Organizational Buying

Behavior
Session 6-8
 Quiz Time
Q. Strategic planning means to identify and work upon the fit between
……………………………….. and…………………………………..
A. Market opportunities and organizational strengths
Q. Strategy can be formulated by the top echelons of management at
………………….., ……………………………… and …………………… level
A. Corporate, SBU and Functional
Q. BCG Matrix’s prime objective is to help a corporate / SBU in
………………………………….. decisions.
A. Resource allocation
Q. According to Porter’s generic strategy model, any organization can
pursue cost leadership / differentiation strategies while targeting a
……………………. or……………………………
A. Broad segment, narrow segment (niche)
 Understanding firms as
Defining the customers is the process of
Process: learning how companies
Understanding rely on a network of
Customer suppliers to add value to
Firms their offerings; integrate
purchasing activities with
those of other functional
areas and outside firms, and
make purchasing decisions
 • What are the B2B customer’s
requirements?
• What is the customer firm’s purchasing
Understanding orientation?
Firms as • Who participates on the buying team?
Customers: • What are the roles of each member?
Things a B2B • What value does each member gain
marketer from the offering?
needs to know • Who makes the final decision to buy?
about each • What is the firm’s buying process?
Customer • Is this a new task, modified rebuy, or
straight rebuy?
• How does the customer evaluate
suppliers?

3-4
Understanding
Purchasing Orientation

• Purchasing entails the acquisition of resources and

capabilities for the firm from outside providers.

• Purchasing orientation is the overall philosophy that

guides managers who make purchasing-related
decisions and delineates their domain and span of
influence.

3-5
 The Goals of Purchasing
Goals
• Uninterrupted flow of
materials
• Manage inventory
• Improve quality
• Managing supplier
relationships
• Achieve lowest total cost
• Reduce administrative costs
Description
• Materials, supplies & services for
Problem free operations
• Minimize the inventory cost
• Careful evaluation of products /
services
• SCM practices
• TCO approach
• Accomplish purchasing objectives at
lowest level of administrative costs
 Understanding Purchasing Orientation

Four Purchasing Orientations

Supply
Buying Procurement Management
– 2 Levels

Primary Goal of Orientation:

Lowest Lowest Best
Price Total Cost Value
 Going from the most traditional to
the most developed, the firms adopt
different approaches to cost
reduction and revenue
enhancement:
Buy for less (Level 1)
Levels of Buy better (Level 2)
Procurement Consume better (Level 3)
development Sell better (Level 4) (ties-up the
purchase activities directly to
strategy)
-Developed by
Mathew Anderson & Paul Katz of
Mercer Management Consulting
 Level 1 (Buy for less)

ACHIEVE COST SAVINGS

BY CENTRALIZING
KNOWN AS DECISION MAKING BY SELECTING
‘LEVERAGED BUY AUTHORITY, WHICH SUPPLIERS THAT
APPROACH’ PERMITS THE PROVIDE BEST PRICES
CONSOLIDATION OF AND TERMS
VOLUME
Understanding Purchasing Orientation

Buying (L1)

Buying concerns The central

executing discrete
transactions with pursuits of buying
suppliers. are:

1. Obtain the best deal

in terms of price,
2. Maximize power
quality, and availability over suppliers

3. Avoid risk
wherever possible
Obtaining the Best Deal
Distributive Negotiations

Maximum price
the buyer is
willing to pay

Value Assessment

Zone of Agreement Price Supplier

Analysis Cost
Analysis
Minimum price
the seller is
willing to accept
0 Price per Unit
 • Commoditization
• Multi-sourcing

Maximizing
Power over
Suppliers
 The Never-Ending Battle Between Buying and
Marketing

Buying seeks Marketing seeks

Commoditization Differentiation

VA = VB VA – PA  V B - PB
 Level 2 (Buy better)

‘Linked Buy approach’

Develop mutually beneficial relationships with the suppliers

Cost savings through streamlining the bidding process, optimizing

delivery, information flows and making stable commitments to enable
efficient production by suppliers

First step towards SCM

Level 3 (Consume better)

Advance the
performance of the
‘Value Buy procurement function
approach’ by optimizing the life
cycle costs and value of
products and services

