WHAT IS ORGANIZATIONAL BUYING?

WHAT IS ORGANIZATIONAL BUYING?

Organizational buying, according to Webster and Wind, 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.1
Just as no two consumers buy in exactly the same way, no two organizations buy in
exactly the same way. Therefore, as they do for the consumer market, business sellers
work hard to distinguish clusters of customers that buy in similar ways and then create
suitable marketing strategies for reaching those targeted business market segments.
However, the business market differs from the consumer market in a number of significant
ways.

The Business Market Versus the Consumer Market

The business market consists of all of the organizations that acquire goods and services
used in the production of other products or services that are sold, rented, or supplied
to other customers. The major industries making up the business market are agriculture,
forestry, and fisheries; mining; manufacturing; construction; transportation;
communication; public utilities; banking, finance, and insurance; distribution; and
services. U.S. marketers can learn more about specific industries by consulting the
North American Industry Classification System (NAICS), a categorized listing of all of
the industries operating in Canada, the United States, and Mexico.

In general, more dollars and items are involved in sales to business buyers than
to consumers. Consider the process of producing and selling a simple pair of shoes.
Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who
sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers.
Along the way, each party in the supply chain also has to buy many other
goods and services, which means that every business seller is a business buyer, as well.

From the number and size of buyers to geographical location, demand, and buying behaviors, business markets have a number of characteristics that contrast sharply with those of consumer markets.

Understanding the impact of these characteristics can help a supplier target
business buyers more effectively. Pittsburgh-based Cutler-Hammer, for example, sells
circuit breakers, motor starters, and other electrical equipment to industrial manufacturers
such as Ford Motor. As its product line grew larger and more complex, C-H
developed “pods” of salespeople that focus on a particular geographical region, industry,
or market concentration. Each individual brings a degree of expertise about a
product or service that the other members of the team can take to the customer. This
allows the salespeople to leverage the knowledge of co-workers to sell to increasingly
sophisticated buying teams, instead of working in isolation.2

Specialized Organizational Markets

The overall business market includes institutional and government organizations in
addition to profit-seeking companies. However, the buying goals, needs, and methods
of these two specialized organizational markets are generally different from those of
businesses, something firms must keep in mind when planning their business marketing
strategies.

The Institutional Market

The institutional market consists of schools, hospitals, nursing homes, prisons, and
other institutions that provide goods and services to people in their care. Many of


Characteristic Description Example
Fewer buyers
Larger buyers
Close supplier-customer relationship
Geographically concentrated buyers
Derived demand
Inelastic demand
Fluctuating demand
Business marketers normally deal with far fewer buyers than do consumer marketers.
Buyers for a few large firms do most of the purchasing in many industries.
With the smaller customer base and the importance and power of the larger customers,suppliers are frequently required to customize offerings, practices, and performance to meet the needs of individual customers.
More than half of U.S. business buyers are concentrated in seven states:
New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan, which helps to reduce selling costs.
Demand for business goods is ultimately derived from demand for consumer goods, so business
marketers must monitor the buying patterns of ultimate consumers.
Total demand for many business goods and services is inelastic and not much affected by price changes, especially in the short run, because producers cannot make quick production changes.
Demand for business products tends to be more volatile than demand for consumer products.An increase in consumer demand can lead to a much larger increase in demand for plant and equipment needed to produce the additional output.
Goodyear Tire Company aims to get orders from buyers for the Big Three U.S. automakers (General Motors, Ford, and Daimler-Chrysler).
Major companies are big customers in industries such as aircraft engines and defense weapons.
Tooling supplier Stillwater Technologies shares office and manufacturing space with key
customer Motoman, a supplier of industrial robots, to minimize delivery distances and enhance their symbiotic working relationship.1
Because the Big Three U.S.
automakers have their U.S.
headquarters in the Detroit area,
industry suppliers head there on sales
calls.
The Big Three U.S. automakers are
seeing higher demand for steel-bar
products, mostly derived from
consumers’ demand for minivans and
other light trucks, which consume far
more steel than cars.
Shoe manufacturers will not buy
much more leather if the price of
leather falls. Nor will they buy much
less leather if the price rises unless
they can find satisfactory substitutes.
An increase of only 10% in consumer
demand for computers might result in
a 200% increase in business demand
for related parts, supplies, and
services; a 10% drop in consumer
demand for computers might cause a
complete collapse in business demand.
Table 3.3 Characteristics of Business Markets
Characteristic Description Example
Fewer buyers
Larger buyers
Close supplier-
customer
relationship
Geographically
concentrated
buyers
Derived
demand
Inelastic
demand
Fluctuating
demand
Business marketers normally deal
with far fewer buyers than do
consumer marketers.
Buyers for a few large firms do most
of the purchasing in many industries.
With the smaller customer base and
the importance and power of the
larger customers, suppliers are
frequently required to customize
offerings, practices, and performance
to meet the needs of individual
customers.
More than half of U.S. business buyers
are concentrated in seven states:
New York, California, Pennsylvania,
Illinois, Ohio, New Jersey, and
Michigan, which helps to reduce
selling costs.
Demand for business goods is
ultimately derived from demand for
consumer goods, so business
marketers must monitor the buying
patterns of ultimate consumers.
Total demand for many business
goods and services is inelastic and
not much affected by price changes,
especially in the short run, because
producers cannot make quick
production changes.
Demand for business products tends
to be more volatile than demand for
consumer products.An increase in
consumer demand can lead to a
much larger increase in demand for
plant and equipment needed to
produce the additional output.
Goodyear Tire Company aims to get
orders from buyers for the Big Three
U.S. automakers (General Motors,
Ford, and Daimler-Chrysler).
Major companies are big customers
in industries such as aircraft engines
and defense weapons.
Tooling supplier Stillwater
Technologies shares office and
manufacturing space with key
customer Motoman, a supplier of
industrial robots, to minimize delivery
distances and enhance their symbiotic
working relationship.1
Because the Big Three U.S.
automakers have their U.S.
headquarters in the Detroit area,
industry suppliers head there on sales
calls.
The Big Three U.S. automakers are
seeing higher demand for steel-bar
products, mostly derived from
consumers’ demand for minivans and
other light trucks, which consume far
more steel than cars.
Shoe manufacturers will not buy
much more leather if the price of
leather falls. Nor will they buy much
less leather if the price rises unless
they can find satisfactory substitutes.
An increase of only 10% in consumer
demand for computers might result in
a 200% increase in business demand
for related parts, supplies, and
services; a 10% drop in consumer
demand for computers might cause a
complete collapse in business demand.
Table 3.3 Characteristics of Business Markets
Continued

109


Characteristics of Business Markets—Continued


Characteristic Description Example
Professional
purchasing
Multiple buying
influences
Multiple sales
calls
Direct
purchasing
Reciprocity
Leasing
Trained purchasing agents follow
organizational purchasing policies,
constraints, and requirements to buy
business products. Many of the buying
instruments—such as proposals and
purchase contracts—are not typical
of consumer buying.
More people typically influence
business buying decisions. Buying
committees are common in the
purchase of major goods; marketers
have to send well-trained sales reps
and often sales teams to deal with
these well-trained buyers.
With more people involved in the
process, it takes multiple sales calls to
win most business orders, and the
sales cycle can take years.
Business buyers often buy directly
from manufacturers rather than
through intermediaries, especially
items that are technically complex or
expensive.
Business buyers often select suppliers
who also buy from them.
Many industrial buyers lease rather
than buy heavy equipment to
conserve capital, get the latest
products, receive better service, and
gain tax advantages.The lessor often
makes more profit and sells to
customers who could not afford
outright purchase.
Programs on the Cisco Systems Web
site allow purchasing agents to
research, select, and price new
networking systems at any hour and
obtain speedy online answers about
products, orders, and service.2
Metal supplier Phelps Dodge uses an
“account management approach” to
reach all the key people who
influence business buying decisions in
customer organizations.3
In the case of major capital
equipment sales, customers may take
multiple attempts to fund a project,
and the sales cycle—between quoting
a job and delivering the product—is
often measured in years.4
Southwest Airlines,Air Madagascar,
and other airlines around the world
buy airplanes directly from Boeing.
A paper manufacturer buys chemicals
from a chemical company that buys a
considerable amount of its paper.
General Electric leases truck and car
fleets, aircraft, commercial trailers,
railcars, and other major equipment
products to business buyers.
Table 3.3
Sources for examples: 1John H. Sheridan, “An Alliance Built on Trust,” Industry Week, March 17, 1997,
pp. 66–70; 2Andy Reinhardt, “Meet Mr. Internet,” Business Week, September 13, 1999, pp. 128–40; 3Minda
Zetlin,“It’s All the Same to Me,” Sales & Marketing Management, February 1994, pp. 71–75; 4Michael Collins,
“Breaking into the Big Leagues,” American Demographics, January 1996, p. 24.


What Is Organizational Buying? 111

these organizations have low budgets and captive clienteles. For example, hospitals
have to decide what quality of food to buy for their patients. The buying objective here
is not profit, because the food is provided to the patients as part of the total service
package. Nor is cost minimization the sole objective, because poor food will cause
patients to complain and hurt the hospital’s reputation. The hospital purchasing
agent has to search for institutional food vendors whose quality meets or exceeds a
certain minimum standard and whose prices are low. Knowing this, many food vendors
set up a separate division to respond to the special needs of institutional buyers.
Thus, Heinz, for example, will produce, package, and price its ketchup differently to
meet the different requirements of hospitals, colleges, and prisons.

Being a supplier of choice for the nation’s schools or hospitals means big business
for marketers such as Allegiance Healthcare. This firm has become the largest U.S. supplier
of medical, surgical, and laboratory products. Through its stockless inventory program,
known as “ValueLink,” Allegiance delivers ordered products to more than 150
hospitals when and where staff members need them. Under the old system, the most
needed items were inevitably in short supply, while the rarely used items were available
in great number. By using Allegiance’s ValueLink system, hospitals save an average of
$500,000 or more yearly and gain faster, easier access to the items they need.3

The Government Market

In most countries, government organizations are a major buyer of goods and services.
The U.S. government, for example, buys goods and services valued at $200 billion,
making it the largest customer in the world. The number of individual purchases is
equally staggering: Over 20 million individual contract actions are processed every
year. Although the cost of most items purchased is between $2,500 and $25,000, the
government also makes purchases of $25,000 and up, sometimes well into the millions
of dollars.

