Nature of Industrial Buying Module 2

Organizational Buying Activities

Buying experience and information is an important factor in the organizational purchase. If the buyers have past experience in the purchase, they have little need for information. If the purchasing situation is entirely new, information needs may be extensive as the firm lacks in the experience. Consists of various phases of decision making, depending on the buying situation, whether its new or routine.

The Buygrid Model

A conceptual model useful in analyzing the purchase decision process over the various buying situation

The Buygrid model incorporates three types of buying situations with the 8 phases in the buying decision process

The new task The straight rebuy The modified rebuy

Buying Situations

New Task

Problem or need is considerably different from past experience Problem recognition may be triggered by internal or external factors

Illustration:A firm's decision to add new product line may necessitate the purchase of new equipment or a change in the customer requirements may necessitate the purchase of new machinery to meet the demand.

The decision makers and influencers enter into extensive problem solving activity.

Buying Situations

Modified Rebuy

Organizational decision makers reevaluate the alternatives in terms of quality improvements or cost reductions. If there is a scope of improvement in the purchase decision and if there is an uncertainity about the suppliers, buyers seek for alternatives

Buying Situations

Straight Rebuy:

Its the most common buying situation in industrial purchasing. Purchasing is continuing or recurring, and little or no information required. Usually have a predefined set of choice criteria

Phases in the Buying Decision Process

Phase 1: Anticipation or Recognotion of a Problem(Need)

Purchasing decision is triggered by the recognition of a problem, need or potential opportunity. Need originates especially when products outmod, equipment breakdown, or existing material are unsatisfactory in quality or availability. Need originates with opportunities for potential performance improvement.

Phases in the Buying Decision Process

Phase 2: Determiantion of the Characteristics and Quality of the Needed Items:

The problem and solution alternatives must be narrowed and precisely analyzed. Decides about the performance specifications Decides about the application requirements Decides about the type of goods and services to be considered Decides about the quantities to be needed

Phases in the Buying Decision Process

Phase 3: Description of the Charateristics and Quantity of the Needed Item

The influencers prepare and effect the specifications of the buying process The influencers evaluate suppliers and gather information for assisting in developing product specification.

Phases in the Buying Decision Process

Phase 4: Search for and Qualification of Potential Sources

Once the solution is identified and precisely described, the buying firm begin to search for alternative sources and decide on the potential vendors They qualify the suppliers, with the influence of the buyers.

Phases in the Buying Decision Process

Phase 5:Acquisition and Analysis of Proposals

Qualified suppliers are indentified and specific proposals are requested. Buyers check catalog or contact suppliers to obtain information about the prices and deliveries. In complex buying situation the need for information is extensive and long time is take to analyze the proposals.

Phases in the Buying Decision Process

Phase 6: Evaluation of Proposals and Selection of Suppliers

Various proposals of competing suppliers are weighed and analyzed. If the firm is facing a make-or-buy decision, proposals are comparedto the cost of needed item within the firm If the firm is not facing a make-or-buy decision, one or more offers from the competing suppliers are accepted.

Phases in the Buying Decision Process

Phase 7: Selection of an Order Routine

Order routines are established by forwarding purchasing orders to the vendors and status reports to the using department. Determining the level of inventory that will be needed over various time periods. The purchase process is not complete until the ordered item is delivered and accepted.

Phases in the Buying Decision Process

Phase 8: Performance Feedback and Evaluation

Consists of formal or informal review and feedback regarding product performance, as well as vendor performance. Determination by the user dept. As to whether the purchased item solved the original problem. If not suppliers are given further consideration. Critical for decision making as to choose the potential vendors.

Marketing Strategies over various Buying Situations and Phases

Phases 1. Problem Recognition New task Anticipate problem;use advertising and creative sales people Modified Rebuy In Supplier: Maintainquality/se rvice standards; Out suppliers: watch for developing trends Straight Rebuy In supplier: maintain close relationships with the suers and buyers; out suppliers: convince firs to reexamine alternatives

2. Solution Determination

Provide technical assistance and information

Insupplier and out Same as phase1 supplier: stress capability and reliability and problem solving capabilities

3. Determining needed item

Provide detailed Same as phase 2 Same as phase 1 product/service information tot he decision makers

Marketing Strategies over various Buying Situations and Phases

Phases New task Modified Rebuy Straight Rebuy In supplier: Same as phase watch for 1 problems; out supplier: demonstrate ability to perform task Understand Make timely details of proposals custmer problems/needs; make timely proposals

