companies use a missionary sales force consisting of their most

effective salespeople

ii. The marketer also tries to reach as many key participants as possible with

information and assistance

iii. In-suppliers are continually seeking ways to add value to their market offer to

facilitate rebuys

III. Participants in the Business Buying Process

A. Who buys the trillions of dollars’ worth of goods and services needed by business

organizations?

i. Purchasing agents are influential in straight-rebuy and modified-rebuy

situations, whereas other employees are more influential in new-buy

situations

ii. Engineers are usually influential in selecting product components, and

purchasing agents dominate in selecting suppliers

iii. The buying center is the decision-making unit of a buying organization

1. “All those individuals and groups who participate in the purchasing

decision-making process, who share some common goals and the

risks arising from the decisions”

2. Initiators: Users or others in the organization who request that

something be purchased

3. Users: Those who will use the product or service.

4. Influencers: People who influence the buying decision, often by

helping define specifications and providing information for

evaluating alternatives.

5. Deciders: People who decide on product requirements or on

suppliers

6. Approvers: People who authorize the proposed actions of deciders or

buyers

7. Buyers: People who have formal authority to select the supplier and

arrange the purchase terms

8. Gatekeepers: People who have the power to prevent sellers or

information from reaching members of the buying center. For

example, purchasing agents, receptionists, and telephone operators

may prevent salespersons from contacting users or deciders

9. Several people can occupy a given role such as user or influencer,

and one person may play multiple roles

10. A buying center typically has five or six members and sometimes

dozens.

iv. Buying Center Influences

1. Participants with differing interests, authority, status, susceptibility to

persuasion, and sometimes very different decision criteria

2. Business buyers also have personal motivations, perceptions, and

preferences influenced by their age, income, education, job position,

personality, attitudes toward risk, and culture.

3. Individuals, not organizations, make purchasing decisions

4. Businesspeople are buying solutions to two problems: the

organization’s economic and strategic problem and their own

personal need for achievement and reward.

B. Targeting Firms and Buying Centers

i. Business marketers may divide the marketplace in many different ways to

choose the types of firms to which they will sell

ii. Finding the sectors with the greatest growth prospects, most profitable

customers, and most promising opportunities for the firm is crucial

iii. Once it has identified the type of businesses on which to focus marketing

efforts, the firm must then decide how best to sell to them.

iv. Whatever information the business salesperson can obtain about personalities

and interpersonal factors is useful

1. Small sellers concentrate on reaching the key buying influencers

2. Larger sellers go for multilevel in-depth selling

3. Companies must rely more heavily on their communications

programs to reach hidden buying influences and keep current

customers informed

IV. The Purchasing/Procurement Process

A. In principle, business buyers seek the highest benefit package (economic, technical,

service, and social) in relationship to a market offering’s costs.

i. The strength of their incentive to purchase will be a function of the difference

between perceived benefits and perceived costs

ii. Framing occurs when customers are given a perspective or point of view that

allows the seller to “put its best foot forward.”

B. New, more strategically oriented purchasing departments have a mission to seek the

best value from fewer and better suppliers

V. Stages in the Buying Process: Eight buyphases, buygrid framework

A. Problem recognition

i. Triggered by internal or external stimuli

ii. Business marketers can stimulate

B. General need description

C. Product specification

D. Supplier Search

i. Includes electronic marketplaces like catalog sites, vertical markets, auction

sites, spot markets, private exchanges, barter markets, buying alliances

ii. Online business buying shaves transaction costs for both buyers and

suppliers, reduces time between order and delivery, consolidates purchasing

systems, and forges more direct relationships between partners and buyers

iii. For disadvantages, it may help to erode supplier–buyer loyalty and create

potential security problems

iv. E-procurement: Web sites are organized around two types of e-hubs and used

in a variety of ways

1. Vertical hubs centered on industries (plastics, steel, chemicals, paper)

2. Functional hubs (logistics, media buying, advertising, energy

management)