Government organizations typically require suppliers to submit bids. Normally,
they award the contract to the lowest bidder, although they sometimes take into
account a supplier’s superior quality or reputation for completing contracts on time.
Because their spending decisions are subject to public review, government organizations
require considerable documentation from suppliers, who often complain about
excessive paperwork, bureaucracy, regulations, decision-making delays, and shifts in
procurement personnel.

Consider the experience of ADI Technology Corporation. The U.S. government
has always been ADI’s most important client, accounting for about 90 percent of its
nearly $6 million in annual revenues. Yet managers at this professional services company
often shake their heads at all of the work that goes into winning the coveted government
contracts. A comprehensive bid proposal will run from 500 to 700 pages, and
ADI’s president estimates that the firm has spent as much as $20,000, mostly in worker
hours, to prepare a single bid proposal.

Fortunately for businesses of all sizes, the federal government has been putting
reforms in place to streamline buying procedures. Now the government is moving all
purchasing on-line, with the use of Web-based technologies such as digital signatures.4
Several federal agencies that act as purchasing agents for the rest of the government
have already launched Web-based catalogs, allowing defense and civilian agencies to
buy everything from medical and office supplies to clothing through on-line purchasing.
State and local governments are following suit: The city of Fort Collins, Colorado,
for example, announces its buying needs, posts requests for proposals, and offers
downloads of standard supplier documents on its Web site. Internet-based purchasing
has enabled Fort Collins to more efficiently buy computers, flooring, and an everwidening
range of goods for city use.


CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

A number of major companies, such as Gateway, Rockwell, Kodak, and
Goodyear, make a special effort to anticipate the needs and projects of the government
market. In this market, success comes to firms that participate in the product
specification phase, gather competitive intelligence, prepare bids carefully, and produce
strong communications to enhance their companies’ reputations.

Business Buying Situations

Business buyers in companies, institutions, and government organizations face many
decisions in the course of making a purchase. The number of decisions depends on
the type of buying situation. Robinson and others distinguish three types of buying situations:
the straight rebuy, the modified rebuy, and the new task.5

.
Straight rebuy: The straight rebuy is a buying situation in which the purchasing
department reorders on a routine basis (e.g., office supplies, bulk chemicals). The
buyer chooses from suppliers on an “approved list.” These suppliers make an effort
to maintain product and service quality. They often propose automatic reordering
systems to help purchasing agents save time. The “out-suppliers” attempt to offer
something new or to exploit dissatisfaction with a current supplier. Out-suppliers try
to get a small order and then enlarge their purchase share over time.
.
Modified rebuy: The modified rebuy is a situation in which the buyer wants to modify
product specifications, prices, delivery requirements, or other terms. The modified
rebuy usually involves additional decision participants on both sides. The insuppliers
become nervous and have to protect the account; the out-suppliers see an
opportunity to gain some business.
.
New task: The new task is a buying situation in which a purchaser buys a product or
service for the first time (e.g., office building, new security system). The greater the
cost or risk, the larger the number of decision participants and the greater their
information gathering—and therefore the longer the time to decision completion.6
New-task buying passes through several stages: awareness, interest, evaluation,
trial, and adoption.7 Communication tools’ effectiveness varies at each stage. Mass
media are most important during the initial awareness stage, salespeople have their
greatest impact at the interest stage, and technical sources are the most important during
the evaluation stage.

The business buyer makes the fewest decisions in the straight-rebuy situation and
the most in the new-task situation. In the new-task situation, the buyer has to determine
product specifications, price limits, delivery terms and times, service terms, payment
terms, order quantities, acceptable suppliers, and the selected supplier.
Different participants influence each decision, and the order in which these decisions
are made can vary. The new-task situation is, therefore, the business marketer’s greatest
opportunity and challenge. For this reason, marketers should try to reach as many
key buying influencers as possible and provide helpful information and assistance.
Because of the complicated selling involved in new-task situations, many companies
use a missionary sales force consisting of their best salespeople.

Systems Buying and Selling

Many business buyers prefer to buy a total solution to their problem from one seller.
This practice, called systems buying, originated with government purchases of major
weapons and communication systems. The government solicited bids from prime contractors;
the winning contractor then bid out and assembled the system from subcomponents
purchased from other contractors. Thus, the prime contractor was providing


Participants in the Business Buying Process 113

a “turnkey solution” that allowed the buyer to, in effect, turn one key and get the job
done.

Sellers have increasingly recognized that buyers like to purchase in this way, and
many have adopted systems selling as a marketing tool. Systems selling can take different
forms. For example, many auto parts manufacturers now sell whole systems, such
as the seating system, the braking system, or the door system. A variant on systems selling
is systems contracting, in which a single supply source provides the buyer with all
required MRO supplies (maintenance, repair, and operating supplies). This lowers the
buyer’s costs because the seller maintains the inventory, less time is spent on supplier
selection, and the buyer enjoys price protection during the life of the contract. The
seller benefits from lower operating costs because of steady demand and reduced
paperwork.

Systems selling is a key industrial marketing strategy in bidding to build largescale
industrial projects such as dams, steel factories, and pipelines. Project engineering
firms must compete on price, quality, reliability, and other attributes to win these
contracts. For example, when the Indonesian government requested bids to build a
cement factory near Jakarta, a U.S. firm made a proposal that included choosing the
site, designing the cement factory, hiring the construction crews, assembling the materials
and equipment, and turning over the finished factory to the Indonesian government.
The proposal of a Japanese bidder included all of these services, plus hiring and
training the factory workers, exporting the cement, and using the cement to build
roads and office buildings around Jakarta. Although the Japanese proposal was more
costly, it won. This is true system selling: The firm took the broadest view of its customer’s
needs and positioned itself as an economic development agency.

PARTICIPANTS IN THE BUSINESS BUYING PROCESS

Who does the buying of the trillions of dollars’ worth of goods and services needed by
business organizations? Purchasing agents are influential in straight-rebuy and modifiedrebuy
situations, whereas other department personnel are more influential in new-buy
situations. Engineering personnel carry the most influence in selecting product components,
and purchasing agents dominate in selecting suppliers.8 These are just some of the
people who may be part of the buying center.

The Buying Center

Webster and Wind call the decision-making unit of a buying organization the buying
center. The buying center is composed of “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.”9 The buying center includes organizational members
who play any of seven roles in the purchase decision process:10

.
Initiators: People who request that something be purchased, including users or
others.
.
Users: Those who will use the product or service; often, users initiate the buying
proposal and help define product requirements.
.
Influencers: People who influence the buying decision, including technical
personnel. They often help define specifications and also provide information for
evaluating alternatives.
.
Deciders: Those who decide on product requirements or on suppliers.
.
Approvers: People who authorize the proposed actions of deciders or buyers.

CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

.
Buyers: People who have formal authority to select the supplier and arrange the
purchase terms, including high-level managers. Buyers may help shape product
specifications, but their major role is selecting vendors and negotiating.
.
Gatekeepers: People who have the power to prevent sellers or information from
reaching members of the buying center; examples are purchasing agents,
receptionists, and telephone operators.
There is also a trend toward team-based buying. In one survey, 87 percent of the
purchasing executives at Fortune 1000 companies see more use of teams drawn from
different departments and functions to make buying decisions.11 This trend is leading
to more team selling, as shown in the earlier Cutler-Hammer example.

To target their efforts properly, business marketers have to figure out: Who are
the major decision participants? What decisions do they influence? What is their level
of influence? What evaluation criteria do they use? When a buying center includes
many participants, the business marketer will not have the time or resources to reach
all of them. Small sellers concentrate on reaching the key buying influencers. Larger sellers
go for multilevel in-depth selling to reach as many buying-center participants as possible.
Their salespeople virtually “live” with their high-volume customers. In general, the
most successful companies rely more heavily on communications to reach hidden buying
influences and keep their current customers sold.12

Furthermore, the buying center can be highly dynamic, so business marketers
need to periodically review their assumptions about who is participating. For years,
Kodak sold X-ray film to hospital lab technicians, not noticing that buying decisions
were increasingly being made by professional administrators. As sales declined, Kodak
was finally forced to revise its market targeting strategy.

Major Influences on Business Buying

Business buyers respond to many influences when they make their decisions. When
supplier offerings are similar, buyers can satisfy the purchasing requirements with any
supplier, and they place more weight on the personal treatment they receive. When
supplier offerings differ substantially, buyers are more accountable for their choices
and pay more attention to economic factors. Business buyers respond to four main
influences: environmental, organizational, interpersonal, and individual13 (Figure
3-5); culture is also a factor.

Environmental Factors

Within the macroenvironment, business buyers pay close attention to numerous economic
factors, including interest rates and levels of production, investment, and consumer
spending. In a recession, business buyers reduce their investment in plant,
equipment, and inventories. Business marketers can do little to stimulate total
demand in recessionary periods; they can only fight harder to increase or maintain
their share of demand.

Companies that fear materials shortages often buy and hold large inventories
and sign long-term contracts with suppliers to ensure steady availability. In fact,
DuPont, Ford, and other major companies regard long-term supply planning as a major
responsibility of their purchasing managers.

Business buyers also actively monitor technological, political-regulatory, and
competitive developments. For example, environmental concerns can cause changes
in business buyer behavior. A printing firm might favor suppliers that carry recycled
papers or use environmentally safe ink. One buyer claimed, “We push suppliers with
technical expertise to be more socially conscious.”


Participants in the Business Buying Process 115

Figure 3-5
Major Influences on Business Buying Behavior


Organizational Factors

Every organization has specific purchasing objectives, policies, procedures, organizational
structures, and systems. Business marketers need to be aware of the following
organizational trends in purchasing:

.
Purchasing department upgrading. Spurred by competitive pressures, companies are
staffing their purchasing departments with MBAs who aspire to be CEOs—like
Thomas Stallkamp, DaimlerChrysler’s recently retired president. In his earlier role
as executive vice president of procurement and supply, Stallkamp was highly
successful in cost-cutting and in streamlining manufacturing processes.14 These new,
more strategically positioned “procurement departments” seek out the best value
from fewer and better suppliers. At Caterpillar and other multinationals, purchasing
departments have been elevated into “strategic supply departments” with
responsibility for global sourcing and partnering. In response to this trend, business
marketers must correspondingly upgrade their sales personnel to match the higher
caliber of the business buyers.
.
Cross-functional roles. In a recent survey, most purchasing professionals described
their job as more strategic, technical, team-oriented, and involving more
responsibility than ever before. “Purchasing is doing more cross-functional work
than it did in the past,” says David Duprey, a buyer for Anaren Microwave Inc.,
which makes microwave-signal processing devices for communication and defense.
Sixty-one percent of buyers surveyed said the buying group was more involved in
new-product design and development than it was 5 years ago. More than half of the
buyers now participate in cross-functional teams, with suppliers well represented.15
.
Centralized purchasing. In multidivisional companies, most purchasing is carried out
by separate divisions because of their differing needs. Some companies, however,
have recentralized their purchasing, identifying materials purchased by several

CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

divisions and buying them centrally to gain more purchasing clout. Individual
divisions can buy from other sources if they can get a better deal, but centralized
purchasing usually produces substantial savings. For the business marketer, this
means dealing with fewer and higher-level buyers, and using a national account
sales group to deal with large corporate buyers.