Value analysis and Standardization

material / process and modular
re-engineering products

Early supplier
involvement in
NPD
Improving Quality

• Specifications describe products or services that the

firm is seeking.
• functional specifications
• technical or materials specifications
• process specifications
• performance specifications
• brand specifications

• Standardization entails establishing agreement on

uniform identifications for definite characteristics of
quality, performance, service, etc.
3-
16
 Quality as
Conformance to Specifications

Perfect
Underspecified Overspecified
Quality

-x 0 +x
Supplier Specifications minus Customer Specifications

3-17
 Total Cost of Ownership (TCO) or Life
Cycle Costs are the sum of all expenses
associated with the acquisition, use,
and disposal or recycling of a market
offering.
Reducing
Total Cost of TCO Analysis is the application of
Ownership Activity-Based Costing to sourcing
strategy and purchasing decisions.

Through TCO analysis, Procurement

managers identify the firm’s major cost
drivers (factors that influence the
nature and level of a major expenditure
category)

3-18
 1. Acquisition costs: selling price
and transportation costs &
administrative costs of evaluating
suppliers, expediting orders, and
correcting errors in shipments or
delivery.
TCO 2. Possession costs: include financing,
storage, inspection, taxes, insurance,
and other internal handling costs.
3. Usage costs: are those associated
with ongoing use of the purchased
product such as installation, employee
training, user labor, and field repair, as
well as product replacement and
disposal costs.

19
 With a procurement orientation,
purchasing managers draw upon
the capabilities and resources of
their first-tier suppliers to jointly
Cooperating improve quality and reduce total
with costs.
Suppliers
Cooperation requires that
customer and supplier:
• trust one another
• equitably share rewards

3-20
 Cooperating with Suppliers
Integrative Negotiations

Zone of
Agreement
Customer’s
Minimal
Acceptable
Level for
Item A

Supplier’s Minimal Acceptable

Level for Item B

(Adapted from Bazerman 1986)

 Understanding Purchasing
Orientation (Summarizing)
Procurement (Level 2 and Level 3)

Procurement
pursues
quality
improvement 1. 2. Reducing
3.
Procurement Improving total costs
s and cost Cooperating
increases of
reductions quality ownership
with
customer suppliers.
through the (TCO)
productivity
integration of
by:
purchasing
with other
functions and
cooperative
relationships
with Tier I
suppliers.
 Level 4 (Sell better)

‘Integrated Sell approach’

Applied when specific product and revenue choices

the purchasing organization makes have a
significant effect on revenue and involve a high
degree of business risk

Choosing the right technologies and sharing

the risk with the important suppliers becomes
crucial
 Understanding Purchasing Orientation
Supply Management (Level 4)

Supply Management
entails the integration and Supply 1. Focus all of the
coordination of purchasing firm’s efforts to
with other functions in the management has deliver value to end-
firm and other firms in the four tenets: users
value network.

2. Concentrate the 3. Build a supply 4. Sustain highly

firm’s resources on a set network that collaborative
of core competencies efficiently completes relationships with select
and outsource all other required business Tier I and lower-tier
activities processes supplier firms
Quiz Time
Q. The philosophy which guides the purchasing managers in an
organization is called…………………………………..
A. Purchasing orientation
Q. L1 mentality purchasers tend to ignore brand ………………………
and reduce them to ……………………………………
A. Differentiations, commodities
Q. The technical name for L2 buying orientation is
…………………………….
A. Linked Buy approach
Q. The objective of L3 buying approach is
………………………………………….
A. Consume Better (Value Buy approach)
Q. L4 kind of buyers treat the preferred suppliers
as……………………………
A. Collaborators / partners
 Firms operate at different levels of development and emphasize different
pathways to cost reduction and revenue enhancement.

Levels of Procurement Development and

Pathways to Savings/Revenue Enhancement
 Supply Management Models
Purchasing Portfolio Matrix

Customer Risk
low high

high
leverage items criticals

Customer build to order design to build

Value
generics bottleneck items

Make to stock Make to replenish

low

3-27
 Segmenting Purchase Categories
1st Point, each firm has a unique portfolio.
2nd Point, more attention on purchases having the greatest impact on revenue
generation or the greatest risk to performance.