3. Set up direct extranet links to major suppliers

4. Form buying alliances

5. Set up company buying sites

v. Lead generation: the right balance between the quantity and quality of leads

E. Proposal Solicitation: the buyer next invites qualified suppliers to submit written

proposals and invites a few suppliers to make formal presentations

F. Supplier Selection: the buying center will specify and rank desired supplier attributes,

often using a supplier-evaluation model

i. To develop compelling value propositions, business marketers need to better

understand how business buyers arrive at their valuations

ii. Researchers have identified eight different customer value assessment (CVA)

methods

1. Internal engineering assessment

2. Field value-in-use assessment

3. Focus-group value assessment

4. Direct survey questions

5. Conjoint analysis

6. Benchmarks

7. Compositional approach

8. Importance ratings

iii. Specify the customer value proposition, following a number of important

principles

1. Clearly substantiate value claims by concretely specifying the

differences between your offerings and those of competitors on the

dimensions that matter most to the customer

2. Document the value delivered by creating written accounts of costs

savings or added value that existing customers have actually

captured by using your offerings

3. Make sure the method of creating a customer value proposition is

well implemented within the company, and train and reward

employees for developing a compelling one.

iv. The choice of attributes and their relative importance vary with the buying

situation.

v. Marketers can counter requests for a lower price in a number of ways,

including framing as noted above

1. Total cost of ownership, that is, the life-cycle cost of using their

product, is lower than for competitors’ products

2. Cite the value of the services the buyer now receives, especially if it

is superior to that offered by competitors

3. Research shows that service support and personal interactions, as

well as a supplier’s know-how and ability to improve customers’

time to market, can be useful differentiators in achieving

key-supplier status

4. Improving productivity helps alleviate price pressures

5. Set a lower price but establishing restrictive conditions: (1) limited

quantities, (2) no refunds, (3) no adjustments, and (4) no services

6. Solution selling can also alleviate price pressure and comes in

different forms

a. Solutions to enhance customer revenues

b. Solutions to decrease customer risks

c. Solutions to reduce customer costs

7. Risk and gain sharing can offset price reductions customers request

vi. Companies are increasingly reducing the number of their suppliers

1. Trend toward single sourcing, though companies that use multiple

sources often cite the threat of a labor strike, natural disaster, or any

other unforseen event as the biggest deterrent to single sourcing

2. May also fear single suppliers will become too comfortable in the

relationship and lose their competitive edge

G. Order-Routine Specification: negotiation of the final order, listing the technical

specifications, the quantity needed, the expected time of delivery, return policies,

warranties, etc.

i. For maintenance, repair, and operating items, buyers are moving toward

blanket contracts rather than periodic purchase orders

ii. Companies that fear a shortage of key materials are willing to buy and hold

large inventories

iii. Some companies go further and shift the ordering responsibility to their

suppliers, using systems called vendor-managed inventory where the

suppliers keep track of inventory and develop continuous replenishment

programs

H. Performance Review: periodic reviews the performance of the chosen supplier(s)

using one of three methods

i. Contact end users and ask for their evaluations

ii. Rate the supplier on several criteria using a weighted-score method

iii. Aggregate the cost of poor performance to come up with adjusted costs of

purchase, including price

VI. Developing effective business-to-business marketing programs

A. Business-to-business marketers are embracing systems selling and adding valuable

services to their product offerings and employing customer reference programs and a

wide variety of online and offline communication and branding activities

i. Business marketers are increasingly recognizing the importance of their

brand, which is often associated with many of the company’s products.

ii. Top firms are redesigning Web sites, improving search results, engaging in

social media, and launching Webinars and podcasts to improve their business

performance through their B-to-B marketing

iii. Buyers can interact with a company and its customers in a variety of ways—

via social media; conferences, events, and trade shows; and their own

personal and professional networks.

iv. Peer-to-peer interaction can assist a potential buyer

1. Establish a formal, organized customer reference program

2. Put references at the center of your growth strategy

3. Use an experienced executive as the leader of the reference program

4. Focus on a smaller group of truly committed, impactful company

advocates

5. Revolutionize your customer value proposition

6. Find customers who want to be advocates because of their passion

for the company and not as the result of any financial inducement.