.
Decentralized purchasing of small-ticket items. More companies are decentralizing
selected purchasing operations by empowering employees to purchase small-ticket
items such as special binders and coffee makers. This has come about through the
availability of corporate purchasing cards issued by credit-card firms. Companies
distribute the cards to supervisors, clerks, and secretaries; the cards incorporate
codes that set credit limits and restrict usage. National Semiconductor’s purchasing
chief says these cards have cut processing costs from $30 an order to a few cents.
“Now buyers and suppliers can spend less time on paperwork, so purchasing
departments have more time for building partnerships.”16
.
Internet purchasing. By 2003, business-to-business buying on the Internet is projected
to reach $1 trillion per year (compared with a projected $108 billion for consumer
buying).17 The move to Internet purchasing has dramatic and far-reaching
implications. Companies are not only posting their own Web pages to sell to
business buyers, they are establishing Intranets for internal communication and
extranets to link with regular suppliers and distributors. So far, most businesses are
using extranets to buy MRO supplies. However, a growing number, such as General
Electric, are preparing to buy nearly all supplies on-line to shave transaction and
personnel costs, reduce time between order and delivery, and consolidate
purchasing. In fact, GE Information Services is a leader in helping GE internal
business units and outside companies use the Internet to buy from and sell to other
businesses; its Trading Process Network lets companies buy raw materials,
components, and just about anything else with a few clicks of the mouse. Internet
purchasing can help forge closer relations between partners and buyers, and it
levels the playing field between large and small suppliers. At the same time, it can
potentially erode supplier-buyer loyalty and open the door to possible security
disasters.18
.
Long-term contracts. Business buyers are increasingly initiating or accepting long-term
contracts with reliable suppliers. For example, General Motors wants to buy from
fewer suppliers who are willing to locate close to its plants and produce high-quality
components. In addition, business marketers are setting up electronic data
interchange (EDI) systems so their customers such as hospitals and bookstores can
enter and transmit purchase orders electronically.
.
Purchasing-performance evaluation and buyers’ professional development. Many companies
have set up incentive systems to reward purchasing managers for good buying
performance, in much the same way that sales personnel receive bonuses for good
selling performance. These systems are leading purchasing managers to increase
their pressure on sellers for the best terms.
.
Lean production. Many manufacturers have moved toward lean production, which
enables them to produce a more high-quality product at lower cost, in less time,
using less labor. Lean production incorporates just-in-time (JIT) production, stricter
quality control, frequent and reliable supply delivery, suppliers locating closer to
customers, computerized purchasing, stable production schedules made available to
suppliers, and single sourcing with early supplier involvement. JIT II, the next level
of customer-supplier partnerships, focuses on reducing the costs and time involved
in day-to-day purchasing transactions by locating one or more supplier employees at

The Purchasing/Procurement Process 117

the customer’s site, in the role of buyer-materials planners. Massachusetts’s Bose
Corporation pioneered this arrangement with G&F Industries, its first in-plant
supplier. Says Christ Labonte, a G&F manager, “It’s a fresh, nontraditional
agreement based on trust. After people get comfortable in their partnering, they
start turning up rocks they wouldn’t have turned up and revealing causes that were
sacred cows.”19

Interpersonal Factors

Buying centers usually include several participants with differing interests, authority,
status, empathy, and persuasiveness. The business marketer is not likely to know what
kind of group dynamics take place during the buying decision process. Therefore, successful
firms strive to find out as much as possible about individual buying center participants
and their interaction and train sales personnel and others from the marketing
organization to be more attuned to the influence of interpersonal factors.

Individual Factors

Each buyer carries personal motivations, perceptions, and preferences, as influenced
by the buyer’s age, income, education, job position, personality, attitudes toward risk,
and culture. Moreover, buyers definitely exhibit different buying styles. For example,
some younger, highly educated buyers are expert at conducting rigorous, computerized
analyses of competitive proposals before choosing a supplier. Other buyers are
“toughies” from the old school and pit competitors against one another.
Understanding these factors can better prepare marketers for dealing with individuals
within the buying center.

Cultural Factors

Savvy marketers carefully study the culture and customs of each country or region
where they want to sell their products, to better understand the cultural factors that
can affect buyers and the buying organization. For example, in Germany, businesspeople
prefer to be introduced by their full, correct titles, and they shake hands at both
the beginning and the end of business meetings. As another example, both Korean
and Japanese businesspeople observe Confucian ethics based on respect for authority
and the primacy of the group over the individual.20 Marketers that sell to firms in
other nations must be aware of such cultural attitudes and practices, because they permeate
business-to-business transactions.

THE PURCHASING/PROCUREMENT PROCESS

Industrial buying passes through eight stages called buyphases, as identified by
Robinson and associates in the buygrid framework shown in Table 3.4.21 In modifiedrebuy
or straight-rebuy situations, some of these stages are compressed or bypassed.
For example, in a straight-rebuy situation, the buyer normally has a favorite supplier
or a ranked list of suppliers. Thus, the supplier search and proposal solicitation stages
are skipped. In the sections that follow, we examine each of the eight stages for a typical
new-task buying situation.

Stage 1: Problem Recognition

The buying process begins when someone in the company recognizes a problem or
need that can be met by acquiring a good or service. The recognition can be triggered
by internal or external stimuli. Internally, problem recognition commonly occurs
when a firm decides to develop a new product and needs new equipment and materi



Source: Adapted from Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying and
Creative Marketing (Boston:Allyn & Bacon,1967),p.14.


CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

Table 3.4 Buygrid Framework: Major Stages (Buyphases) of the Industrial
Buying Process in Relation to Major Buying Situations (Buyclasses)

Buyphases
New Modified Straight
Task Rebuy Rebuy
1. Problem recognition Yes Maybe No
2. General need description Yes Maybe No
3. Product specification Yes Yes Yes
Buyphases 4. Supplier search Yes Maybe No
5. Proposal solicitation Yes Maybe No
6. Supplier selection Yes Maybe No
7. Order-routine specification Yes Maybe No
8. Performance review Yes Yes Yes

als, when a machine breaks down and requires new parts, when purchased material
turns out to be unsatisfactory, and when a purchasing manager senses an opportunity
to obtain lower prices or better quality. Externally, problem recognition can occur
when a buyer gets new ideas at a trade show, sees a supplier’s ad, or is contacted by a
sales representative offering a better product or a lower price. For their part, business
marketers can stimulate problem recognition by direct mail, telemarketing, effective
Internet communications, and calling on prospects.

Stage 2: General Need Description

Once a problem has been recognized, the buyer has to determine the needed item’s
general characteristics and the required quantity. For standard items, this is not a very
involved process. For complex items, the buyer will work with others—engineers,
users, and so on—to define the needed characteristics. These may include reliability,
durability, price, or other attributes. In this stage, business marketers can assist buyers
by describing how their products would meet such needs.

Stage 3: Product Specification

With a general need description in hand, the buying organization can develop the
item’s technical specifications. Often, the company will assign a product value analysis
(PVA) engineering team to the project. Product value analysis is an approach to cost
reduction in which components are carefully studied to determine if they can be
redesigned or standardized or made by cheaper methods of production.

The PVA team will examine the high-cost components in a given product,
because 20 percent of the parts usually account for 80 percent of the costs of manufacturing
it. The team will also identify overdesigned product components that last
longer than the product itself, then decide on the optimal product characteristics.
Tightly written specifications will allow the buyer to refuse components that are too
expensive or that fail to meet the specified standards. Suppliers, too, can use product
value analysis as a tool for positioning themselves to win an account. By getting in early
and influencing buyer specifications, a supplier can significantly increase its chances
of being chosen.


The Purchasing/Procurement Process 119

Stage 4: Supplier Search

The buyer now tries to identify the most appropriate suppliers, by examining trade
directories, doing a computer search, phoning other firms for recommendations,
scanning trade advertisements, and attending trade shows. However, these days the
most likely place to look is on the Internet. This levels the playing field, because
smaller suppliers have the same advantages as larger ones and can be listed in the
same on-line catalogs for a nominal fee.

One of the more comprehensive, global on-line catalog libraries is being assembled
by Worldwide Internet Solutions Network Inc, better known as WIZ-net (www.wiznet.
net). The firm’s database includes full catalogs from more than 72,000 manufacturers,
distributors, and industrial service providers around the world, containing
more than 8 million product specifications. For purchasing managers, this kind of
one-stop shopping can be an incredible time saver (and price saver, because it allows
easier comparison shopping). And it is more convenient: WIZ-Net also offers secure email
so buyers can communicate directly with suppliers to ask for bids or to place
orders.22

To get noticed during this buyphase, the supplier should get listed in major online
catalogs or services, develop communications to reach buyers who are seeking
new suppliers, and build a good reputation in the marketplace. Suppliers who lack
capacity or have a poor reputation will be rejected, while those who qualify may be visited
by buyer’s agents, who will examine their facilities and meet their personnel. After
evaluating each company, the buyer will end up with a short list of qualified suppliers.

Stage 5: Proposal Solicitation

In this stage, the buyer is ready to invite qualified suppliers to submit proposals. When
the item is complex or expensive, the buyer will require a detailed written proposal
from each qualified supplier. After evaluating the proposals, the buyer will invite a few
suppliers to make formal presentations.

Business marketers must thus be skilled in researching, writing, and presenting
proposals. Their written proposals should be marketing documents, not just technical
documents. Their oral presentations should inspire confidence, positioning their
company’s capabilities and resources so that they stand out from the competition.