4. Searching for In supplier: and qualifying maintain supplier dependability; Out supplier:demons trate ability to perform task 5. Analyzing Proposals Understand details of customer problems/needs; make timely proposals

Identifying the Buying Center Members

Marketing Manufacturing Research and Development General Management Purchasing

Buying Centers Influence Matrix

Phase Need Identification New Buy Modified Rebuy Straight Rebuy Production, Purchasing Purchasing, Engineering, Production Engineering, Purchasing, Purchasing, R&D, Production, Production Engineering

Establishment of Engineering, Engineering, specification Purchasing, R&D, Purchasing, Production Production, R&D, Quality Control Modification and Engineering, evaluation of Purchasing, R&D buying alternatives Supplier selection Purchasing Engineering, R&D, Quality Control Purchasing, Engineering, Production Purchasing, Engineering, Production

Purchasing, Engineering, Production Purchasing, Engineering, Production

Buying Center Roles

Primary Roles

Deciders-The organizational members who have formal or informal authority who actually make the buying decision. Identifying the actual decision makers is the most difficult task. Influencers-Those individuals inside or outside the organization who influence the decision process(directly or indirectly). They provide information on criteria for evaluating buying alternatives by establishing product specifications.

Buying Center Roles

Secondary Roles

Users-Those organizational members who use the product or services. They have minor or very significant influence on the purchasing decision. They may even initiate the purchasing process Buyers-Buyers are organizational members who have the formal authority in the selection of suppliers. They may even at instance include high level officers of the company who may be the decision makers.

Buying Center Roles

Gatekeepers- These are organizational members who control the flow of information into the buying center, it might be done by controlling printed information and advertisement. They even have a control on the sales person, who are allowed to speak to individuals within the buying center. Identifying the role of the gatekeepers is critical in the development of industrial marketing strategy. They act as filters from source to destiny, who become a virtual decision maker by allowing only the information favourable to their opinion to actual decision makers.

Identifying Key Buying Influencers

Identifying the key buying influencers is complex; as the buying centers changes for different organizations The key influencers are most often located outside the purchasing departments.

Overview of the Buygrid

Analysis of the decision making process

Creeping Commitment- Decision making involves a sequence of choices, each of which eleminates certain alternatives from further consideration. Center of Gravity- Varoius phases or combinations of phases become more critical to final outcome of purchase decisions, and the individual involved in critical cases have more power.

Objectives in Organizational Buying

The vendors must understand the various criteria that customers use in evaluating potential sppliers. The organizational buying reflects organizational goals and the members are influenced by both task and nontask objectives Task oriented objective involve price, quality, service and return on investment Nontask objectives are mainly job security, recognition, promotion, and salary

Task Oriented Objectives

Price- Customer do not buy products; they buy value(Satisfaction). In evaluating price, buyers consider factors that minimize costs, ie.

What amount of waste will result from the use of the material? What will be the cost of processing the material be?

A supplier is given a contract even if he is priced high, but has a high reputation for quality and dependable delivery

Task Oriented Objectives

Quality-Customer search for quality levels that are consistant with specifications of the product

customers are reluctant to pay for extra quality and are unwilling to compromise with specifications

Task Oriented Objectives

Assurance of Supply-Interruptions in the flow of parts and materials may cause a shutdown of the production process, resulting in delay and loss of sales. Distribution system is one of the important factor which can influence the purchasing decision.

For the reason the purchasers do not rely on a single source.

Task Oriented Objectives

Reciprocity-Giving considerations to selecting suppliers because of their value as customers is known as reciprocity. Its an agreemnent on an exchange of business that is mutually beneficial for the buyer and the seller.

Nontask Objectives

People join organization to accomplish their personal goals such as status, promotion, job security, salary increase and social interaction. In Industrial marketing, the major factors influence purchase decisions are social considerations such as friendship, reputation, mutually beneficial interactions.

Models of Organizational Buying Behaviour

The Webster and the Wind Model

It includes a set of variables which affect the buying decision process in the firm, they are:

Environmental Organizational Buyig Center The Individual

Models of Organizational Buying Behaviour

The Sheth Model- Emphasis on the joint decision making by two or more individuals

The model includes 3 components

The difference among the individual buyer expectations The variales determine the buying decisoins are autonomous or joint Illustrates the methods used in the conflict resolution in the joint decisoin making process

Contemporary Purchasing Activities

JIT-Delivery It means that the materials arrive at the buyer's factory exactly when needed by the buyer, thus zeroing the inventory and maximizing quality and productivity. Outsourcing- Purchasing a part of the company's operations instead of producing internally. Single Sourcing-Industrial firm place orders with one supplier even with options of altenatives, as they believe all the eggs are in one basket

Contemporary Purchasing Activities

Value Analysis-Objective is to reduce cost while maintaining product reliability, It analyzes function it performs, value of the function and alternative methods of performing same function Buying Committee-a formalized buying center is a buying committee, includes institutions, and govt companies. It consists of one or two members who dominate the decision making. The sales persons provide the information to the members of the buying committee.

