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.