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B2B buying behaviour
This chapter will help you to: 1 understand the nature and structure of B2B buying; 2 appreciate the differences between B2B and consumer buying; 3 analyse the buying process and the reasons why purchasing varies across different buying situations; and 4 link B2B buying with the development of marketing strategy.
The essence of the marketing philosophy was described at the beginning of this book as the satisfaction of customers’ needs and wants through the provision of the right products and services, at the right time, in the right place at the right price. This remains true whether that customer is an individual or an organisation. All organisations, whether making products or delivering services, purchase goods and services from a range of suppliers so that they can run their own operations. Consider, for example, a small local garage. It may purchase not only petrol, but also spare parts, tools, supplies, some capital machinery, confectionery, and accountancy services, for instance. Compare that with a large steel producer or car assembly plant and the thousands of suppliers that are dealt with regularly. There are, therefore, sufficient differences between individuals and organisations in what they purchase and the ways in which they go about their purchasing to make separate consideration worthwhile. This chapter looks at the special characteristics and problems of B2B markets, beginning with a definition of B2B marketing and a classification of B2B customers. The characteristics of B2B markets are then discussed, and attention is given to the ways in which they differ from consumer markets. The buying decision-making process is analysed, laying the foundations for looking at the roles that individuals and groups play within it. The last two sections examine the criteria, both economic and non-economic, that affect B2B purchasing and the importance of long-lasting buyer–seller relationships.
Purchasing within the health industry is big business. In the UK, £16bn is spent each year on average nationally. The shopping list includes a wide variety of goods and services, such as operating theatres, beds, ambulances, cleaning contracts, catering, buildings and maintenance, to name but a few. For each one, specifications have to be established and agreed internally, and bids and performance monitored. The Barts and The London
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NHS Trust alone deals with 24,000 purchase orders, 125,000 invoices and 20–30 major contract tenders each year and its aim is to balance fitness for purpose against value for money. Although some of the purchasing is routine, once the contracts have been set up, a number of other projects demand new purchases to meet emerging clinical and service need within the Trust. All this means that professional purchasing expertise is needed within the Trust. In the never-ending search for reductions in public expenditure, an NHS Purchasing and Supply Agency (PASA) has been formed to coordinate and utilise the buying power of all NHS organisations of which there are over 600 in England alone. PASA now has a role not just in overseeing the spend across the country but also in finding out what is available, negotiating contracts and even managing some of them. It works closely with the NHS's 28 collaborative procurement hubs (where NHS Trusts collaborate in purchasing) around England. The agency offers them advice, product and market knowledge and negotiating skills. This is all part of an effort to seek efficiency gains each year of 3 per cent. Potential suppliers to the NHS thus have to be fully aware of all these structures, their policies and processes and how to plot their sales strategy to win business (Arminas, 2005a; Persaud, 2005; Riley, 2000). In your wider reading you may come across the terms organisational marketing and industrial marketing. Generally speaking, these terms are often used interchangeably with ‘B2B’ or ‘business-to-business marketing’. This text, however, uses the term B2B marketing, although we acknowledge that not all organisations that make substantial purchases, for example government departments, universities and hospitals, are in business in the profit-making sense of the word. Thus, as pp. 149 et seq. will show, the term B2B marketing covers a wide range of purchasing relationships between a wide range of organisations. First, however, it is important to define more precisely what B2B marketing is.
Defining B2B marketing
B2B marketing is the management process responsible for the facilitation of exchange between producers of goods and services and their organisational customers. This might involve, for example, a clothing manufacturer selling uniforms to the army, a component manufacturer selling microchips to IBM, an advertising agency selling its expertise to Kellogg, Kellogg selling its breakfast cereals to a large supermarket chain, or a university selling short management training courses to local firms. Whatever the type of product or organisation, the focus is the same, centred on the exchange, the flow of goods and services that enable other organisations to operate, produce, add value and/or re-sell. Figure 4.1, even though it only offers a simplified view of this flow, gives an idea of the number and complexity of exchanges involved in getting products to the end user or consumer. The steel producer, for example, takes raw materials (and we will not even begin to consider the mining, refining and transport processes that go into the production of the iron ore and coke that the steel producer buys) and turns them into steel that is then pressed into panels or cast into components to sell on. The car producer can then assemble these components, along with others from different sources (glass, plastics, paints, fabrics, tyres, electrics, etc.), with the finished car as the output to be sold on. Both the steel producer and the car manufacturer use more than just the components and raw materials that make the physical product, however. Both of them also buy in various services and supplies that support the main production without directly providing a physical part of it. For example, proper planned maintenance of plant and machinery is essential for safe and consistent production. The steel producer will perhaps use contract engineering service companies to do this work and would consider it as contributing indirectly to the end product. Similarly, the supplies and services used by the quality control function or the managers and administrators that keep a smooth flow of goods and orders in and out of the
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Figure 4.1 Flows within a B2B market
Raw materials Support services/ Supplies Equipment/Plant
Panels/Sheets Services/Supplies Equipment/Plant
End user/ Consumer
organisation support the end product indirectly. Thus an organisation may have to purchase not only raw materials and semi-finished goods, but also financial, technical and management consultancy services. Once the cars or the spares leave the car manufacturer, the retail showroom, i.e. the car dealership, as a re-seller, takes the products and sells them to the general public with little change other than perhaps the addition of number plates and fine tuning of the engine. Most of the value added comes from intangible elements of customer service. Even at the re-seller level, there are also other support services to consider. A car dealership selling to the general public, for instance, would put a lot of thought into the design and ambience of the showroom, the training of its sales and service staff and its advertising and other promotional activities. All these services can be bought in and add to the successful sale of the physical product. All of this goes to show that B2B marketing and purchasing is a complex and risky business. An organisation may buy many thousands of products and services, costing anything from a few pennies to many millions of pounds per item. The risks are high in these markets where a bad decision, even on a minor component, can bring manufacturing to a halt or cause entire production runs to be scrapped as substandard. There are several differences between B2B and consumer marketing, as Table 4.1 shows. If a consumer goes to the supermarket and finds that their preferred brand of baked beans is not there, then it is disappointing, but not a disaster. The consumer can easily substitute an alternative brand, or go to another supermarket, or the family can have something else for lunch. If, however, a supplier fails to deliver as promised on a component, then the purchasing organisation has a big problem, especially if there are no easily accessible alternative sources of supply, and runs the risk of letting its own customers down with all the commercial damage that implies. Any failure by any link in this chain has a severe impact on the others.