Buyer-Seller Relationship
Development of a mutually satisfying, profitable long term relationship with the customer is an asset to an industrial marketer. Factors include: the Content of information, and the Style in which the information is exchanged. The content includes product features, prices,services, as well as the individual needs of the buyer and seller. The style includes mannerism and the format usedin the communication

Buyer-Seller interaction-a Famework

Compatible Style Incompatible Style

Compatible content

Ideal Transaction

Insufficient Transaction

Incompatible content

Insufficient Transaction

No Transaction

Types of Relationships

Transactional Exchanges or Relationships- Its timely exchange of basic product, for a competitive price between customer and supplier.Transactional exchange includes only one-time exchange. Little interest either by buyer or seller to extend the relationship. It is preferred when:

Many suppliers are available The supplier market is stable The purchase decision is not complex The purchase decisoin is considered less important

Types of Relationships

Collaborative Relationships- Moving beyond the relationship range to have a collaboration between customer and the supplier. Its the prosess of building a strong social, economic, service and technical ties over a long period of time. The foundations are commitment and trust

Types of Relationships

Value Added Exchanges- Its between the Transactional and the collaborative relationships. The firms group the customers as A, B, C depending on the profitability. The focus is on the complete understanding of the present and future needs of the customer, and meeting better than the competitors

Relationships and Marketing Strategies

Strategies based on the STP:

Concentrated Marketing Differentiated Marketing Undifferentiated Marketing

Criteria for selecting business firms for transactional value added are based on the characteristics of customer

Technological contribution Dependence Purchasing Orientation Sales Potential

Customer Relationship Marketing

Aims to retain each valued customer by developing along term relationship and providing an excellent real time customer service: Similar to Collaborative. It improves customers' loyalty resulting in profitability. Most of the companies invest in the CRM software application to integrate sales, customer service and marketing information in real time.

Methods used to Influence Industrial Customers

Major Methods used are Sales Presentation
Identify and respond to the customer needs Present the positive points about the product/service and then the company Have two sided discussion Highlight superior value against the competitor claim Use technology for presentation

Methods used to Influence Industrial Customers

Negotiation- Its the process to maximize the mutual benefits and take a long term view of their relationship. Initially emphasis is given to identify the problem rather then giving solutions Dimensions of Negotiation-basic focus on the customer satisfaction, and to givie effective customer service, it is necessary to have interaction with customer. Many times the buying decision is subjective or objective, therefore the sales person has to have necessary skills to understand the customer.

Methods used to Influence Industrial Customers

Purpose- increase in the price of raw materials, consumables, freight,excise duty or getting higher share of busines, recovering old payments etc. Information-before the final negotiation, its important to collect the necessary information about the customer needs, key decision making people, customer perception, competitor quality, service, price , payment terms, customer's market Customer Trust and Confidence- Lot of formal and informal meetings are needed by sales, not only for building the trust and confidence but also for collecting the required information Time Factor-The supplier has to provide with the realistic time frame of delivery of goods from the date of purchase order.

Styles of Negotiation

I win you lose (winning at all cost)- generally used when a strong competition prevails

They start with tough demands and rediculous offers They have no authority to make concessions They raise voice to make emotional outburst They are rigid in making any changes in the offer They ignore deadlines

Styles of Negotiation

Both of us win(Win-Win style)

Negotiations widely used to have a mutual satisfaction, with emphasis on the relationship for customers, suppliers, employees, relaties and so on.

Build an environment of a strong trust and confidance, have en open mind for the customer to cummunicate easily Relate the terms of the agreement to the general statement of the problem

Styles of Negotiation

Both sides have to work togetreguher, pooling their resources, ideas and sharing information. Regualar frequency of concessions is needed( not on the size of the concesions) Avoid defencive, don not be ignorant, be responsive and responsive to the information Adopt the friendly, amenable approach rather leagalistic or contractual appraoch.

Styles of Negotiation
You win I lose-Sometimes used by the sales persons with demanding and highly cost concious customers, who feel satisfied if they win the negotiation. Its adopted to gain market share and build customer relationship. Both of us lose-Persons who behave 'child like' bossy and immature in their negotiations end up in a lose-lose situation, and the negotiation ends with a loss.