A supplier’s first priority during this stage is to become qualified or, in some cases,
to become certified, so it will be invited to submit proposals. Consider the hurdles that
Xerox has set up for suppliers. Only suppliers that meet ISO 9000 international quality
standards can qualify for certification. These suppliers must complete the Xerox
Multinational Supplier Quality Survey, participate in Xerox’s Continuous Supplier
Involvement process, and undergo rigorous quality training and evaluation based on
the Malcolm Baldrige National Quality Award criteria. Not surprisingly, only 176 companies
worldwide have become certified Xerox suppliers.23

Stage 6: Supplier Selection

Before selecting a supplier, the buying center will specify desired supplier attributes
(such as product reliability and service reliability) and indicate their relative importance.
It will then rate each supplier on these attributes to identify the most attractive
one.

At this point, the buyer may attempt to negotiate with preferred suppliers for
better prices and terms before making the final selection. Despite moves toward strategic
sourcing, partnering, and participation in cross-functional teams, buyers still spend
a large chunk of their time haggling over price, which remains a key criterion for sup



CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

plier selection.24 Marketers can counter a buyer’s request for a lower price in a number
of ways. They may be able to show evidence that the “life-cycle cost” of using the
product is lower than that of competitors’ products. They can also cite the value of the
services the buyer now receives, especially where those services are superior to those
offered by competitors.

Hewlett-Packard, for example, has worked hard to become a “trusted advisor” to
its customers, selling specific solutions to their unique problems. Along the way, HP
discovered that some companies want a partner and others simply want a product that
works. Still, the company estimates that the trusted-advisor approach has contributed
to 60 percent growth of its high-end computer business.25

As part of the supplier selection process, buying centers must decide how many
suppliers to use. In the past, many companies preferred a large supplier base to ensure
adequate supplies and to obtain price concessions. Out-suppliers would try to get in
the door by offering an especially low price.

Increasingly, however, companies are reducing the number of suppliers.
Companies such as Ford, Motorola, and AlliedSignal have cut the number of suppliers
anywhere from 20 percent to 80 percent. The suppliers who remain are responsible
for larger component systems, for achieving continuous quality and performance
improvements, and for lowering prices annually by a given percentage.

There is even a trend toward single sourcing, using one supplier. The Knoxville
News-Sentinel and the New York Daily News newspapers both rely on a single source for their
newsprint. This makes it easier to control newsprint inventories and maintain paper consistency
to avoid the time and expense of changing presses for different papers.26

Stage 7: Order-Routine Specification

After selecting suppliers, the buyer negotiates the final order, listing the technical
specifications, the quantity needed, the delivery schedule, and so on. In the case of
MRO 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 at agreed-upon prices over a specified
period. Because the seller holds the stock, blanket contracts are sometimes called
stockless purchase plans. The buyer’s computer automatically sends an order to the seller
when stock is needed, and the supplier arranges delivery and billing according to the
blanket contract.

Blanket contracting leads to more single-source buying and ordering of more
items from that single source. This system locks suppliers in tighter with the buyer and
makes it difficult for out-suppliers to break in unless the buyer becomes dissatisfied
with the in-supplier’s prices, quality, or service.

Stage 8: Performance Review

In the final stage of the buying process, the buyer periodically reviews the performance
of the chosen supplier(s). Three methods are commonly used. The buyer may
contact the end users and ask for their evaluations. Or the buyer may rate the supplier
on several criteria using a weighted score method. Or the buyer might aggregate the
cost of poor supplier performance to come up with adjusted costs of purchase, including
price. The performance review may lead the buyer to continue, modify, or end the
relationship with the supplier. Therefore, to stay in the running for future purchases,
suppliers should monitor their performance carefully using the same criteria applied
by the product’s buyers and end users. Smart suppliers also analyze the rivals who compete
for the same business, as discussed in the next chapter.


Notes 121

EXECUTIVE SUMMARY

Organizational buying is the decision-making process by which formal organizations
establish the need for purchased products and services, and then identify, evaluate,
and choose among alternative brands and suppliers. The business market consists of
all of the organizations that acquire goods and services used in the production of
other products or services that are sold, rented, or supplied to others: profit-seeking
companies, institutions, and government agencies.

Compared to 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.

Three types of buying situations are the straight rebuy, the modified rebuy, and
the new task. Systems buying is a practice in which the buyer wants to purchase a total
solution to its problem from one seller. 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 the buying center, marketers must be aware of environmental, organizational,
interpersonal, individual, and cultural factors. 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.
Successful marketers anticipate and provide what buyers are seeking in each
buyphase, increasing the chances that they will be selected and, ultimately, build a
long-term relationship with their customers.

NOTES

1. Frederick E. Webster Jr. and Yoram Wind, Organizational Buying Behavior (Upper Saddle
River, NJ: Prentice-Hall, 1972), p. 2.
2. Robert Hiebeler, Thomas B. Kelly, and Charles Ketteman, Best Practices: Building Your
Business with Customer-focused Solutions (New York: Arthur Andersen/Simon & Schuster,
1998), pp. 122–24.
3. Hiebeler, Kelly, and Ketteman, Best Practices, pp. 124–26.
4. Laura M. Litvan, “Selling to Uncle Sam: New, Easier Rules,” Nation’s Business, March 1995,
pp. 46–48; Ellen Messmer, “Feds Do E-Commerce the Hard Way,” Network World, April 13,
1998, pp. 31–32; Anna Muoio, “Fast Agency, Slow Government,” Fast Company, December
1999, pp. 344, 346, 348.
5. Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying and Creative
Marketing (Boston: Allyn & Bacon, 1967).
6. See Daniel H. McQuiston, “Novelty, Complexity, and Importance as Causal Determinants
of Industrial Buyer Behavior,” Journal of Marketing, April 1989, pp. 66–79; and Peter Doyle,
Arch G. Woodside, and Paul Mitchell, “Organizational Buying in New Task and Rebuy
Situations,” Industrial Marketing Management, February 1979, pp. 7–11.
7. Urban B. Ozanne and Gilbert A. Churchill, Jr., “Five Dimensions of the Industrial
Adoption Process,” Journal of Marketing Research, August 1971, pp. 322–28.

CHAPTER 6ANALYZING BUSINESS MARKETS AND BUYER BEHAVIOR

8. See Donald W. Jackson Jr., Janet E. Keith, and Richard K. Burdick, “Purchasing Agents’
Perceptions of Industrial Buying Center Influence: A Situational Approach,” Journal of
Marketing, Fall 1984, pp. 75–83.
9. Webster and Wind, Organizational Buying Behavior, p. 6.
10. Ibid., pp. 78–80.
11. See “ ‘I Think You Have a Great Product, but It’s Not My Decision,’ ” American Salesman,
April 1994, pp. 11–13.
12. Ibid.
13. Webster and Wind, Organizational Buying Behavior, pp. 33–37.
14. Sara Lorge, “Purchasing Power,” Sales & Marketing Management, June 1998, pp. 43–46;
Joann Muller, “The One-Year Itch at Daimler-Chrysler,” Business Week, November 15, 1999,
p. 42.
15. Tim Minahan, “OEM Buying Survey—Part 2: Buyers Get New Roles but Keep Old Tasks,”
Purchasing, July 16, 1998, pp. 208–209.
16. Shawn Tully, “Purchasing’s New Muscle,” Fortune, February 20, 1995; Mark Fitzgerald,
“Decentralizing Control of Purchasing,” Editor and Publisher, June 18, 1994, pp. 8, 10.
17. Mohanbir Sawhney and Steven Kaplan, “Let’s Get Vertical,” Business 2.0, September 1999,
p. 85.
18. Robert Yoegel, “The Evolution of B-to-B Selling on the ‘Net,’ ” Target Marketing, August
1998, p. 34; Andy Reinhardt, “Extranets: Log On, Link Up, Save Big,” Business Week, June
22, 1998, p. 134; John Evan Frook, “Buying Behemoth—By Shifting $5B in Spending to
Extranets, GE Could Ignite a Development Frenzy,” InternetWeek, August 17, 1998, p. 1;
John Jesitus, “Procuring an Edge,” Industry Week, June 23, 1997, pp. 56–62.
19. Lance Dixon, “JLG Industries Offers JIT II Advice,” Purchasing, January 15, 1998, p. 39.
20. (Germany, Japan) Teresa C. Morrison, Wayne A. Conaway, and Joseph J. Douress, Dun &
Bradstreet’s Guide to Doing Business Around the World (New York: Prentice-Hall, 1997);
(Korean) “Tips, Tricks and Pitfalls to Avoid when Doing Business in the Tough but
Lucrative Korean Market,” Business America, June 1997, p. 7.
21. Robinson, Faris, and Wind, Industrial Buying and Creative Marketing.
22. John H. Sheridan, “Buying Globally Made Easier,” Industry Week, February 2, 1998,
pp. 63–64.
23. See “Xerox Multinational Supplier Quality Survey,” Purchasing, January 12, 1995, p. 112.
24. Minahan, “OEM Buying Survey—Part 2: Buyers Get New Roles but Keep Old Tasks.” To see
how the Internet is affecting supplier selection, see Kevin Ferguson, “Purchasing in Packs,”
Business Week, November 1, 1999, pp. EB32–38.
25. Rick Mullin, “Taking Customer Relations to the Next Level,” The Journal of Business Strategy,
January-February 1997, pp. 22–26.
26. Donna Del Moro, “Single-Source Newsprint Supply,” Editor & Publisher, October 25, 1997,
pp. 42–45.