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‘FlyBE to the moon’
When an airline buys new aircraft there is often a scramble to win the order, and FlyBE is an airline with a shopping list. FlyBE is a UK-based low-cost airline, mainly serving domestic routes, but with some short-haul services from UK regional airports to France and Spain. Now that it has established its position within the low-cost sector, it is looking to expand further the number of routes it operates, particularly from airports in the north of Britain. That means expanding its fleet of aircraft and ensuring that its fleet has the range to fly from Scotland to southern Spain. The winning supplier is a Brazilian company, Embraer, and it wasn’t the obvious choice. Most of FlyBE’s competitors use 150-seater Boeing 737s or Airbus aircraft and indeed FlyBE had previously leased three Boeing 737s on a trial basis. In contrast with these two household names, Embraer has
The new BAe 146 aircraft that flyBE chose for its expanding service.
quietly established its reputation as the world’s leading manufacturer of smaller aircraft of up to 110 seats. The new 118-seater E-195 which is the subject of the FlyBE deal is the largest commercial jet it makes and is at the forefront of the company’s expansion into the mid-range aircraft market. Although the E-195 is smaller than competing models from Airbus and Boeing, FlyBE has calculated that the cost per seat
is comparable, and that the seat capacity is more appropriate for the kind of routes FlyBE services. The E-195 has been found to use 20 per cent less fuel per seat than its competitors, which not only cuts operating costs but is also compatible with moves within the airline industry towards ‘greener’ operation. FlyBE has given a firm order for fourteen aircraft with the option of a further twelve in a deal worth around £523m. The first fourteen aircraft will be delivered at the rate of nearly one per month up to December 2007. For Embraer, this deal marks a very successful launch into the mid-range aircraft market and its ability to deliver, and the extent to which FlyBE is satisfied with the performance of the aircraft and the service received from Embraer is bound to be monitored very carefully by other expanding airlines.
Sources: Clark (2005); Done (2005); The Guardian (2005); Kaminski-Morrow (2005).
Table 4.1 Differences between B2B and consumer marketing
B2B customers often/usually . . . • purchase goods and services that meet specific business needs • need emphasis on economic benefits • use formalised, lengthy purchasing policies and processes • involve large groups in purchasing decisions • buy large quantities and buy infrequently • want a customised product package • experience major problems if supply fails • find switching to another supplier difficult • negotiate on price • purchase direct from suppliers • justify an emphasis on personal selling Consumer customers often/usually . . . • purchase goods and services to meet individual or family needs • need emphasis on psychological benefits • buy on impulse or with minimal processes • purchase as individuals or as a family unit • buy small quantities and buy frequently • are content with a standardised product package targeted at a specific market segment • experience minor irritation if supply fails • find switching to another supplier easy • accept the stated price • purchase from intermediaries • justify an emphasis on mass media communication
g. design equipment.g. that of a profitmaking organisation involved in transactions with other similarly orientated concerns. In addition. A final reminder of the volume and variety of B2B buyer–seller relationships is provided in Figure 4. fabrics. and institutions. job agencies Suppliers of manufacturing equipment e. There are. only one kind of B2B buying situation has been considered in detail. Policy decisions have to be made about purchasing.g. office equipment. linings. which shows in detail the wide range of goods and services essential to a clothing manufacturer. cutting equipment.QXD 29/3/06 9:36 am Page 149 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 149 Thus the links have to be forged carefully. and relationships managed over time to minimise the potential problems or to diagnose them early enough for action to be taken. management consultancy Suppliers of other equipment and suppliers e. clothes hangers and racks. packaging equipment and materials. All these goods and services represent relationships that have to be established.g. B2B customers So far.2. pressing machinery CLOTHING MANUFACTURER Suppliers of services e. trimmings Suppliers of labour e. All these issues will be addressed later in this chapter. each of which represents a lot of buying power. however.PROM_C04. government bodies. sewing machines. goods handling equipment. Overall. stationery . maintenance and repair. there are three main classes: commercial enterprises. decisions have to be made about how the purchasing process should operate (who is authorised to do what and with what safeguards). educational establishments. or whether to manufacture rather than outsource. goods distribution.g.2 A clothing manufacturer and its suppliers Suppliers of raw materials and components e. for example whether to source from one supplier only (single sourcing) or from several suppliers (multiple sourcing). other kinds of organisation that have different philosophies and approaches to purchasing. maintained and sustained. Figure 4. utilities.
PROM_C04. from office supplies to public buildings. and often small. Some of these components will be recognisable even after the OEM has finished with them. office equipment and management consultancy services. This group is the closest to the end consumer of the product and should. Re-sellers Re-sellers purchase goods for re-sale. Original equipment manufacturers Original equipment manufacturers (OEMs) incorporate their purchases into their own product. and needs good buyer–seller coordination as it has to be tied in with production schedules. important purchasers of goods and services. the Ministry of Defence has an annual spend of around £10bn and it has been estimated that public procurement across the EU countries is worth some €1500bn. I Government bodies Government bodies are very large. as is often seen in defence procurement. A full outline of the role and function of re-sellers can be found in Part five of this book.QXD 29/3/06 9:36 am Page 150 150 PA R T 2 · C U S T O M E R S A N D M A R K E T S I Commercial enterprises Commercial enterprises consist of profit-making organisations that produce and/or re-sell goods and services for a profit. The National Audit Office (NAO) also assesses the purchasing performance of the Ministry of Defence.7bn. others are much more mundane and routine. be able to feed valuable information back up the chain on what the end market really wants. as the car manufacturer does with the electrics. tyres. there was still room for improvement. involving international suppliers. whereas others. plastics. equivalent to about 16 per cent of European GDP (Wood. Purchasing power of this magnitude makes government contracts highly attractive despite the complex procedures that need to be followed. although the item purchased does not enter directly into the finished product. This group of B2B buyers includes both local and national government. etc. cleaners. from army bootlaces to battleships. Although some vetting and inspection may take place before these suppliers are allowed on to the list of approved suppliers. as well as European Commission purchasing. these procedures are far less rigorous than those imposed on companies wishing to supply goods and materials that do directly enter or support the production process. Take. fabrics. for example. The NAO reported that the 2004 overspend was £1. Recognisability is important for the tyre manufacturer as a means of developing links with the end consumer and encouraging brand loyalty when it is time to buy new tyres. and although this was lower than the 2003 overspend of £3. therefore. In the UK. The range of purchasing is wide. such as the paint. eg Like the NHS example considered earlier. are incorporated anonymously. Plumbers. for example. from airline tickets to motorways. All the members of the flow shown in Figure 4. and involve very little public concern. expensive and high profile. suppliers. As mentioned above when discussing the car dealership.1 fall into this category. the value added stems largely from service elements. OEMs’ purchasing is very closely linked with forecast demand for their end products. defence procurement is a high-profile activity and any significant delay or overspend soon attracts media attention. tracking weapon systems. The Head of the NAO summed it up: ‘There must be greater . caterers and travel agents thus supply services that are an indirect means to an end rather than a direct influence on production. Although some purchases may be very large.1bn. Large chemical and steel process manufacturing plants may source a wide range of services from a myriad of local. which can be further divided into a number of subgroups. Examples of this are CAD/CAM systems. 2004). for instance a tyre is a recognisable element of a car and is usually strongly branded by the original supplier. usually making no physical changes to them. from refuse collection to management consultancy. Users Users purchase goods and services to facilitate their own production. paint.