Segmenting the Buy

 Organizational Buying Process
2. General
1. Problem 3. Product
Description
Recognition Specifications
of Need

Organizational 5. Acquisition
4. Supplier
Buying and Analysis
Search
Process of Proposals

6. Supplier 7. Selection
8. Performance
Selection of
Review
Order Routine
 Buying as a Process

BUYING IS A PROCESS, THERE ARE VARIOUS IT STARTS WITH

NOT AN EVENT POINTS IN THE PROCESS
THAT ARE REFERRED TO “PROBLEM
AS “CRITICAL DECISION RECOGNITION”
POINTS” AND
“EVOLVING
INFORMATION
REQUIREMENTS”
 • Before anything is bought,
most buyers need to be
made aware of a problem
1. Problem
Recognition
 Internally:

• A machine breaks down

1. Problem
• Someone needs to order an
Recognition MRO product

• Someone recognizes an
opportunity that can be
captured by acquiring the
product
 Externally:

• More often than not, it is the

salesperson who precipitates
the need for a new product
1. Problem
Recognition • Direct Marketing also can
influence purchasing

• Many organizations use the

Push/Pull Strategy
 Once a need is recognized, the purchasing
department works with the need group to
define what is required by asking:

2. General • What is the extent of the problem?

Description • What alternatives can solve the problem?
• Where can the solution be purchased?
of Need
Each small decision ultimately helps define
the product specifications.

Sometimes the supplier is involved if the

supplier influences the sale (i.e., the supplier
makes the buyer aware of the need).
 Many times the question boils
down to:

1. Is it a new task buy?

2. Is it a straight rebuy?
3. Is it a modified rebuy?
3. Product
Specifications Buyers try to be objective and
consider many ideas.
Professional sellers try to
influence this decision as early as
possible in the buying process—if
they can!
 This is an important
because it often
determines how the
contract is structured
3. Product and the specific wording
Specifications that it uses
 4. Supplier Search

Who will be the supplier?

The one creating or influencing the need has a lot of say

about the choice of supplier. If a salesperson creates the
need, often the specs are written so that only the
salesperson’s organization is able to fulfill the contract.

In established businesses, often only

preferred vendors are considered.
 5. Acquisition and Analysis of Proposals

This step occurs only

when the buying
organization lacks
adequate information to
make a decision.

Proposals are presented Many times, this step is

in detail often to a team perfunctory. The buyer may
have already determined the
of engineers, users and
preferred vendor, but legally it
purchasing agents. may be necessary to seek other
Successful proposals vendor proposals to attain the
determine the supplier. contracts.
 6. Supplier Selection

At this point,
negotiation
includes not only
Quantities Delivery times
money, but also:

Payment
Level of service Warranties
schedules

And a host of final

details that
determine
selection
7.
• Once the supplier is
Selection selected, the order
routines are
of Order established
Routine
 After receipt of the
product or service, a
performance review asks:
8. • Did the supplier meet delivery
time?
Performance
• Did the product meet the
Review specs?
• Does the contract have to be
modified?
• Did the vendor live up to
expectations?
 Stages in the buying process are
not as sequential as suggested by
the model.

Sometimes steps are skipped. For

Buying example, on straight rebuys,
buyers choose to purchase
Process almost immediately.

However, the model represents

important aspects of how
companies buy and evaluate
business purchases.
 There other events
that influence the
buying process,
Buying
most notably:
Process • Economic conditions
• Competition
• Basic shifts in the
organizational objectives
• The buying situation
Three Buying Situations

1. Straight rebuy
2. Modified rebuy
3. New Task
 Straight
Rebuy
• Straight rebuy – a
problem or need that is
recurring or a
continuing
requirement.
• Buyers have
experience in the
area
• Require little or no
new information
• Buyers operate in
routine problem-
solving stage
 Straight
Rebuy
• Routine problem solving
situations requiring routine
solutions.

• This is the repeat business

situation that every major
supplier desires.

• MRO: Maintenance, Repair

and Operation items fall into
this category as do various
services such as travel.
 Straight Rebuy

MANY COMPANIES REVIEW THIS RELATIONSHIPS BECOME VERY

AREA OF BUSINESS EVERY NOW IMPORTANT.
AND THEN, BUT THE EDGE
USUALLY GOES TO THE SUPPLYING
COMPANY.
Marketing Challenges to
Straight Rebuy
• Purchasing departments handle this
situation in most cases; the
determinant is who is “IN” and who
is “OUT”

• “IN” seller needs to constantly

reinforce their services, meet
buying expectations, continue
developing relationships and be
responsive to changing needs.