LESSON NO. 3: INDUSTRIAL BUYING BEHAVIOUR

STRUCTURE:
3.1 Introduction 3.2 Purchasing Objectives of Industrial Buyer 3.3 Purchasing Activities of Industrial Buyers 3.4 Buying Situation Types 3.5 Decision Making Unit 3.6 Key Members in Buying Organisation 3.7 Models of Organisational Buying Behaviour 3.8 Modern Purchasing Activities 3.9 Summary 3.10 Questions for Discussion OBJECTIVES
To develop an effective marketing strategy, industrial marketers need to understand the nature of industrial buying as well as the industrial buying behaviour. The objective of the lesson are: to understand organizational buying objectives; different phases in the buying decision process and buying situations; to identify decision making units; to understand the models of organizational buying behaviour.
3.1 INTRODUCTION Selling and buying are the two major pillars in industrial marketing. But, buying (purchase) is an important function in an organization. To maintain an adequate flow of goods and services into the operations; purchase department of a firm develops organizational buying objectives and performs activities. The behaviour of suppliers as well as potential users of the organization influences the department. To know these influences, firstly we have to study the purchase objectives of the industrial customers.
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3.2 PURCHASING OBJECTIVES OF INDUSTRIAL BUYER Basically, the objective of the purchase department in an organization is defined as “buying the right items in the right quantity, at the right price, for delivery at the right time and place” to define what is “right” for each dimension is the responsibility of management. The objectives of the purchasing function are as follows:
Delivery and availability of goods and services
The prime objective of the purchasing department is to ensure that purchased goods and services are available or delivered when and where they needed. The untimely delivery of the purchased good/services may affect adversely performance of the purchase function. On the other hand, the vendor/supplier’s reliability in delivery is the most important criterion at the time of vendor evaluation.
Product quality
The quality of product should be consistent with the specifications and use of the product. Some products meet the Indian Standard (IS) or British Standard (BS) specifications, but they fail on shop-floor when they are used on a machine. It is significant to ensure consistency in quality of product to reduce the cost of inspection, interruptions in production process due to rejections, and arranging replacements of rejected material.
Lowest price of the product
Always, the buyers like to buy at the lowest price consistent with availability and quality of the product. The buyers consider price as an important objective, if delivery and quality objectives are met, because low price is worthless, if the product is not delivered when needed or if the quality of the product is unacceptable.
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Services
The industrial buyers need many types of services to accompany the purchase of goods for achieving the goals of organisation. These services include prompt and accurate information from suppliers, application or technical assistance, spare-parts availability, repairs and maintenance capability, and training, if required.
Supplier relationship
Different industrial buyers have developed the purchase departments in their organisation. Because, manufacturing firms spend more than fifty per cent of their sales revenue on purchase. To develop a good long-term supplier/vendor relationship and to develop new sources of supply, industrial marketers need to understand that purchasing objectives. These objectives are also based on the company objectives. Resultantly, the buying members of an organisation are also influenced by both purchasing objectives of the firm and personal objectives. Personal objectives of industrial buyers include higher status, job security, salary increments, promotions and social considerations: friendship, mutually beneficial relationships, and personal favours. The industrial buyers try to achieve both objectives simultaneously. The industrial marketers ought to realise that it is important to satisfy the purchasing objectives of an industrial firm as well as the personal objectives of the buying members.
3.3 PURCHASING ACTIVITIES OF INDUSTRIAL BUYERS In consumer marketing, consumers make buying decisions based on certain mental stages such as need recognition, information search, evaluation, purchase decision, and post-purchase behaviour. But, in industrial markets the buying decision making process includes observable sequential stages involving many people in the buying organisation. The understanding of these steps/phases of buying-decision making is helpful to an industrial marketer to develop an appropriate selling strategy.
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The purchasing activities of industrial buyers consist of various steps/phases in buying-decision-making process. The importance of each step depends upon the type of buying situation. The industrial marketers should understand both (step in decision-making process and the type of buying situations) to market the product or service. In 1967, Robinson, Faris, and Wind developed a process “buyphases” having eight steps in buying-decision process in industrial market. These phases or steps are elaborated as follows:
Recognition of Need of Industrial Buyer
A smart marketer recognises the need/problem of industrial buyer originated within the firm. If the material supplied by the existing supplier is not satisfactory in terms of quality, or the material is not available as per requirement, or the machine supplied by him breaks down too often, the buying organisation recognises the problem. If an industrial marketer identifies a problem in the buying organisation and suggests how the problem could be solved, there will be a better possibility of it being selected as a supplier.
3.3.2 Determination of the Characteristics and Quantity of Needed Product If the problem is recognized within or outside the buying organisation, then the buying firm will try to answer questions such as: What type of products or services to be considered? What quantity of the product needed? and so on. For technical products, the technical departments (R&D, industrial engineering, production, or quality control) will suggest general solutions of the needed product. For non-technical goods or services, either the user department or purchase department may suggest products or services, based on experience and also the quantity required to solve the problem. Nevertheless, if the required information is not available internally within the buying organization, the same can be obtained from the outside sources.
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3.3.3 Development of Specification of Needed Product Stage 2 and 3 are closely related. After the general solution to the problem is determined in the second phase, the buying organisation, in the third stage, develops a precise statement of the specifications or characteristics of the product or service needed. During this stage the purchase department takes the help of their technical personnel, or if required, outside sources such as suppliers or consultants. Industrial marketers have a great opportunity to get involved at this stage by helping the buyer organisation to develop product specifications and characteristics. It would give a definite advantage by ensuring that the needed product includes his or her company’s product characteristics and specifications.
3.3.4 Search the Qualified Potential Suppliers In this stage, the buying organisation searches for acceptable suppliers or vendors. Firstly, they have to obtain information about all available suppliers and secondly, they have to decide the qualifying suppliers. The search for potential suppliers is based on the various sources of information like trade journals, sales calls, work-of-mouth, catalogues, trade-shows, industrial directories. The qualifications of acceptable supplies may depend on the type of buying organization such as government undertaking, private sector commercial organisation, or institutions, and the buying situation, and the decision-making members. Furthermore, the factors like quality of product or service, reliability in delivery, and service are considered in qualifications of suppliers.
3.3.5 Obtaining and Analysing Supplier Proposals If the qualified suppliers are decided then the buying organisation obtains the proposals by sending enquiries to the qualified suppliers. A supplier’s proposal can be in the form of a formal offer, quotation, or a formal bid, submitted by the supplier to the buying organisation. It must include the product specification, price, delivery period, payment terms, taxes and duties applicable, transportation
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cost (or freight), cost of transit insurance, and any other relevant cost or free service provided. For purchases of routine products or services, the stages 4 and 5 may occur simultaneously, as the buyer may contact the qualified suppliers to get the latest information on prices and delivery periods. For technically complex products and services, a lot of time is spent in analyzing proposals in terms of comparisons on products, services, deliveries, and the landed costs: includes the price after discount plus excise duty, sales tax, freight, and insurance.
3.3.6 Evaluation of Proposals and Selection of Suppliers The industrial buyers evaluate the proposals of competing suppliers and selects one or more suppliers. Further negotiations may continue with selected suppliers on prices, payment terms, deliveries, and so on. The decision makers in the buying organization may evaluate each supplier on a set of agreed-upon attributes or factors. Each supplier is evaluated on each attribute by giving a weightage to each attribute proportionately or on rating scale basis. The supplier(s) who get the highest total score receives the business or the order from the buying organisation. If a buying firm faces a make-or-buy decision, the supplier’s proposals are compared with the cost of producing the needed item within the buying organization. If it is decided to make the item within the buying organization, the buying process is stopped at this stage.
3.3.7 Routine Order Selection In this stage the procedure of exchange of goods and services between a buyer and a seller is worked out. The activities include placement of orders (i.e. purchase orders) with the selected suppliers, the quantity to be purchased from each supplier, frequency of order placement by buyers and delivery schedules to be adhered to by the supplier, schedule, and the payment terms to be adhered to by the buyer. The user department would not be satisfied until the supplier delivers the required item as per delivery schedule, and with acceptable quality.
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3.3.8 Performance Feedback and post-purchase Evaluation In this final phase a formal or informal review regarding the performance of each supplier (or vendor) takes place. The user department gives a feedback on whether the purchased item solved the problem or not. If not, the members of the decision-making unit review their earlier decision and decide to give a chance to the previously rejected supplier. The industrial vendor should recognize that marketing effort is no over after the order is received. He or she must check the feedback and evaluation process in the customer (buyer) organisation. In particular, the industrial marketer must monitor the user satisfaction levels or complaints so that immediate corrective action can be taken before a major damage. In fact, a quick response to customers’ complaints can result in good buyer-seller relationship. The type of products, the phase of the buying-decision making process of customer firms, and the purchasing situations also influence the marketing strategy of industrial seller.
3.4 BUYING SITUATION TYPES There are three common types of buying situations namely (i) New purchase (or New task), (ii) Change in supplier, and (iii) Repeat purchase; discussed as follows:
3.4.1 New Purchase The industrial buyers buy the item for the first time in this situation. The need for a new purchase may be due to internal or external factors. For example, when a firm decides to diversify into new purchase situations the buyers have limited knowledge and lack of previous experience. Therefore, they have to obtain a variety of information about the product, the suppliers, the prices and so on. The risks are more, decisions may take longer time, and more people are involved in decision making in the new purchase decisions.
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3.4.2 Change in Supplier This situation occurs when the organisation is not satisfied with the performance of the existing suppliers, or the need arises for cost reduction or quality improvement. The change in supplier may also be necessary if technical people in the buying organization ask for changes in the product specification, or marketing department asks for redesigning the product to gain some competitive advantage. As a result, search for information about alternative sources of supply becomes necessary. Even though, certain attributes or factors can be used to evaluate the suppliers. There may be uncertainty regarding the supplier who can best meet the needs of the buying firm. Therefore, the modified rebuy situation occurs mostly when the buying firms are not satisfied with the performance of the existing suppliers.
3.4.3 Repeat Purchase If the buying organization requires certain products or services continuously and products/services had been purchased in the past then the situation of repeat purchase occurs. In such a situation, the buying organisation reorders/places repeat orders with the suppliers who are currently supplying such items. This means that the product, the price, the delivery period, and the payment terms remain the same in the reorder, as per the original purchase order. This is a routine decision with low risk and less information needs, taken by a junior executive in the purchase department. Generally, the buying firms do not change the existing suppliers if their performance is satisfactory.
3.5 DECISION MAKING UNIT It is essential to understand the roles of buying-center members or decisionmaking units (DMUs) before identifying the individuals and groups involved in the buying-decision process. It is helpful to the industrial marketers to develop an effective promotion strategy. The roles of buying center members are as follows:
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3.5.1 Initiators The initiators might be any individuals in the buying firm. Often, the users of a product/service play the role of the initiators.
3.5.2 Buyers The major roles of buyers are obtaining quotations (or offers) from suppliers, supplier evaluation and selection, negotiation, processing purchase orders, speed up deliveries, and implementing purchasing policies of the organization. Generally, they are the purchase (or material) officers and executives.