PROM_C04. Tendering is a very competitive process that demands that the suppliers are well tuned into the procedures and are able to find out early what tenders are on offer. The laudable purpose of this is not only to try to get the best prices.411. reports from within the UK rail industry have suggested that between 2000 and 2003. If not. in his view. of course). It is often too late to establish contact once formal bidding has begun. Some jobs are only open to tender from organisations already on an approved list. 162 and pp. governments favouring their domestic suppliers. although all the signs suggest that largely they haven’t worked. The contact and reputation building necessary for next year’s bids needs to be done this year. Alan Wood. i. 2004). and for works €3. and there must be greater control of costs. large and small. and the Nimrod patrol aircraft slipped six months behind schedule and overspent by £408m (Spiegel.uk). some capabilities may have to be foregone or delayed to compensate…’ (as reported by Spiegel. Tendering for the right to supply Organisations are requested to bid or tender for the right to supply.834. Given the value of the public procurement market. 179 et seq. His report suggested that there is indeed little competition between nations for public procurement contracts. There are ways of getting around the law without actually breaching it. 2004). Although the thresholds vary depending on the kind of govermental body that is making the purchase. Much of this is down to having the right contacts within the purchasing organisation and maintaining good relationships and communication links with them (within ethical boundaries. More recently.014. both France and Germany sourced all their new railcars from within their own countries while the UK sourced about 25 per cent of its new railcars from outside its own borders.QXD 29/3/06 9:36 am Page 151 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 151 certainty as to when equipment will be ready . Such procedures might be classified under the following headings. These issues of buyer–seller relationships are expanded further at p. ‘the French still want to buy from France. Other industries too have raised similar concerns about protectionism. Because of the traditional bureaucracy and public accountability surrounding government sector purchasing. the development of specifications may be done in conjunction with specialist consultants and the potential suppliers’ development personnel.e. Specifications within a contract can be designed to suit a specific national supplier. The development of precise specifications for the good or service For more innovative and large-scale projects. chief executive of Siemens. in general for supplies and services the threshold (as set at 1 January 2004) is €154. Assessment of tenders The submitted tenders are assessed and the winning one is chosen. These directives are also designed to try to reduce national protectionism. therefore was commissioned by the UK government to investigate this issue. Public procurement contracts over a certain value have to be put out to open tender and advertised in the Official Journal of the EU. it is not surprising that the EU has issued a number of directives designed to make tendering and bidding processes fairer and more transparent. . Some years ago. the managing director of a radio communications equipment manufacturer told us that. while others are open to anyone. or the price specifications can be set so that only a state-subsidised .gov. there are specialised purchasing procedures that are often more explicit and formal than those found in many commercial organisations. Overruns were also experienced on the Joint Stiker Aircraft. . The trades unions interpret this as meaning that the UK is perhaps more scrupulous in adhering to EU rules on competitive tendering than other countries that might be tempted to favour their own local companies (Turner. The minimum number of potential suppliers bidding should be five (http://www.ogc. there were extended delays on the delivery of the Type 45 destroyer being assembled by BAe in Glasgow. 2004). from across all EU states access to information and opportunities to bid for business. but also to allow companies. the Germans from Germany and the British from anywhere’.
Figure 4. These institutions may have an element of government funding. for example. but in purchasing terms they are autonomous. If. perhaps part financed by government. yet these have implications both up and down the chain. such as a new lecture theatre. 2004. It is also common practice to break a contract down into a number of smaller. . I Nature of demand Derived demand All demand in B2B markets is derived demand – derived from some kind of consumer demand. Language barriers can also be a problem. or in bulk to equip an entire office. although the bulk of purchases may come from just a few of them. a potential supplier makes a bid without knowing what price anyone else has quoted). that is. between 30 and 40 per cent of the population read newspapers. A typical university may deal with over 5000 suppliers. The following subsections look at some of the characteristics of B2B markets that generate these different approaches. for instance. there is perhaps still a lot of valuable business that is not being awarded as transparently as it might be (Warner. and thus only about 16 per cent of public procurement ever gets as far as being advertised in the Official Journal of the EU. the increase in demand for high-quality.int) shows that all of them require documentation and tenders to be submitted in the home language of the purchasing authority. the use of the marketing mix and the interaction between buyer and seller. then demand for the component parts of it will also dry up. can be bought as a one-off by an individual for private use. Wood. A university.3 represents the links in the chain stretching from forestry to reading material. Webster. depend on predictions of future consumer demand for washing machines. whereas in southern Europe it is closer to 10 per cent. has to purchase a wide range of products and services in order to teach and undertake research and consultancy. however. but with a greater degree of flexibility of choice. 2004. The same model of personal computer.eu. The numbers of electric motors demanded. there are different influences on the activities and behaviour of the organisations. So. and that is a B2B market. for example.publications.PROM_C04. quality and quantity of paper and printing processes demanded. washing machine manufacturers demand electric motors from an engineering factory. They are likely to follow some of the same procedures as government bodies.e. Characteristics of B2B markets The differences between consumer and B2B markets do not lie so much in the products themselves as in the context in which those products are exchanged. churches and independent schools. for example. may be subject to tendering and closed bidding (i. The basic product is identical in specification but the ways in which it is bought and sold will differ. individual contracts. A quick scan of some of the notices in the Official Journal of the EU (http://www. there is a recession and consumers stop buying the end product. for example. Similarly. I Institutions This group includes (largely) non-profit making organisations such as universities. Large capital projects.QXD 29/3/06 9:36 am Page 152 152 PA R T 2 · C U S T O M E R S A N D M A R K E T S supplier could ever afford to undertake it. At each stage in the process.ted. Many other supplies are purchased with varying degrees of efficiency and formality from a range of different suppliers. As the EU public procurement market is worth about €1500bn per year. as has happened. An increase in that reading rate to bring it closer to the northern level would have a great impact on those supplying paper to the newspaper industry in that region. full colour special interest publications (for instance CD review magazines) affects the type. none of which are valuable enough to fall under the procurement rules. In northern Europe. 2004).
for example.000 new products per year (competing companies such as H&M and Gap produce up to 4000 products per year). the more remote it is from the end consumer and the further ahead it has to look in order to predict demand. weight. It can do this because there is a high degree of vertical integration within the design and production process.QXD 29/3/06 9:36 am Page 153 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 153 Figure 4. its close relationship to suppliers makes life a lot easier.3 Influences on a B2B purchasing chain Forestry • Environmental policy.4 presents a very traditional view of the fashion industry. Zara has started to outsource . international competition • New technology for grades.000 special interest magazines) Business Consumer • Advertising expenditure • Quality upgrade of promotional material • Internationalisation of trade • Growth of technical/ trade demand for printed literature • Demographic changes • Education levels • Use of electronic media • Reading rates Another problem with derived demand is that the further up the supply chain an organisation is. organisations such as ICI and DuPont that produce dyes and fibres have to be two years ahead of the market. A pioneer of so-called ‘fast fashion’ is the Spanish retailer Zara which can get this lead time down to as little as 14 days.4 shows how those two years are used up in the product development process. composition and surface treatment of paper Paper manufacturing • New technological processes: colour. management Wood fibre/ Pulp processing • Level of import penetration • Cyclical demand with investment cycle • Mergers. polywrapping • Demand for coated paper Press/ Publishers • Growth of desktop publishing • Demand for advertising expenditure • Increased quality expectations • Interest segmentation (UK has over 3. For a company producing some 11. eg M Figure 4. but some retailers are trying to achieve a competitive advantage by cutting the lead times involved in getting garments from the drawing board to the retail outlet. This means that in spring 2006 they will be deciding what colours and fabrics will be fashionable in spring 2008! Figure 4. automatic Printers binding. subsidies. In the fashion industry.PROM_C04. One of Zara’s sister companies produces 40 per cent of its fabric needs and between 50 and 60 per cent of its manufacturing is done in-house. and with sales of €5bn in 2004. Fabric can be held in stock and then cut and dyed at the last minute to suit a fresh design.