• “OUT” sellers have a much more

difficult task.
Buying Companies’ Risk to
Change Vendors – Straight
Rebuys

The buying company is usually

reluctant to change because
“OUT” sellers are unknown,
they are a big risk, and change
is expensive.

The old adage is: “If it ain’t

broke, don’t fix it.”
Out Sellers in Straight
Rebuy

To get in, OUT sellers need to

convince the buying
organization that:
• Their current supplier is not doing
their job.
• They are experiencing problems
that they were not aware of earlier.
• Their purchasing requirements have
changed.
• They should consider other
alternatives.
 Modified Rebuy

 Modified rebuy—Decision makers feel there is a

benefits to reevaluating alternatives.

 Internal Forces:
 Search for quality improvement
 Cost reductions
 • Buyers feel they can make
significant advances if they review
their buying situations on a
regular basis.

• Often, changes in styles, materials

or even alternative solutions
Modified Rebuy facilitate this review.

• Another reason for Modified

Rebuy is dissatisfaction with
present supplier.

• New supplier was able to find the

present supplier’s weaknesses and
offered buyers new alternatives to
“fix” their problem(s).
 Buying Decision Approaches

• Simple Modified Rebuy: Involves narrow choices

and minimal research.

• The major area of consideration is supplier

relationship.

• Complex Modified Rebuy: Involves larger items,

more research, extensive specification
development, a competitive bidding process and
long-term relationship development with new
supplier(s).
 01 02
03

Marketing Marketer Initiate 04

Get
Consideration s can gain problem
involved
an edge if recogniti Underst
for on
very early
and the
they: in the
New Task Buys decision- buying
making organiza
process tion's
behavior
patterns
 • If a marketer is already
established with an account, often
he or she can leverage that
situation into further business.

New Task – • This is why present suppliers

continue to develop further
In Supplier’s business with their customers—
Edge they understand their prospects’
buying philosophy, developing
situations and contacts.

• They can also initiate the need

since the prospect trusts them.
 • IN suppliers need to
understand developments
within the buying organization
so they can be a part of the
IN verses modified rebuy situation. They
OUT generally have an edge unless
they are “out of touch” with
Suppliers the buyer.
 • OUT suppliers need to initiate
the need for change and
influence the buying
organization to consider other
IN verses alternatives. This demands
OUT superior salesmanship.
Suppliers
• Selling company needs to
offer performance guarantees,
warranties and often
additional services and
training.
 The business marketer must
always try to understand the
sale from the buyer’s
perspective and do everything
to make it easier for the buyer
to buy.
B2B Marketing
Strategy
Considerations
 Forces Influencing Organizational Buying Behavior
• Economic outlook:
domestic & global
Environmental • Pace of technological
A projected change in change
Forces • Global trade relations
business conditions
can alter buying plans
drastically. • Goals, objectives and
Organizational strategies
Forces • Organizational position
Organizational of purchasing
Buying
Behavior • Roles, relative
Group influence and patterns
Forces of interaction of buying
decision participants

•Job function, past

Individual experience, and buying
Forces motives of individual
decision participants
 • Changes in the environment such as
business conditions, technological
advances or new legislation can affect
buying plans.
Environmental
Forces - • Since much of business is driven by
Economic derived demand, business marketers
must be sensitive to changes in the
Influences consumer market.

• Also, the economy can determine a

company’s ability or willingness to buy.
If the economy is bad, companies often
put off purchasing until they see a
change (refer PMI)
 • Not all companies are affected
equally. For example, high
interest rates may affect housing
starts but may not affect food
products, medical or
transportation services.

Economic • Finally, there is an affect from

Influences foreign competitors such as
China. They have strong labor
saving costs as a competitive
advantage.
 Technology is changing so quickly that
yesterday’s technological advancement is
today’s electronic commodity.

Example: Computers

Technological
Influences However, all companies need to stay alert to these
changes. For example, Nokia’s leading position in mobile
phones market in India came crashing down within 2
years because they couldn’t foresee the impact of
Android based devices.