3.5.3 Users The user is those individuals who use the product or service that is to be purchased. Generally, users play the role of the initiators. The influence of the users in purchasing decisions may vary from minor to major. They may define the specifications of the needed product. They may be shopfloor workers, maintenance engineers, or R&D engineers.
3.5.4 Influencers Those individuals who influence the buying decision are known as influencers. Generally, technical people such as designers, quality control engineers have a substantial influence on purchase decisions. Sometimes, individuals outside the organisation, who are experts or consultants, play the role of influencers by drawing specifications of products or services.
3.5.5 Deciders The deciders make the actual buying decisions. They may be one or more individuals involved in the buying decision. It is very significant to identify the deciders, although at times it may be difficult task. Generally, for routine purchases the buyer (or purchase executive) may be the decider. But, for highvalue and technically complex products, senior executives are the deciders.
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3.5.6 Gatekeepers The gatekeepers are those individuals who control (or filter) the flow of the information regarding products and services to the members of the buying center. Sometimes, the gatekeepers may control sales people’s meetings with the members of the buying center. Gatekeepers are often the assistants or junior persons attached to purchase (or materials) manager. After understanding the roles of DMUs, industrial marketers, must identify the individuals and groups who are the members of buying center. The DMUs are useful tools which answers the question-Who are involved in buying decision in an industrial organization? It is defined as a body of all the individuals or groups participating in the buying decision process and who have interdependent objectives and share common risks. The emphasis in the buying center is on the organizational groups i.e. the functional areas, which participate in the buying decision process.
3.6 KEY MEMBERS IN BUYING ORGANISATION The following discussion clarifies different key members or DMUs in industrial buying decisions:
Top Management
For purchases of high value capital equipment, the top management in most firms got involved in the supplier selection, as it may have a major impact on the firm’s operations. The top management in an industrial organisation consists of managing director, director, presidents, and vice-president of general manager. They are generally involved in purchase policy decisions such as diversification into a new product/project, approval of purchase or materials department annual budgets and objectives, and deciding the guidelines for purchase decisions.
Technical Persons
The technical persons are designers, production manager, maintenance manager, quality control manager, R & D manager, and industrial engineers. Generally,
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they are involved in product specification or description, technical evaluation of offers received from suppliers, negotiations with suppliers, performance feedback on products supplied, and so on. They visit the factories of potential suppliers to achieve more information and assurance of manufacturing capability.
Purchasers
Buyers are the individuals in the purchase or materials department. They may be senior executives or managers, and also, at junior levels, purchase officers or assistants. Generally, they are involved in most of the phases or steps of the purchase activities. They coordinate with technical persons, top management, accounts or finance persons within an organization, as well as, with suppliers or vendors externally. Buyer’s influence on selection of suppliers is considerable. They are conscious of keeping good relations with other decision-making members within the organization and also with the suppliers.
Accounts/Finance Persons
The contribution of finance/accounts persons are seen while finalising commercial terms such as modes of payment, issuance of bank guarantees, financial approval of capital purchases, issuing payments to suppliers, and so on.
Marketing People
When a purchase decision has an impact on the marketability of a firm’s product, marketing people become influencers in the buying decision process. For example, a manufacturing firm market the electric motors had to change its packing due to damages caused to the product in transportation. It also affects the satisfaction level of the customers. The marketing manager insisted that suppliers should use good quality and thicker wood for packing the motors to minimize damage in transit.
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3.7 MODELS OF ORGANISATIONAL BUYING BEHAVIOUR The buying decisions of industrial buyers are influenced by many factors. Usually, these are influenced by organisational factors or task-oriented objectives viz. best product quality, or dependable delivery, or lowest price and personal factors or non-task objectives viz. like promotion, increments, job security, personal treatment, or favour. When the suppliers’ proposals are substantially similar, organizational buyers can satisfy organisational objectives with any supplier, and therefore personal factors become more important. When suppliers’ offers differ significantly, industrial buyers pay more attention to organisational factors in order to satisfy the organisational objectives. There are two models available to provide a comprehensive and integrated picture of the major factors that combine to explain organisational buying behaviour. These are:
The Webster and Wind Model
The Webster and Wind Model of organisational buying behaviour is quite a comprehensive model (Figure 3.1). It considers four sets of variables: environmental, organizational, buying center, and individual, which, affect the buying-decision making process in a firm.
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Figure 3.1: The Webster and Wind Model of Organisational Buying Behaviour
Environmental Variables
· Physical · Technological · Economic · Political and legal · Labour unions · Cultural · Customer demands · Competitive practices moreover pressures · Supplier information
Organisational Variables
· Objective/goals · Organisation structure · Purchasing policies and procedures · Evaluation and reward systems · Degree of decentralization in purchasing
Buying Centre Variables
· Authority · Size · Key influencers · Intepersonal relationship · Communication
Organisational Buying Decisions
· Choice of Suppliers · Delay decision and search for more information · Make, or lease, or buy · Do not buy
Individual Variables
· Personal Goals · Education · Experience · Values · Job position · Lifestyle · Income
Source: R.E. Webster, Jr and Y Wind, journal of Marketing, 36, pp 12-17, April, 1972. The environmental variables include physical, technological, economic, political, legal, labour unions, cultural, customer demands, competition and supplier information. For example, in a recessionary economic condition, industrial firms minimize the quantity of items purchased. The environmental factors influence the buying decisions of individual organisations. The organizational variables include objectives, goals, organisation structure,
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purchasing policies and procedures, degree of centralization in purchasing, and evaluation and reward system. These variables particularly influence the composition and functioning of the buying center, and also, the degree of centralization or decentralisation in the purchasing function in the buying organisation. The functioning of buying center is influenced by the organisational variables the environmental variables, and the individual variables. The output of the group decision-making process of the buying center includes solutions to the buying problems of the organisation and also the satisfaction of personal goals of individual members of the buying centre. The strengths of the model, developed in 1972, are that it is comprehensive, generally applicable, analytical, and that it identifies many key variables, which could be considered while developing marketing strategies by industrial marketers. However, the model is weak in explaining the specific influence of the key variables.
3.7.2 The Sheth Model In 1973, Professor Jagdish N Sheth developed the Sheth model. This model highlights the decision-making by two or more individuals jointly, and the psychological aspects of the decision-making individuals in the industrial buying behaviour (Figure 3.2). It includes three components and situational factors, which determine the choice of a supplier or a brand in the buying decision making process in an organization. The differences among the individual buyers expectations (Component 1) are caused by the factors: background of individuals; information sources; active search; perceptual distortion; and satisfaction with past purchases. The background of individuals depends upon their education, role in the organization, and life style. The factor perceptual distortion means the extent to which each individual participant modifies information to make it consistent with his existing beliefs and previous experiences. It is difficult to measure perceptual distortion, although techniques
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such as factor analysis and perceptual mapping are available for this purpose. In Component (2), there are six variables, which determine whether the buying decisions are autonomous or joint. According to the Sheth Model, larger the size of the organization and higher the degree of decentralization, more will be possibilities of joint-decision making. Figure 3.2: The Sheth Model
Component (1) Component (2) Component (3) Situational Factors Differences among individual buyers caused by factors: ·Background of individuals ·Active search ·Perceptual distortion ·Satisfaction with past purchases Variables that determine autonomous or joint buying decision: (A) Product specific factors, including ·Time Pressure ·Perceived risk ·Type of Purchase (B) Company specific factors, including · Company size ·Company orientation · Degree of centralisation Methods used for conflict resolution in joint-decision making process: · Problem-solving · Persuasion · Bargaining · Politicking Supplier or brand chooice Source: Jagdish N. sheth, “A Model of Industrial Buyer Behaviour”,
journal of Marketing, 37, pp 50-56, October, 1973. The methods used for conflict resolution in joint-decision making process are indicated by the Component (3) in the model. Problem-solving and persuasion methods are used when there is an agreement about the organizational objectives. If there is no such agreement, bargaining takes place. Conflict about the style of decision-making is resolved by politicking. Situation factors can be varied like economic conditions, labour disputes, mergers and acquisitions. The model does not explain their influence on the buying process.
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3.8 MODERN PURCHASING ACTIVITIES There are some contemporary purchasing activities, which are used in industrial buying processes. These are discussed as follows:
3.8.1 Just-in-Time (JIT) It refers that the material arrives at the buyer’s factory exactly when needed by the buyer. It minimizes the inventory, and increases the quality and productivity. The goal of JIT delivery is zero inventory and excellent quality of the material delivered by the supplier. This ensures nil rejection at the buyer’s factory. The JIT delivery means that the buying and selling organizations work together closely to reduce costs.
3.8.2 Single Sourcing In this activity, the industrial customers place orders with only one supplier not to two or three suppliers. It means all the eggs are not in one basket. The practice makes possible for the buying and selling organizations to work closely together, involve the supplier from the design stage, and utilize the supplier’s expertise.
3.8.3 Value Analysis The industrial buyers to reduce cost with maintaining product reliability use the value analysis. It involves analyzing a product item by the function it performs, the value of the function, and the alternate methods of performing the same function. It uses creative technique like brainstorming and includes members of various departments such as production, quality control, design, industrial engineering, marketing, and purchase.
3.8.4 Purchase Committee Some industrial buyers develop a formalized decision-making unit i.e. purchase committee. It is used in many industrial organizations including institutions (such as universities and hospitals) and Government companies. Generally, in a typical purchase committee, one or two individuals nominate in the decision-
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making. The salesperson must provide information to all the members of the purchase committee, and should target the real sales efforts to those dominant members who influence the buying decisions. Identifying purchase committee individuals, their technical and commercial expertise, their individual needs, buying decision process, and the organization structure are the important tasks to be performed by the effective industrial marketer.
3.9 SUMMARY The purchasing objectives and purchasing activities of industrial buyers must be understood by the industrial marketers to formulate an effective marketing strategy. The industrial buyers are influenced by both purchasing objectives of the firm and personal objectives. Further, the individuals involved in buyingdecision process have certain roles. The industrial marketers should identify the key members of buying centre in each buying organization. The industrial marketers should also be aware of models of organizational buying behaviour and the up to date purchasing activities, such as just-in-time delivery, single sourcing, value analysis, and purchasing committee.
3.10 QUESTIONS FOR DISCUSSION 1. In what stage(s) of industrial buying decision making process the industrial marketers should get involved and what are the benefits of such an involvement? 2. “It is said that the industrial marketer’s job is not over after getting an order from the industrial customer”. Give the comment. 3. Explain the models of organisational buyer behaviour and their implication in the organisation. 4. How industrial buying behaviour is different from consumer buying behaviour? What are the major factors that influence business buyers? 5. Discuss the contemporary techniques of purchasing in industrial buying. References:
1. Hawaldar, K. Krishna (2002), “Industrial Marketing”(1st ed.), TATA McGraw-Hill Publishing Company Limited, New Delhi. 2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), “Industrial Marketing”(4th ed.), All India Traveller Book Seller Publishers And Distributors, Delhi. AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.