Key Points on Negotiations

Prepare and plan for negotiation-Decide on what you have to offer; its value to the customer, its price. Gather information about the decision maker. While in a team, nominate a leader and members with different skills. And take notes of the discussion.

Opening- Always be positive and introduce the team. Listen and observe the signals of the customer. Show intensions of win-win style of approach

Key Points on Negotiations

Exploring-Ask the customer their agenda and try to find out what they want most. Try to get agreement for their general statement of the problem, or explore the area where you both agree.

Bidding-If the discussion is favourable to the supplier, he can aim high with his proposal. Make concessions slowly and in small amounts. The weakest party will make the first concession. Variables are used to get concessions.

Conclusion- on conclusion confirm the deal my signing a mutual agreement document.

Conflict and Resolution in Joint Decision Making

Conflict-Difference in the opinion when two or more individuals have to reach an agreement over the issues such as

Product specifications Information credibility Vendor capability Contact tems Multiple sourcing Order routine Buying objectives Evaluation criteria

Conflict Resolution Strategies

Conflict resolution depends whether the conflict is good or bad in the situation.
Party's Attempt to Satisfy own Concern
Avoiding Accommodating Competing Collaborating

Compromising

Party's attempt to satisfy other's concern

Conflict Resolution Strategies

Competing-Lets do it my way! The desire to win one's concern at the other party's expense-desire to dominate-assertive, uncooperative behaviour Accommodating-I see your Point of view- the desire to satisfy other's concern without attending own concern-peaceful co existance- long run motives- cooperative and unassertive Collaborating-may be we can work this one out-the desire to fully satisfy the concern of both parties-sharing responsibilty, problem solving,indepth exploration, mutually beneficial agreement, assertive, cooperative. Avoiding-better let the situation cool down before we act-entering an attitude of indifference of concern of both parties- postponing, threatning of withdrawal, unassertive, uncooperative Compromising- Lets split the difference- the desire to reach mutually acceptable agreementwhich is somewhat short of total satisfaction for either party- seeking middle ground solution, intermidiate to assertive and cooperative

Power in Conflict Resolution

Its important to identify the sources of power held by key decision makers. It is combined power base or an individual with little formal power who is able to stop or hinder a purchase Effective Marketing strategy rests on the ability to determine which individuals hold and utilize power to influence various decisions.

Sources of Power in Conflict Resolution

Legitimate power Formal authority or position within the organizational structure, the power to reward or coerce The ability to inspire and convince others because of one's own physical appearence or atttitude, wit, charme or status The possession, access to, or even withholding the information The ability to influence a decision by granting monetary, social, political or psychological benefits The ability to impose monetary or psycological punishment-noncompliance

Personality Power

Expertise Power Reward power

Coercive power

Supplier Evaluation System

Evaluating Supplier Performance by Using 'Balance Scorecard' Technique Its a framework that can be used to evaluate supplier performance in informance age companies. It translates a company's mission and strategy into a set of performance measurement. Its framework is organized into four parts- 1. financial 2. customer3. Internal business processes 4. learning and growth

Financial To succeed financially, focus on financial objectives that will satisfy shareholders

Balance Scorecard Technique

Inter Business process To satisfy shareholders and Customers, what business Process co. Must excel at?

Mission and Strategy

Customer Which customer value company Should focus on, to achieve Its mission

Learning and Growth How can company improve And change to achieve its mission

A Supplier Evaluation System

Attribute(factor) Weight(importance) Supplier performance (actual) 0.8 0.4 0.6 0.6 0.2 Sipplier rating

Quality Delivery Price Service Flexibility Total

30 25 15 20 10 100

30*0.8=24 25*0.4=10 15*0.6=9 20*0.6=12 10*0.2=2 57

Weighted Point Method of Supplier Evaluation

Under this method, the organization assigns weights to the different evaluation criteria such as quality, delivery, price, service, flexibility. By assigning weights to each factor enables the buyer to develop a composite performance index that can be quantitatively used to compare suppliers

Appropriate Criteria in Measuring Buyer's Performance

Making purchases that arrive on time Making purchases that pass incoming quality assurance inspection Meeting target costs Knowledge of productsin the buyer's area of responsibility Ability to control purchase order cycle time Ability to cultivate qualified suppliers Ability to perform work with minimum errors Ability to determine bottom price a supplier will take Amount of complexity of products in buyer's responsibility Providing timely responses to inquires from suppliers and internal customers