Technological change—especially from the

Internet—is drastically changing the way
companies do business.
 The Internet has leveled the playing field,
allowing competitors the opportunity to
compete in the world’s most
technological advanced countries.

Technological
Change It affects not only entire companies (the
printing industry is struggling due to
digital printing and electronic
communication), but also individual
careers (An Indian professional’s edge in
outsourcing market is vanishing quickly
due to the competition from Vietnam,
Poland and other such countries).
 As manufacturing has become less
important, purchasing and
procurement have become more
Organizational important.
Forces &
Growing
Influence of Companies are outsourcing many
activities such as manufacturing,
Purchasing marketing, accounting, etc., yet
procurement remains a strong
influence resulting in a shift to
more professional procurement
positions.
 As the purchasing profession grows, so do
its goals and priorities.

Strategic
Purchasers are more ambitious, resulting
Priorities in a more competitive environment. An
effective marketing strategy develops
in stronger and deeper relationships with
purchasers.

Purchasing
This is the impetus for Relationship
Marketing.
 B2B Sales: How to Assess Group Forces
There are three questions that need to be
addressed:

1. Who takes part in the buying process?

2. What is each member’s relative influence in
decision?
3. What criteria is important to each member in
evaluating the supplier?

Answering these questions puts the salesperson in

a better position to become the chosen supplier.
 Quiz Time
Q. The ……steps purchase process in B2C marketing expands
to……….. steps in B2B context.
A. 5, 8
Q. For a successful B2B marketer, the most crucial step in B2B
purchase process is …………………………………………………
A. Product specifications
Q. How do B2B marketers cut-out the competition at this
stage?
A. By getting the customers to write the specifications
favoring their product / service
Q. …… suppliers generally have an advantage in most of the
buying situations with the customers
A. IN / Existing
 Roles in the Buying Center

Initiator Influencers Gatekeepers

Decider Purchaser Users

8
 Initiator Initially perceives a problem and initiates the
buying process to solve it.

Affects the purchasing decision by providing

Influencer technical information or other relevant
(internal or external) information.

Controls the information to be reviewed by

Buying Gatekeeper members of the buying group. (For example,

buyer may screen advertising material and
even salespeople.)

Center Decider
Actually makes the buying decision, whether
or not they have formal authority to do so.

Roles
Could be the owner, an engineer or even the
buyer.

Has formal authority to select and purchase

Buyer products or services and the responsibility to
implement and follow all procurement
procedures.

User Actually use the product in question. Can be

inconsequential or major players in the
process.
 Buying Center Members
Members of the buying center assume different
roles throughout the procurement process.

1. Isolate the personal stakeholders

Clues to help
identify powerful 2. Follow the information flow
buying center 3. Identify the experts
members:
4. Trace the connections to the top
5. Understand purchasing’s role

SOURCE: Adapted from John R. Ronchetto, Michael D. Hutt, and Peter H. Reingen, “Embedded Influence
Patterns in Organizational Buying Systems,’ Journal of Marketing 53 (October 1989), pp. 51-62.
 Isolate personal stakeholders.
Who has the most to gain and/or
Clues for lose?
Identifying
Follow the information flow.
Powerful Influencers are usually the ones
who actually facilitate the
Buying exchange.
Center Identify the experts. Experts ask
Members the most questions, exhibit the
most knowledge, and are often
the most influential.
Clues for 4. Trace the communication to the
top. Who are the decision makers?
Identifying
Powerful
Buying 5. Make sure you understand
purchasing’s role. Often purchasers
Center are not decision makers, but they
may be the bargainers. In repeat
Members buying situations, they are usually
dominant players because of their
specialization.
 Individuals make the decision,
not organizations!

Who
Each member has a unique
Makes personality, experience and
motive, and are subject to risk
the and rewards.