B. Systems Buying and Selling

i. Systems buying originated with government purchases of major weapons and

communications systems

1. Prime contractors traditionally provided a turnkey solution, so-called

because the buyer simply had to turn one key to get the job done

2. Sellers have increasingly recognized that buyers like to purchase in

this way, and many have adopted systems selling as a marketing tool.

ii. One variant of systems selling is systems contracting, in which a single

supplier provides the buyer with its entire requirement of MRO supplies.

1. During the contract period, the supplier also manages the customer’s

inventory.

2. Customer benefits from reduced procurement and management costs

and from price protection over the term of the contract

3. Seller achieves lower operating costs thanks to steady demand and

reduced paperwork

C. Services play an increasing strategic and financial role for many business-to-business

firms selling primarily products.

i. Adding high-quality services to their product offerings allows them to

provide greater value and establish closer ties with customers.

ii. Technology firms are also bundling services to improve customer satisfaction

and increase profits

iii. All kinds of firms are finding ways to bundle value-added services to their

products

VII. Managing Business-to-Business Customer Relationships

A. Loyalty is driven in part by supply chain management, early supplier involvement,

and purchasing alliances

B. Business-to-business marketers are avoiding “spray and pray” approaches to

attracting and retaining customers in favor of honing in on their targets and

developing one-to-one marketing approaches

C. The Benefits of Vertical Coordination

i. Building trust is one prerequisite to enjoying healthy long-term relationships

1. Provide full, honest information

2. Provide employee incentives aligned to meet customer needs</

3. Partner with customers to help them learn and help themselves

4. Offer valid comparisons with competitive products

ii. Four relevant ones ways to develop relationship are availability of

alternatives, importance of supply, complexity of supply, and supply market

dynamism.

iii. Buyer–supplier relationships are categorized into eight categories

1. Basic buying and selling – simple, routine exchanges with moderate

levels of cooperation and information exchange

2. Bare bones – require more adaptation by the seller and less

cooperation and information exchange

3. Contractual transaction – defined by formal contract and generally

have low levels of trust, cooperation, and interaction

4. Customer supply – In this traditional supply situation, competition

rather than cooperation is the dominant form of governance

5. Cooperative systems – The partners in cooperative systems are united

in operational ways, but neither demonstrates structural commitment

through legal means or adaptation

6. Collaborative – much trust and commitment lead to true partnership

7. Mutually adaptive – Buyers and sellers make many

relationship-specific adaptations, but without necessarily achieving

strong trust or cooperation

8. Customer is king – In this close, cooperative relationship, the seller

adapts to meet the customer’s needs without expecting much

adaptation or change in exchange

iv. Closest relationships between customers and suppliers arose when supply

was important to the customer and there were procurement obstacles, such as

complex purchase requirements and few alternate suppliers

v. Greater vertical coordination between buyer and seller through information

exchange and planning is usually necessary only when high environmental

uncertainty exists and specific investments (described next) are modest

D. Risks and Opportunism in Business Relationships

i. Establishing a customer–supplier relationship creates tension between

safeguarding (ensuring predictable solutions) and adapting (allowing for

flexibility for unanticipated events).

1. Vertical coordination can facilitate stronger customer–seller ties but

may also increase the risk to the customer’s and supplier’s specific

investments

2. Specific investments entail considerable risk to both customer and

supplier.

3. Opportunism is “some form of cheating or undersupply relative to an

implicit or explicit contract

ii. The presence of a significant future time horizon and/or strong solidarity

norms typically causes customers and suppliers to strive for joint benefits.

Their specific investments shift from expropriation (increased opportunism

on the receiver’s part) to bonding (reduced opportunism)

VIII. Institutional and Government Markets

A. The institutional market consists of schools, hospitals, nursing homes, prisons, and

other institutions that must provide goods and services to people in their care.

i. Many of these organizations are characterized by low budgets and captive

clienteles.

ii. In most countries, government organizations are a major buyer of goods and

services.

iii. Different types of agencies—defense, civilian, intelligence—have different

needs, priorities, purchasing styles, and time frames.