LESSON NO. 2: INDUSTRIAL MARKET

STRUCTURE
2.1 Introduction 2.2 Types of Industrial Customers 2.3 Industrial Products and Services 2.4 Marketing Implications for different Customer and Product Types 2.5 Purchasing Practices of Industrial Customers 2.6 Summary 2.7 Questions for Discussion OBJECTIVES
The objectives of this lesson are to: describe the diversity of industrial customers and the types of products and services they purchase; know the influencing factors to marketing strategy in terms of type of customer being served and the product or service being marketed; and to learn the characteristics of organizational purchasing.
2.1 INTRODUCTION To develop an effective marketing plan, an industrial marketer needs to understand industrial markets. The industrial market is composed of commercial enterprises, governmental organisations, and institutions whose purchasing decisions vary with the type of industrial good or service under consideration. Effective marketing programs thus depend upon a thorough understanding of how marketing strategy should differ with the type of organisation being targeted and the products being sold. The industrial market is characterised by wonderful diversity both in customers served and products sold. Component parts, spare parts, accessory equipment, and services are example of the types of products purchased by the variety of customers in the industrial market. Industrial distributors or dealers who in turn sell to other industrial customers, commercial businesses, government, and institutions buy a variety of products that, in one way or another, are important to the functioning of their business
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endeavours. Knowing how this immense array of industrial customers’ purchase and use products and what criteria are important in their purchasing decision is an important aspect of industrial marketing strategy. For the purpose, industrial sellers understand the types of industrial buyers.
2.2 TYPES OF INDUSTRIAL CUSTOMERS Industrial customers are normally classified into four groups: (i) Commercial Enterprises, (ii) Governmental Agencies, (iii) Institutions, and (iv) Co-operative Societies. These are as shown as follows in the Figure 2.1.
2.2.1 Commercial Enterprises Commercial enterprises are private sector, profit-seeking organisations such as IBM, General Motors, Computer Land, and Raven Company, purchase industrial goods and/or services for purposes other than selling directly to ultimate consumers. However, since they purchase products for different uses, it is more useful from a marketing point of view to define them in such a way as to understand their purchasing needs at the time of examination of the varieties of products they purchase and how marketing strategy can be developed to meet their needs.
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Figure 2.1: Industrial Customers
Industri al Cooperative Customers Institutional Costomers Government Customers Commercial Enterprises Industrial Distributor Original Equipment Manufacturer Users Public Sector Units Government Undertaking Public Institutions Private Institutions Manufacturing Units Non-manufacturing Units Cooperative banks, Housing cooperative societies School, Colleges Government Hospital Indian Railways, State Electricity Board, defense units TVS-Suzuki is user for HMT machine tools Maruti Udyog Limited Exide for battery products Maharashtra Sugar Cooperative Society Intermediaries Thus, it is more logical to look at commercial enterprises: (i) industrial distributors or dealers, (ii) original equipment manufacturers (OEMs), and (iii) users. As and when, these categories tend to overlap; are useful to the industrial marketer because they point out the ways of uses of products and services in buying firms.
2 Industrial Distributors and Dealers
Industrial distributors and dealers take title to goods; thus, they are the industrial marketer’s intermediaries; acting in a similar capacity to wholesalers or even
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retailers. the intermediaries not only serve the consumer market but also they serve other business enterprises, government agencies, or private and public institutions. They purchase industrial goods and resell them in the same form to other industrial customers.
2.2.3 Original Equipment Manufacturers (OEMs) These industrial customers purchase industrial goods to incorporate OEMs into the products they produce. For instance, a tyre manufacturer (say, MRF), who sells tyres to a truck manufacturer (say, TELCO), would consider the truck manufacturer as an OEM. Thus, the product of the industrial marketer (MRF) becomes a part of the customer’s (TELCO’S) product.
2.2.4 Users An industrial customer, who purchases industrial products or services, to support its manufacturing process or to facilitate the business operations is referred as a user. For example, drilling machines, press, winding machines, and so on are the products which support manufacturing process, whereas the products which facilitate the operations of business like computers, fax machines, telephones, and others. In addition to above, sometimes there may be overlapping of categories means a manufacturer can be a user or an OEM. For example, a car manufacturer buys a drilling machine to support the manufacturing operation and is referred to as a user. The same car manufacturer also buys batteries which is incorporated into cars and hence, it can be also referred to as an OEM.
2.2.5 Government Customers In India, the largest purchasers of industrial products are Central and State Government departments, undertakings, and agencies, such as railways, department of telecommunication, defense, Director General of Supplies and Disposal (DGS&D), state transport undertakings, state electricity boards, and so on. These Government units purchase almost all kind of industrial products and
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services and they represent a huge market.
2.2.6 Institutions Public and private institutions such as hospitals, schools, colleges, and universities are termed as institutional customers. Some of these institutions have rigid purchasing rules and others have more flexible rules. An industrial marketing person needs to understand the purchasing practice of each institute so as to be effective in marketing the products or services.
2.2.7 Cooperative Societies An association of persons forms a cooperative society. It can be manufacturing units (e.g. Cooperative Sugar Mills) or non-manufacturing organisations (e.g. Cooperative Banks, Cooperative Housing Societies). They are also the industrial customers.
2.3 INDUSTRIAL PRODUCTS AND SERVICES The industrial products and services are classified into three broad groups: (i) materials and parts, (ii) Capital items, (iii) Supplies and services; discussed as follows:
2.3.1 Materials and Parts Goods that enter the product directly consist of raw materials, manufactured materials, and component parts. The purchasing company, as part of manufacturing cost treats the cost of these items. Raw Materials: These are the basic products that enter in the production process with little or no alternations. They may be marketed as either OEMs or user customer. For instance, when a large bakery purchases natural gas to fire the ovens that are used to produce cakes, it is a user customer. When the same firm purchases sugar for processing the cakes, it is an OEM. Manufactured Materials: Manufactured materials include those raw materials that are subjected to some amount of processing before entering the manufacturing process e.g., Acids, fuel oil, and steel that are the basic
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ingredients of many manufacturing activities. For example, an aluminum extrusion unit buys aluminum billets to manufacture aluminum-extruded products such as door and window frames, by using an extrusion press. Thus, aluminum billets are called manufactured materials. Component Parts: Component parts such as electric motors, batteries and instruments can be installed directly into products with little or no additional changes. When these products be sold to customers who use them in their production processes, they are marketed as OEM goods. The component parts are also sold to the dealers or distributors, who resell them to the replacement market. For example, MICO spark plugs are sold to a truck or car manufacturer, as well as to automotive dealers/distributors throughout India.
Capital items
Capital items are used in the production processes and they wear out over certain time frame. Generally they are treated as a depreciation expense by the buying firm or user customers. These are classified as follows: Installations/Heavy Equipment: Installations are major and long-term investment items such as factories, office buildings and fixed equipments like machines, turbines, generators, furnaces, and earth moving equipment. These items are shown in the balance sheet as plant and equipment, and are fixed assets to be depreciated over a period of years if they are absolutely purchased. However, if these are leased, the purchaser treats the cost for tax purpose as an expense. As the unit purchase price of capital items is high, borrowing money for a period of time, which is roughly equivalent to the expected life of the fixed assets, finances these items. Accessories/Light Equipment: Light equipment and tools which have lower purchase prices and are not considered as part of fixed plant, are power operated hand tools, small electric motors, dies; jigs, typewriters and computer terminals. Purchases of accessories are either considered as current expenses with purchase
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prices taken as operating expenses in the year purchased, or they may be considered as fixed assets and therefore, depreciated over a period of few years. Plant and Buildings: These are the real estate property of a business/ organisation. It includes the firm’s offices, plants (factories), warehouses, housing, parking lots, and so on.
2.3.3 Supplies and Services Supplies and services sustain the operation of the purchasing organisation. They do not become a part of the finished product. They are treated as operating expenses for the periods in which they are consumed. Supplies: Items such as paints, soaps, oils and greases, pencils, typewriter ribbons, stationery and paper clips come under this category. Generally, these items are standardized and marketed to a broad section of industrial users. Services: Companies need a broad range of services like building maintenance services, auditing services, legal services, courier services, marketing research services and others.
2.4 MARKETING IMPLICATIONS FOR DIFFERENT CUSTOMER AND PRODUCT TYPES For large OEMs or users selling is done directly from a seller to a buyer organisation for materials and parts products. Though, for smaller volume OEMs and users, the standard raw materials or components are sold through industrial dealers or distributors, as it is cost effective. In case the components are custom-made, considerable interaction takes place between technical and commercial persons from both buyer and seller organisations, and obviously selling is done directly. It is therefore, important for an industrial salesman to remains in close touch with purchase or materials department persons as well as with quality, production, R&D, marketing, and accounts/finance persons of buyer organisations as they influence buying or payment releasing decisions. Apart from personal contacts, product leaflets/brochures help to industrial AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.
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marketer in communicating product and other information. In case of standard products, the factors, which influence buying decisions, with differing share of business for various suppliers, are product quality and performance, delivery dependability, price, payment terms, customer service, and customer rapport. When component parts such as batteries and tyres are sold in the consumer replacement market, marketers either create a product differentiation through consumer advertising or sell on a competitive price basis. For this, advertising and distribution through multiple channels all over the country becomes an important part of marketing strategy. For example, Crompton Greaves Ltd manufactures and markets a wide range of electrical motors ranging from fractional horse power (FHP) to large high tension (HT) motors. The company adopted a marketing strategy to sell its standard motors through a network of industrial dealers to small-scale manufacturers, all over India. However, the special purpose motors to the original equipment manufacturers (OEMs) such as pump manufacturers and compressor manufacturers, are sold directly through its sales persons located at various branches. The field sales persons are trained in both technical and commercial aspects of selling and are required to establish a close rapport with various departments such as purchase/materials, quality, R&D, marketing, and finance/accounts in the customers’ organizations. The company could, therefore, maintain a leadership position in the competitive market due to its strategy of customer satisfaction through superior product quality and performance, delivery dependability, competitive prices and excellent customer service. For capital items like heavy machinery and construction of factories and office buildings, direct selling with extensive interactions, involving top executives in both buying and selling organisations are very common. Negotiations take considerable time on key factors such as price; return on investment, credit facilities, delivery period, installation time, third party certificate for previous