produce samples. 2005. This gives designs a scarcity value that customers are prepared to pay for.QXD 29/3/06 9:36 am Page 154 154 PA R T 2 · C U S T O M E R S A N D M A R K E T S some of its simpler. and much of the success of chains like Zara is down to their ability to produce affordable mass-market versions of the latest designer couture before designers have even got the full-priced originals into their own stores (Carruthers. making decisions on textures/prints. As well as this bottom-up approach. through market research. it’s gone’ philosophy. The Economist. They then sell to the Textile mills Autumn 2006 who produce fabrics. less high-fashion garments to low-cost producing countries. has to define the ‘story’ and the ‘look’ for the spring 2008 season. designers also gain inspiration from the catwalk fashion shows. The founder of Zara.4 Derived demand in the fashion industry Spring 2006 Dye and fibre manufacturers who take predictions from experts such as the British Textile Colour Group to plan colours and develop yarns for spring 2008. Saini. Amancio Ortega. There’s a strong communications link between the shop floor and the designers so that they can react quickly to what customers are buying and what they say they want. but it is questionable just how far this can be done while maintaining the flexibility and responsiveness. Zara and its customers are happy to operate on a ‘when it’s gone. and stock-outs in stores are filled with a new product rather than more of the same. Figure 4. such as China. They then sell on to the Clothing manufacturer Spring/Summer 2007 who. so that designs are produced in small batches.PROM_C04. The final range is then sold to the Autumn 2007 Clothing retailer Spring 2008 who then offers the final product to the Consumer . 2003. design the range. 2005). has been quoted as saying that the key to successful retailing is to ‘keep five fingers on the factory and five fingers on the customer’ (as quoted by Saini. and keeps customers coming back to the stores regularly with a strong sense of excitement and anticipation to see what’s new. 2005) and that certainly seems to be at the core of Zara’s operations. then refine the range.
and that interest and demand for these tyres is spread across drivers of all kinds of cars.com. it is often closely linked with demand for other B2B products. the Pax system. Mound (2002). Michelin and Goodyear cannot just sell it straight to tyre retailers. http://eu. If there are problems or delays with the supply of disk drives. Technology continues to move on. the new tyres are great for drivers. thus enabling the driver to get home without changing the wheel. small disc brakes and electric motor in the rim to assist tracking and braking. wants to make flat tyres a thing of the past but the problem it faces is convincing car manufacturers. however. Stewart (2005). So the Audi 8.com (among others). has an inner plastic ring and a new method of attaching tyre rubber to the wheel frame which means it can be used on larger vehicles. Interestingly. http://eu. This is a conventional tyre with active electric suspension. flat tyre. which uses RunOnFlat tyre technology and can be run for 80 km at 80 kph. especially if the spare tyre is also flat! Michelin. From spring 2005. Audi found that the Pax wheel retained agility and passenger comfort. and they’re great for car manufacturers as the need to include a spare tyre takes up space and adds to costs. Michelin has developed a tyre that can still be run while deflated. with the Pax system can travel at 55 mph on a fully deflated tyre. However useful the tyre. .V. The airless tyre is being developed to last as long as the vehicle.QXD 29/3/06 9:36 am Page 155 155 marketing in action It’s dark. not just the high performance expensive models. The Active Wheel project is also being developed by Michelin. Goodyear was using television advertising to generate awareness and understanding of its RunOnFlat brand concept. This emphasises that there is often a need to plan and coordinate production schedules between the buyer and a number of suppliers. The problem for manufacturers. not just one.PROM_C04. and a number of them. albeit functional.uk. which is bad news for the tyre retailers. such as BMW. Michelin found it especially difficult to penetrate the Japanese car manufacturers and it wasn’t until 2004 that was it adopted by Honda. in summer 2005. Maserati. offer it as either standard or optional on some of their models. the French multinational tyre maker. Mercedes and Mini Goodyear RunOnFlat tyres are constructed with special reinforced sidewall inserts that use new compound technology. it has only been adopted on some car models such as the Audi and the Rolls Royce Phaeton as standard. For example. That is. Perhaps the manufacturers will be encouraged by Goodyear’s own market research that suggests that 84 per cent of drivers would prefer to have this type of tyre technology offered as an option with their new vehicle than things like satellite navigation systems or rear parking assistance systems. Goodyear has launched a similar tyre. Although launched in the late 1990s. The adoption requires joint development as it must work with a tyre monitoring system built into the car with a dashboard warning so that drivers actually know that they have a flat tyre and can adjust their driving accordingly. Joint demand It is also important to note that B2B is often joint demand.goodyear. even if totally deflated. for example. Ferrari. you’ve a flat tyre and you’re 20 km from the nearest motorway exit If you have ever had a flat tyre on a motorway you will know what a nuisance it is. as they spell an end to those miserable episodes of roadside tyre changing. and both Goodyear and Michelin work closely with the car manufacturers. Land Rover. Talk about reinventing the wheel! Sources: Carty (2004). Source: © Goodyear Dunlop Tyres Europe B.co. then the firm assembling the computer might have to stop buying casings temporarily. it was fitted as standard on the BMW 3-series.goodyear. Goodyear has been working hard to get the new tyre system adopted by car manufacturers. demand for casings for computers is linked with the availability of disk drives.michelin. One of its designs. as without the accompanying tyre pressure monitoring system there is the danger that drivers will have accidents with a less stable. Like Michelin. is that it is not just a case of fitting new tyres. it’s raining. however. Nissan was soon expected to follow. The increased stiffness means the tyre can bear the weight of the whole vehicle. On the face of it. Such cars could switch from front to rear to four-wheel drive as required and this innovation even opens up the possibility of eliminating conventional transmission systems. http://www.