Decision? Professional marketers

understand this and make sure
that they learn to recognize and
match to it.
 Evaluative Criteria

Industrial product users value:

1. Prompt delivery
2. Efficient and effective service
Engineering team values:
1. Product quality
2. Standardization
3. Testing
Purchasing department values:
1. Price advantage and economy
2. Shipping and forwarding
 By understanding the buying
process and the various roles
that link the buying group
together, the marketer is in a
better position to match with
them by working with the
Marketing right people and the
Response appropriate sales process
 Most people are averse to
risk, especially buyers.
Great risk can mean great
loss and buyers can get
fired for that.
Risk-
Reduction
There are two
components to perceived
risk. They are…
Perceived Risk Components

1. Uncertainty about decision

outcomes.

2. Magnitude of consequences
associated with making a
wrong selection.
 The larger the purchase, the
more influential the buying
center becomes and can often
include higher ranking members.

Confronting There is an extensive outside

search to see what others are
Risk doing in similar situations.

Sellers who have a proven track

record are favored.
 The Buying Team
Building the Value Stack

Beware: different units of a customer firm may perceive

or receive only a portion of an offering’s total value!

2 purchasing 4

1 R&D IT 5

manufacturing logistics
Distribution of value elements 1-5.

(Adapted from Narayandas 2002)

 The Buying Team
Building the Value Stack

Marketers create a value stack by educating all units on

the total value of the offering to their firm!

The Value Stack

(Adapted from Narayandas 2002)
 Step 1: Understanding customer
requirements and preferences
• Depending on your products /
(In summary) services, you can predict, in which
Approach for category of purchasing portfolio mix
would they be considered.
B2B • Understanding the purchasing
Marketers orientation of the customer firm,
the B2B managers can formulate
strategies to target customers that
are seeking the lowest purchase
price, lowest TCO or the greatest
value creation.
 Step 2: Analyze the buying process in
each customer firm and act
accordingly
• The members of the buying center
Contd. • Their roles and influence
• The process that the customer is
likely to adopt for your kind of
product / service (BuyGrid
framework)
Depicting the Buying Process
The BuyGrid Framework

Task Definition
New Modified Straight
Task Rebuy Rebuy
Buying Phases:

1. problem recognition yes yes yes

2. determination of need yes maybe no

3. product specification yes yes yes

4. certification of vendors yes maybe no

 Depicting the Buying Process
The BuyGrid Framework
Task Definition
New Modified Straight
Buying Phases: Task Rebuy Rebuy

5. request for proposals yes maybe no

6. supplier selection yes maybe no

7. following order routine yes yes yes

8. performance evaluation yes yes yes

(Adapted from Robinson, Faris, with Wind 1967)

Step 3: Understand how they will be
evaluated

The supplier performance evaluation systems tend to vary by

purchasing orientations
• Buying orientation – Review the supplier performance on
committed terms like lead time, reliability, availability and
quality
• Procurement orientation – Use measures that focus on TCO.
Monczka and Trecha created SPI. SPI = (net purchase price +
nonperformance cost) / net purchase price
Contd.

• Supply management orientation – Utilizing

vendor performance data, they do value
assessment by the fundamental value equation
on how the supplier is contributing to the firm’s
market offerings
Step 4: Continuous Innovation

• Map Customer Activity and Value Cycles

• Understand customer’s customers.

• Can you innovate your present offerings to give more

value to the customer somewhere and hence gain value
for your company?
Step 5: Team Selling

• Integrate Team Selling Method, wherever feasible

• Create selling teams which mirror buying team

specialists
Team Selling

• Integrates functional specialists with customer relationship

specialists
• Ideal team structure that meets customer needs
• Benefits
• Customer questions answered faster
• Customers can speak directly with desired specialist
Examples – Projects, Industrial selling, Software
development, Advertising agencies
BUYING AND SELLING TEAMS STREAMLINE
MULTILEVEL SELLING

Buying Company Selling Company

Vice President Vice President

Of Purchasing Of Sales

Director of Account
Purchasing Manager

Product
Engineer
Specialist
Partnership Communication:
From Single Level To Multi-level
Buying Company Before Partnering Selling Company
Production Engineering
Marketing Marketing
Purchasing Sales
Department Finance
Finance Purchasing Credit and
Salesperson
Accounting Agent
Billing
Shipping Shipping
& Receiving After Partnering & Receiving
Buying Company Selling Company
Production Engineering
Marketing Marketing
Purchasing Sales Purchasing
Finance Finance
Accounting Credit & Billing
Shipping Shipping
& Receiving & Receiving