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jobs done, and so on. Personal selling is the primary promotional method used which is used in industrial marketing. For example, the marketing strategy for a large furnace manufacturer was to directly sell its furnaces to the industrial buyers. As the value of each furnace was running into millions of rupees, the buyers treated it as a capital item. Senior executives from marketing, engineering, and finance from the selling organization not only decided the technical and commercial aspects at the time of submission of quotations/offers, but also visited as a team, for negotiations, with the senior technical and commercial persons from the buyers’ organizations. Apart from price, payment terms, delivery and installation time, meeting the technical parameters required by the customers and the performance of similar furnaces supplied earlier to other industrial customers played important role in securing high value orders. Direct selling, is used for marketing supplies for large-volume buying firms. And distributors or dealers are used to market to diverse markets consisting of small and medium size companies. The purchase or materials department persons generally make buying decisions based on dependable delivery, price, and locational convenience. Advertising in magazines, trade journals, local newspapers, and yellow pages are used to generate awareness of the company and its products to the latent users and distributors/dealers. In the strategy of marketing of service, buying firms contact the selling firms to know their reputation by way of word of mouth. The selling firm’s efforts are on consultative or advisory nature, and continuation of the service depends upon the quality, price, and timeliness of service to meet the customer’s needs.
2.5 PURCHASING PRACTICES OF INDUSTRIAL CUSTOMERS The industrial marketers market industrial goods or services at different types of customers such as commercial enterprises, governmental customers, and institutional customers. For effective marketing of industrial products, it is significant to know the purchasing practices generally customized by the various
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types of industrial customers.
2.5.1 Purchasing in Commercial Enterprises The purchasing practices depend upon the nature of business and the size of the commercial enterprise as well as the volume, variety, and technical complexity of the products purchased. In large and medium size organizations, the purchase decision makers involve from different departments viz. production, materials, quality, finance/cost accounting, engineering, and also senior management executives. Thus, there are many persons who influence the purchase decisions in such organizations. Industrial buyers use the techniques viz. material planning, supplier rating system, economic order quantity, value analysis and so on. Materials/purchase managers are professionals they must be well informed about price trends, commercial matters, and negotiating skills. They make use of in-house technical expertise when required. Further, an industrial marketer must understand a set of formal purchasing procedure and documentation motioned in a commercial enterprise. An industrial marketer must understand a set of formal purchasing procedure and documentation motioned in a commercial enterprise. These are shown in Table 2.1, as follows:
Step Activity Responsible Unit 1. User department initiates the process by issuing purchase requisition (P.R.) or indent to the purchase (materials) department User department 2. Check if the material required is in stock. If yes, the material (against the P.A.) is issued to the user department and the P.A. is filed, indicating action taken Purchase department 3. If the material (required as per P. R.) is not in stock, then identify potential suppliers, get quotations, negotiate, select supplier(s), and issue purchase order (P.O.) Purchase department 4. The supplier (or vendor) acknowledges the P.O. Supplier 5. Follow-up with the supplier (if required) on delivery Purchase
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department 6. The supplier dispatches the material and informs the dispatch details (such as invoice and lorry receipt number and date, invoice value, transporter name) to purchase department Supplier 7. On receipt of material, stores (or receiving department) checks the material against delivery challan and P.O. and issues material receipt report (M.R.R.) Stores 8. Quality control (or inspection) department inspects the material and issues Inspection report (I.R.) Quality or Inspection department 9. Purchase department issues supplier invoice along with M.R.A. and I.A. to accounts department for payment and closes the order if it is executed fully Purchase department 10 Accounts department checks all the above documents with P.O. and issues payments to supplier. Accounts or Finance department
Table 2.1, shows that a typical purchasing process in a large or medium size commercial organisation involves various departments, like technical (R&D, production, quality, industrial engineering), finance or accounts, purchase, stores, and sometimes, for high value purchases and policy matters, senior level executives are also involved. The major tasks in the purchasing process are identifying potential suppliers, negotiating and selecting suppliers, ensuring right quality and quantity of material at the right time, and a long-term business relationship with the suppliers. Many commercial organisations have established a separate purchasing department to enhance the status of purchasing in manufacturing organisations; because, on an average fifty to seventy per cent of sales revenue is spent on purchase in these organisations. Therefore, purchasing can enhance operational efficiency by saving in material cost, by making available good quality material at the right time, and thus contributing to the company’s competitive advantage in the market.
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The Government units are the largest purchasers of industrial goods and services. To compete successfully and to get more business, an industrial marketer must understand the complexities involved in selling to Government units. There are many centers where State and Central Government units buy a variety of products required by railways, department of telecommunications, state electricity boards, state transport undertakings, defense units, and so on. DGS&D is an agency, which finalises running contracts for various standard products on behalf of the Central Government. Though, other large Central and State Government units have their own procurement departments with a set of standard from and conditions to be fulfilled by suppliers. In general, the first step is to get the name of the company and the products registered with the Government units. Generally, the procedure of registration involves the submission of duly filled standard forms, product leaflets, and company details properly certified by a chartered accountant. Some Government units depute their inspectors to inspect the company’s manufacturing facilities, and based on the favourable report from the Government inspector, the company is registered as approved supplier for those products consequently. For standard products and services, tender notices are advertised in national newspapers, based on which suppliers procure tender papers from the specified Government authority after paying a small amount of tender fees. The suppliers are then required to submit tender offers in sealed envelopes, duly signed by the signatory authority, as per the instructions given in the tender papers, by certain specified time and date. After the tender offers are received in the “tender box”, the sealed covers are opened at the specified date and time in the presence of the representatives of the suppliers and then the prices, delivery, and other relevant terms are read out for the benefit of those attending the “tender opening”. For closed tenders or limited tenders, the tender opening procedure of reading out the prices and other terms are not followed. In closed or limited tenders, tender enquiry is sent to
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only limited (a few) suppliers who are registered with the Government unit for certain category of non-standard products. The purchase orders are issued based on the evaluation of tender offers, with or without negotiations with the suppliers. The tender offers of various suppliers are kept secret and not made known to suppliers. Based on the lowest prices or the lowest landed costs i.e. adding all charges with basic price, the orders are released on the lowest bidder who has quoted the lowest price or has the lowest landed cost, if other factors such as technical specifications, delivery period, and payment terms are the same as per tender enquiry. If the value of tender enquiry is small, the orders are placed to one or two suppliers. If the tender value is large then the maximum share of the total value is decided on the lowest bidder and the balance orders are distributed to more than one bidder after other bidders agree to match the lowest price. There may be small variations in the purchase procedures described above in different Government or public sector units, but whatever are the procedures or terms and conditions, the same are indicated in the tender papers.
2.5.3 Institutional Purchasing Institutional buyers are either the Government or the private organisations. If it is a Government hospital or college then it normally follows the Government purchase procedures. However, in cases of privately owned educational or other type of institutions, the purchase procedures are similar to those followed by commercial enterprises. An industrial marketer should study the purchasing practices of each institutional buyer so as to be effective in marketing the company’s goods or services.
2.5.4 Purchasing in the Reseller’s Market Reseller market or replacement market consists of industrial dealers or distributors whose main goals are profits and sales volume. Therefore, the intermediaries select a supplier based on product, quality and also based on the
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policies of the supplier’s product. An industrial dealer/distributor could deal either exclusively with a supplier or manufacturer’s product or may deal with many competing firms of a product. Yet, the supplier related policies which affect competitiveness of traders in the market are: sharing of local advertising cost by the supplier, providing product leaflets or display materials, competitive prices and trade discounts, flexible payment terms with credit facility, and so on. Acceptance of some of these terms by a dealer would depend upon the relative strengths of the dealer and the supplier and also on the consumer’s acceptance level of the supplier’s products. The reseller or the dealer/distributor has to ultimately abide by the policies of the supplier/manufacturer. In a competitive market, both the reseller and the supplier have to work harmoniously as a team so as to face the competition, increase the market share, and make sound profits. If a reseller or a trader does not make a profit over a period of time from the products or services of a manufacturer/supplier, he would most probably change the supplier because he does not achieve the main goal of profitability.
2.5.5 Purchasing in Cooperative Societies Industrial marketers should study the purchasing practices of each cooperative society in order to become effective in marketing their goods and services. For example, the cooperative sugar factories in Maharashtra and U.P. may adopt different buying practices while purchasing sugar machinery, pumpsets, compressors, etc. While making purchase decisions, their emphasis on the factors viz. quality, delivery, price, payment terms, service and long-term relationship with suppliers, also affect the purchase decision under consideration.
2.6 SUMMARY Selling in the industrial market is complicated by a broad spectrum of customers. Commercial enterprises, governmental organizations, and institutions give buying responsibility to individuals who are quite knowledgeable in their
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particular markets. These individuals are often more realistic in assessing the
competitive value of a vendor’s product than the vendor. Thus, they normally
identify, evaluate, and select suppliers, domestic or foreign, who provide the
greatest value. To formulate a successful industrial marketing strategy, it is
essential to know the administration of buying function in a diversity of markets
and situations; and also to know the bases viz. nature of the business, the size of
the firm, and the volume, variety, and technical complexity of the products
purchased by the industrial buyers.
2.7 QUESTIONS FOR DISCUSSION 1. Explain the different participants in industrial buying. 2. Discuss the types of industrial customers and their purchase practices in India. 3. What the types of industrial products and services? 4. What are the marketing implications for different customer and product types in industrial marketing? 5. How does the government purchasing differ from the commercial enterprises purchasing? References:
1. Hawaldar, K. Krishna (2002), “Industrial Marketing”(1st ed.), TATA McGraw-Hill Publishing Company Limited, New Delhi. 2. Richard M.Hiii, Ralph S.Alexander & James S.Cross (2003), “Industrial Marketing”(4th ed.), All India Traveller Book Seller Publishers And Distributors, Delhi. 3. Robert R.Reeder, Edward G.Brierty & Betty H.Reeder (2001), “Industrial Marketing” (2nd ed.) , Prentice-Hall of India Private Limited, New Delhi 4. Peter M. Chisnall (1985), “Strategic Industrial Marketing”, Prentice-Hall International, 1985. 5. Woodruffe, Helen (2000), “Service Marketing: Operation, Management and Strategy”, Macmillan India Limited, New Delhi. AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license.