available infrastructure or national and EU government incentives. differ in both respects.PROM_C04. is quite small and the age of the respective fleets. Whatever happens. Industrial concentration B2B markets tend to have a small number of easily identifiable customers. A car battery. for example. Think of the market for fast food. and the car manufacturer will demand neither more nor fewer batteries than before the price change. or will cause the manufacturer to look for alternative components or cheaper sources of supply (but that takes time and effort and may have implications for production processes. Elastic demand. and although negotiations may be private. It allows more focused targeting and. Inelastic demand Elasticity of demand refers to the extent to which the quantity of a product demanded changes when its price changes. . inelastic demand means that an increase in price will make no difference to the quantity demanded. the boundaries of the market are fuzzy and malleable. In this context. in contrast.QXD 29/3/06 9:36 am Page 156 156 PA R T 2 · C U S T O M E R S A N D M A R K E T S Such tight and crucial links are not common in consumer markets. Considerable knowledge. Traditionally. More recently. McDonald’s can persuade non-customers to try its product and become customers. or the establishment of regional offices and/or distribution facilities. demand is inelastic. most organisations in the trade know what the others are doing. however. Conversely. B2B markets. A fall in the price of batteries is not going to have an impact on the quantity of cars demanded. since the manufacturer has obligations and orders to fulfil. so that it is relatively easy to define who is or is not a potential customer. Geographic concentration Some industries have a strong geographic bias. for example. Airbus and Boeing. the dedication of specific members of staff to service that relationship. for example. airports and seaports have given impetus to organisations concerned with freight storage. means that there is a great deal of price sensitivity in the market. in some cases. and indeed in any manufacturing situation where a large number of components are used. heavy industry and large mass producers. A close example. Where there is a finite number of known customers. will be very aware of each other and the strategies they will employ. they are diffuse. but the two things are not as inextricably tied as in the B2B situation above. which McDonald’s has shown to have worldwide appeal to many millions of customers. therefore. mass markets. I Structure of demand One of the characteristics of consumer markets is that for the most part they comprise many potential buyers spread over a wide geographic area. The number of airlines worldwide with the need for wide-bodied jets. such as shipbuilders. in that sense. is just one component of a car. the outcomes are very public. is that demand for carpets can be linked with the level of buying and selling activity in the housing market. have acted as catalysts for the development of a range of allied suppliers. for instance. Such geographic concentration might develop because of resource availability (both raw materials and labour). experience and trust can build up between buyers and suppliers. A small increase in price will lead to a relatively large decrease in demand. quality and specifications). demand will not change and in the short term cannot change. the coal and steel industries and the motor industry. Any price changes will be passed on in higher prices charged to the manufacturer’s customers or be absorbed into the total costing of the product. This kind of concentration opens up all sorts of marketing possibilities in terms of relationship building and personal contact that just would not be feasible in consumer mass markets. insurance and other related services. whereas a manufacturer of kilns to the brick and roofing tile industry would have problems in trying to extend its customer base beyond very specific types of customer. movement. expected retirement dates and the operational problems encountered are widely publicised so there are few secrets or hidden opportunities in the aircraft manufacturing industry. that is.
whether software specialists or marketing consultants! SKF sells bearings direct to larger OEMs across Europe. which implies certain differences from the consumer situation. B2B purchasing policy Certain systems and procedures for purchasing are likely to be imposed on the B2B buyer. or rules on single/multiple sourcing or on the number of quotes required for comparison before a decision can be sanctioned. Often. resulted in a number of small suppliers also going out of business because they could not find new markets for their skills quickly enough. I Buying process complexity Consumers purchase primarily for themselves and their families. the local conditions have been favourable for more modern forms of concentration. From a traditional manufacturing base. at a rate well above that of many other German länder (Barber. There may be guidelines on favoured suppliers. A small. For the most part. In contrast. The closure of a coach works in Shannon. This new form of geographic concentration provides obvious opportunities for a range of service providers. these are relatively low-risk.e. the organisation).skf. has been described as ‘Mobile Valley’ because it has the second most important geographic concentration in the world of R&D in mobiles and broadband technology. as Chapter 3 has shown. International companies such as IBM. the Baden-Württemberg region has developed many science parks and high technology research centres based on what is claimed to be the highest geographic concentration of scientists in Europe. a purchasing manual is provided for all staff who may be involved in dealing with suppliers.QXD 29/3/06 9:36 am Page 157 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 157 eg Kista. and the marketer must appreciate them when designing strategies for encouraging trial and reordering. electrical and mechanical engineering sectors. low-involvement decisions that are made quickly. This . Similarly in Germany. With a well-educated population and the highest mobile and internet per capita use in the world. These differences give rise to much more complexity in the buying process. lead to a high degree of mutual dependency. however. Nokia and Siemens have set up competence and research centres in the area which in turn has spawned many smaller niche suppliers and producers. The net effect is a technically highly skilled workforce that favours innovation (Brown-Humes.com Concentration can. just north of Stockholm. 2000). Ireland. especially in the automotive. Motorola. Source: SKF http://www.PROM_C04. The various dimensions of complexity are as follows. highly specific customer base can leave a supplier very vulnerable if something goes wrong. B2B purchasers are always buying on behalf of other people (i. 2000). the region now has thriving export businesses. Intel. although there may be some economic and psychological influences affecting or constraining them.
learn from experience and try to avoid errors and misunderstandings. etc. With a single source. it is unlikely to get involved in helping the supplier to achieve it. Philips has three categories of supplier: 1 Supplier–partners: these are the most important suppliers and Philips builds intense. eg Philips is a global operator in the electronics market with factories all over the world.2 outlines the advantages and disadvantages of alternative sourcing strategies. 2 Preferred suppliers: these suppliers are less important. 3 Commercial suppliers: these are the least important suppliers and although Philips will encourage better performance in terms of quality. the purchaser needs to be assured of the continuity and consistency of supply.QXD 29/3/06 9:36 am Page 158 158 PA R T 2 · C U S T O M E R S A N D M A R K E T S manual would outline organisational rules and approaches to purchasing. 1993/94). and might list approved suppliers and the procedures to be undertaken for approving a new supplier. logistics. Philips also emphasises the importance of supplier re-evaluation as a basis for improving future performance. An organisation’s decision whether to source from a single supplier or from multiple suppliers is another important aspect of purchasing policy. solve problems. Philips cannot develop and maintain deep relationships with every one of its suppliers. Philips and its suppliers develop technology. Clearly. it assesses its suppliers to discover which are the most important in terms of their strategic significance to Philips’ business.2 The advantages and disadvantages of alternative sourcing strategies (a) Single sourcing Advantages • Improved communications and understanding between buyer and supplier • Increased responsiveness to buyer’s needs • Shared design of quality control systems • Elimination of supplier switching costs • Improvement in product cost effectiveness • Reduced prices through larger volumes • Reduced prices through reduced supplier costs • Enhanced ability to implement JIT systems Source: Adapted from Treleven (1987). as well as value for money. as their loss could seriously undermine Philips’ current business and future direction.. logistics and price to gain mutual benefit. and together. These suppliers might well have essential knowledge and/or expertise that Philips could not otherwise access or develop for itself. which in turn depends on the performance of suppliers. Table 4. costs and responsiveness (European Purchasing and Materials Management. Disadvantages • Increased costs through lack of competitive pressure • Increased supply vulnerability • Reduced market intelligence and thus flexibility • Improved supplier appraisal capacity . Table 4. Instead. The company recognises that customer satisfaction depends on the quality of what happens on the production line.PROM_C04. This makes these suppliers extremely significant strategically. but there is still good reason for Philips to work closely with them on issues such as quality. Philips cultivates supplier relationships based on trust and cooperation. involved relationships with them. A supplier’s actual performance is measured against mutually agreed targets in terms of quality.
