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.