cost and delivery competencies rather than trusting them to suppliers (Render and Heizer. highspending organisations might gain more by using competitive pressure to keep a number of suppliers on their toes.000 Method of enquiry Type of quote Authorisation Phone/In person Written/Catalogues Written Written Oral Non-competitive Competitive quotes Tenders Junior manager Middle manager Senior manager Board members . This matrix provides clear guidelines on who should be involved. in a study of sourcing strategy. If building a long-term partnership is not the goal of the buying firm. and the burden of responsibility for maintaining the necessary technology. arising from whether the buyer wanted close. The consequences. Further restraints might also be imposed relating to how much an individual is allowed to spend under particular budget headings on behalf of the organisation before a second or more senior signature is required. quality. market structure and location. Segal (1989) found that the decision whether to adopt single or multiple sourcing was often the result of an overriding organisational attitude to suppliers. 2000). Segal does concede. even in this matrix. expertise. repetitive orders. powerful. might also influence the decision.QXD 29/3/06 9:36 am Page 159 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 159 Table 4. that other factors. or an arm’s-length. such as product type. It is easy to see how the selection of sourcing policy makes a clear statement to suppliers about value and how the buying company may be willing to play suppliers off against each other to obtain the best deal (Zeng. 1990). Linking individual spending limits with the most appropriate quotation procedure could give rise to a matrix such as that shown in the hypothetical example in Table 4. Other benefits of multiple sourcing include a greater degree of flexibility in technical areas and better protection in the event of supply difficulties from any one supplier (Ansari and Modarress. are a large base of suppliers.2 Contd (b) Multiple sourcing Advantages • Increased competitive pressure • Improved supply continuity • Improved market intelligence • Improved supplier appraisal effectiveness Disadvantages • Perceived lack of commitment • Increased costs • Less supplier investment • Reduced willingness to adapt • Higher operating costs Source: Adapted from Hahn et al. then multiple sourcing could well be favoured. This would also reduce the buyer’s vulnerability to supply interruption from strikes or breakdowns. and if the initial price is more important than longer-term cost efficiencies. much would depend on the nature of the organisation. however. for a car manufacturer placing high volume. They proposed that large. Reprinted by kind permission of MCB University Press Ltd.000 Above £20. (1986) and Ramsay and Wilson (1990).3. however. long-term relationships with suppliers.PROM_C04. and the types and methods of quotation required. competitive type of atmosphere.3 Purchasing guidelines Estimated value of order Below £500 £500 – £2000 £2000 – £20. for what amount. very short-duration contracts. the order value categories would be completely inappropriate. 1997). Table 4. challenged the growing belief in Japanese models of long-term single sourcing. However. Ramsay and Wilson (1990). Clearly.
while the size of expenditure influenced the managerial level of those involved. In addition. . 172 et seq. delivery schedules and quality standards) is a significant job. These do not just cover the obvious concerns of remaining within the law and not abusing authority for personal gain. Group decision-making The need for full information. every saving matters. A full discussion of the role and structure of groups (buying centres or decision-making units) can be found at pp. the system will be severely impaired. Originally.QXD 29/3/06 9:36 am Page 160 160 PA R T 2 · C U S T O M E R S A N D M A R K E T S In addition to the formal requirements associated with purchasing.000 to 2000.5 per cent. 2005b). fair competition and the declaration of vested interests. take it or leave it. 1981). but due to the loss of face-to-face contact. While there are group influences in consumer buying. Using e-auctions is part of the strategy employed by BA to reduce its procurement bill by over 7. where close discussion and joint development may take place to develop designs and specifications that meet the requirements of the application. such as a continuous production plant. they are likely to be less formally constituted than in the B2B purchasing situation. defining the terms of supply so that they are consistent and compatible with production requirements (for example performance specification. allows little scope for varying the types of purchases made and needs suppliers who will conform to the standards required for maintaining the system (Sheth. usage and function. other than in the smallest organisations or for the most minor purchases. although with careful planning they can be reorganised and modified to accommodate new products. guidelines are often produced on ethical codes of practice. eg BA decided to use an e-auction to help reduce its European public relations spend by 25 per cent. for example the family unit. BA was very careful to ensure that the specifications for the contract were very tightly defined in the first place. The auction lasted two hours compared with the five days it would have normally taken by traditional methods. according to Hallén (1980). On a turnover of £8bn and a procurement expenditure budget of £4bn. Different types of production and operating systems will help to shape an organisation’s purchasing task. with clearly defined price. An inflexible or technology-driven manufacturing organisation. but often it is the buyer who will determine requirements and dominate the supply situation. to find individuals given absolute autonomy in organisational spending. This contrasts with unit production.PROM_C04. the number of suppliers has been cut from 14. adherence to procedures and accountability tends to lead towards groups rather than individuals being responsible for purchasing decisions (Johnson and Bonoma. Mattson (1988) found that product related aspects of the purchase strongly influenced the area of the organisation involved in the purchase. Most consumer purchasing does not involve so great a degree of flexibility: the product is standard and on the shop shelf. It is thus critical for the suppliers in such a system to be able to meet the demands of the customer’s technology. Much negotiation is required where complex customised technical products are concerned and. even for small components used in manufacturing. business gifts and hospitality. streamlining costs and helping the procurement function to make a direct contribution to BA’s profitability (Arminas. 1977). At times of model changes and reorganisation. Mass production systems are often rigid in the short term. BA worked with three PR agencies across Europe but cut this to two agencies working on a three-year basis rather than on an annual rolling contract. Furthermore. Professional purchasing The risk and accountability aspects of B2B purchasing mean that it needs to be done professionally. but also address issues such as confidentiality. if there is no guaranteed economic and stable flow of materials at a consistent quality level. there may be an opportunity for the supplier to adopt new technical solutions. It is rare.
An obvious example would be the sourcing of goods from nations under various international trade embargoes. the organisation has bought this product before and has already established suppliers. If caught. The decision-making here will be a longer. frequently purchased. 1967). etc. An example of this is the purchase of a fleet of cars. some regulations specifically influence the sourcing of products and services. while a commercial modified re-buy involves issues such as price and delivery. Bearings for the car and electrical motor industries are sold in this way. which happens less frequently in an organisation’s life. therefore. New task purchasing is the most complex category. with Singapore. For instance. Increasingly. whereas the latter is more likely to concern the purchasing department. many-faceted decision-making process with wide involvement from both internal members of staff and external consultants. but with the benefit of drawing on past experience. gas. the illegal operators face being shut down and prosecuted (Hosenball. is related to changing design and performance specifications. 2003). such as utilities. these types of purchase form part of computer-based automatic reordering systems from approved suppliers. electricity. but as provisional for the following three months. These products may be relatively low-risk. with JIT systems. A technical modified re-buy. Increasingly. such as Iraq in the 1990s. This too involves a detailed. especially where it involves a high-risk or high-cost product. The decision-making process here is likely to involve very few people and be more a matter of paperwork than anything else. The schedule may be regarded as definite and binding for one month ahead. A blanket contract may cover a specific period and a schedule of deliveries over that time is agreed. but in B2B markets. is the commissioning of new plant or buildings. routine or modified re-buys). more formal and involved process. in the case of a routine re-buy. Laws and regulations As we saw in Chapter 2. as does the fierce competition between suppliers who will therefore be prepared to negotiate hard for the business. Precise dates and quantities can then be adjusted and agreed month by month nearer the time. where new models and price changes make review necessary. The organisation has no previous experience of this kind of purchase. or a feeling that the current supplier is not the best. Another situation. as it could lead to regular future business (i. The former type may be decided by technical personnel. . One example of this might be the sourcing of raw materials for a completely new product.e. Perhaps there have been significant technological developments since the organisation last purchased this item.QXD 29/3/06 9:36 am Page 161 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 161 Purchase significance The complexity of the process is also dictated by the importance of the purchase and the level of experience the organisation has of that buying situation (Robinson et al. This represents a big opportunity for a supplier. However. that has not stopped alternative methods being used. schedules may even be day or hour specific! A modified re-buy implies that there is some experience of buying this product.. and therefore needs a great deal of information and wide participation in the process. The problem is that it cannot get any spare parts or new equipment from the United States as part of a ban imposed in 1980. for example. More specifically. or a desire to renegotiate the parameters of the purchase. Iran has set up networks of front companies to buy materials from US suppliers that eventually end up in Iranian arsenals. It is a big decision for the purchaser who will want to take the time and effort to make sure it is the right one. eg Iran still uses a lot of military hardware purchased during the time of the Shah. London and other cities being used to avoid export controls. governments may seek to regulate sourcing within certain industrial sectors.). but there is also a need to review current practice.PROM_C04. The routes taken are often circuitous. regulations affect all areas of business. inexpensive supplies such as office stationery or utilities (water. and high levels of negotiation.
to be based on more solid information and to reflect more collective responsibility than a consumer decision. more formalised process than in consumer markets. There are many models of organisational decision-making behaviour. The result of all the above complex factors working together is to make B2B purchasing a much longer. Webster and Wind (1972) and Robinson et al. or a lack of stock. then it is possible for the buyer and the seller to build experience. obligations and penalty schemes (for late delivery.QXD 29/3/06 9:36 am Page 162 162 PA R T 2 · C U S T O M E R S A N D M A R K E T S I Buyer–seller relationships Apart from the tangible characteristics of buyer–seller relationships. How the model is formulated depends on the type of organisations and products involved. In the short term. It could also be something more sudden and dramatic than that. and the formal and informal influences on marketing. These issues are covered more fully at pp. Where there is a small number of identifiable customers. for example Sheth (1973). the individuals involved. The processes involved are similar to those presented in the model of consumer decision-making described in Chapter 3. organisational purchasing policies. Suppliers can tailor their offerings to suit particular buyers. (1967). Figure 4. The stimulation could be internal and entirely routine: it is the time of year to renew the photocopier maintenance contract. likely to be more rationally made. by the implementation of expansion plans or the imminent production of a new product. B2B buying decisions have to be justified to managers. leading to long-term relationships with joint development potential. The formulation of marketing strategies that will succeed in implementation depends on this understanding. either party may come to regard the other as essential. They are also more likely to lead to long-term. One of the problems of such close relationships. Buying decision-making process It is just as important for marketers to understand the processes that make up the buying decision in B2B markets as it is in consumer markets. therefore. for instance). with different levels of detail. analysis. 167 et seq. It could be a planned new buy precipitated. a problem that a purchase can solve. in that information search. a small injection moulding firm found itself selling 80 per cent of its output to a large multinational manufacturer of domestic vacuum cleaners. mutually valuable. for example. knowledge and trust in each other to an intimate level that consumer marketers can only dream of. but the interaction of human and organisational elements makes the B2B model more complex. the level of their experience in purchasing.PROM_C04. the following subsections discuss the constituent stages. choice and post-purchase evaluation also exist here. there are also less concrete factors shaping the way in which two organisations do business. the purchaser comes to rely on regular supplies conforming to quality standards. such as the failure of a piece of plant or machinery. accountants and shareholders. . on the basis of these. and are. interdependent relationships between specific buyers and sellers. For example. however. while over a longer period.5 shows two models of organisational decision-making and. it was able to exert considerable influence over the small supplier who could not afford to lose the business. legally drawn-up contract that lays out both parties’ responsibilities. the start of the process has to be the realisation that there is a need. I Precipitation Clearly. as formalised in a negotiated. Since the purchasing organisation also had two alternative suppliers on the sidelines. is dependency.
QXD 29/3/06 9:36 am Page 163 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 163 Figure 4. Organisations such as Ford. The privatisation of electricity supply in the UK created a competitive market for supplying large industrial users. . talking to visiting sales representatives or reading the trade press might also generate awareness of opportunities. whether based on new technology. The energy buyers ensure that what was always considered a routine repurchase in the past can now be bought with the most advantageous long-term supply contracts from the most appropriate supplier.5 Models of organisational buying decision-making Robinson et al. (1967) Hill and Hillier (1977) Anticipation or recognition of need Precipitation Determination of characteristics and quality of required item Specification of characteristics and quality of required item Product specification Search for and qualification of potential suppliers Supplier selection Acquisition and analysis of proposals Evaluation of proposals and supplier selection Selection of order routine Commitment Performance feedback and evaluation External influences can also stimulate a need. If the competition has invested in new technology. which would stimulate the buying process. cost reduction or quality improvements. Attending trade exhibitions. then other organisations will have to consider their response. Tesco and Abbey National have appointed energy buyers with responsibility for undertaking a modified re-buy review of the electricity supply market. Changes in the wider business environment can also trigger a need.PROM_C04. Thus changes in the energy environment have precipitated changes in purchasing decisions and processes.
In offering an automatic off-site backup service for PCs and networks. it can work its way through the zone. It is very much in the interests of the company responsible and the relevant authorities to ensure a rapid clean-up that minimises the impact of the spillage on marine life. in case of fire or theft.com Not all needs can or will be fulfilled and it is possible for the decision-making process to stop here. stabilising the sea surface and collecting up to 6000 tonnes of oil while spreading a dispersant to break up any remaining pollutant into harmless droplets (http://www. Alstom’s Marine Sector has been working on this problem and has developed a troubleshooting trimaran called the Oil Sea Harvester. This means exposing potential clients to a problem that they may not have even thought about. has to stimulate potential clients to be aware of the importance of storing essential data away from their normal premises. birds and beaches. eg Potential suppliers may have to help the customer to realise that they have a need.alstom. Artist’s impression of the Alstom oil harvester.com). for instance. Through its innovative design and its equipment. Security Backup Systems.QXD 29/3/06 9:36 am Page 164 164 PA R T 2 · C U S T O M E R S A N D M A R K E T S eg When there is a disaster at sea involving a significant oil spillage.PROM_C04. product specification. there’s usually an accompanying PR spillage too and the critical attention of the media and various ‘green’ groups turn to the site. Nevertheless. It can operate in extreme conditions and travel quickly to a disaster zone.alstom. Source: © Alstom http://www. some opportunities will be followed through and these move on to the next stage. or be postponed until the organisational or environmental conditions are better. and offering a solution that they may not have realised was available. outline the cost and arrange a follow-up meeting to discuss the client’s needs in detail. the company uses telemarketing to raise the awareness of risk. .
It may not necessarily be cost. there is often a bias towards existing suppliers who are known and trusted. . If existing suppliers can do the job. good working relationships between members of staff within the two organisations and an appreciation of the constraints under which each of them works. Automatically pushing business towards the existing supplier does. then makes proposals to the client who can reject or negotiate from there. All of this helps the B2B buyer to make a more informed choice. reviews in detail a wide range of business equipment and services. Even external consultants and suppliers could be involved in particularly complex situations. A typical edition reviews such issues as supplier lists. technical data. balancing ideals against cost and practicality. In the case of new technology. but the fine detail will be deliberately vague to allow the agency plenty of creative scope. discounts and after-sales service for various product categories. An organisation wanting to develop a corporate brochure. but is not appropriate in all circumstances.QXD 29/3/06 9:36 am Page 165 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 165 Product specification Unlike a consumer. I Supplier selection The next stage involves the search for a suitable supplier who can best meet all the specified criteria. Sometimes. production managers. have its risks. or to locate the supplier first and then adapt the specifications to suit what they can offer. but a more detailed one would follow later. Existing suppliers are at least a known quantity. then speed of delivery and installation may be of the essence. A key decision early on will be whether to develop a specification based on known particular needs and then locate a suitable supplier. it may be necessary for buyers to be proactive by openly seeking new suppliers and encouraging quotations from those who could meet their requirements. If a machine has suddenly broken down. in terms of its function. Where specifications are largely set by the seller rather than the buyer. delivery schedules and service backup. Think about buying a component to be incorporated into another end product. for example. These specifications will need the combined expertise of engineers. an organisation must determine in some detail precisely what is required. Nevertheless. its relationship and compatibility with other components. its design. purchasing specialists and marketers (representing the interests of the end customer). the choice may hinge on compatibility with existing facilities. A level of fine detail in specifications is understandable in an engineering context. among others. On other occasions. for whom half the fun of shopping is often not quite knowing exactly what is wanted. The existing relationship means that there should be better mutual understanding. might have a certain amount of in-house expertise within its marketing department. the scope of the content. then they are likely to be favoured. perhaps after a shortlist of two or three suppliers has been drawn up. and the purchasing department will keep files on who can do what. the future prospects for upgrading it or the service support offered. reports and publications can be used to compare the different features and performance of competing products. the more true this is. guidelines on running costs. The brief may specify the number of pages for the brochure. There are some advantages in this approach. The publication What to Buy for Business. the target audience and an indication of the price that the organisation is prepared to pay. The physical characteristics of that component must be specified. It is also worthwhile at this stage to define the criteria or priorities for choice. Is the purchasing organisation becoming too dependent on the one supplier? Will this extra business strain the production capacity of the supplier? Is the purchasing organisation missing out on other suppliers with better technology which are anxious to prove themselves? Some exploration of who and what exists beyond the ‘usual’ supplier makes sense. The agency ‘interprets’ the brief. however. but will issue a general brief to a number of external agencies in order to get a fresh perspective in the light of current practice. a general specification will be issued to potential suppliers. the inclination to search for potential suppliers can be quite low. from franking machines to company health insurance. expected quality and performance levels. for example. In the first instance.PROM_C04. but there are also the less tangible but no less important considerations of quantity required. and the greater the strategic significance of the purchase. and the purchasing organisation will have experience and a realistic view of their capacity to perform.
com).com since 2003. E-marketplaces can be classified according to their openness. extranets allow both small and large parties to participate. just as a checking procedure to make sure that the existing supplier is not taking advantage of the established relationship.com) links 30. In contrast. 2003). whether it be EDI or extranets. with three specific types: public.9bn savings each year (Businesss Week 2000).QXD 29/3/06 9:36 am Page 166 166 PA R T 2 · C U S T O M E R S A N D M A R K E T S e-marketing in action B2B e-marketplaces: going private or public Kelly Page-Thomas In the sphere of business-tobusiness transactions. also known as virtual private networks (VPN). According to Hamblen (2005).com) for the healthcare industry.urms. its compatibility with supporting the buyer/seller relationship and the quality of service delivery. sometimes including a blend of industry-specific buyers. is of increasing importance in B2B e-marketplaces. There will be complex discussion. industry or consortia. and beyond the reach of most SMEs. Thus.000 auto parts suppliers and 6900 dealers in an electronic network. businesses are increasingly harnessing the potential of information and communication technologies to facilitate and consummate businessto-business (B2B) exchanges. With the range and sophistication of technologies available. suppliers. while EDI uses proprietary formats or legacy systems developed and implemented by the organisation. Electronic Data Interchange (EDI) and extranets have at times been confused with each other. Additional problems may be caused where different suppliers will be expected to work closely together. Electronic technologies can assist business-to-business exchanges in two direct ways.medmarket.com) which provides a B2B exchange centre for the raw materials industry. for instance. infrequent purchase (i. Sources: Business Week (2000). Ford Motor Company (www. An example of a public online marketplace is BuyerZone. the principal difference being that an extranet operates over an internet protocol network.covisint.3bn in 2009. the new task situation). EDI) are costly and complex to set up and maintain.ford. requiring invitation from the host company. and distributors.e. and United Raw Materials Solutions (URMS) Inc. meeting both buyer and seller expectations in terms of the type of technology used. Their compatibility with each other. providing a collaboration network with suppliers. will directly affect the buyer's intention to do business with that seller in the future (MacDonald and Smith. lengthy selection procedure is likely to be implemented.PROM_C04. the second involves facilitating the relationship between organisations and their suppliers in the value chain. venture-backed company known for its success in offering a fast and easy ‘Request for Quotes’ service that connects buyers and sellers of business products and services. A low-risk. with forecasts that sales will grow to US$3. a buyer's satisfaction with a seller's use of technology. One or two other known suppliers might also be requested to quote for the job. Public e-marketplaces are generally owned by third-party providers and are open to any company that wants to purchase and/or sell products. resulting in an estimated US$8. In a high-risk. Hamblen (2005). on the nature of the purchasing task. such as on the building of a new manufacturing plant. the leading online marketplace for business purchasing. sales of IP VPN services in the US in 2004 amounted to US$640m. MedMarket (www. an annual growth rate of nearly 40 per cent. The first is in simply facilitating sales transactions between businesses. This is a profitable. For example. With more than US$2bn in business purchasing transactions facilitated through BuyerZone. However. customers and other business parties. a consortium or industry e-marketplace is jointly developed and owned by two or more industry incumbents. IP VPN are fast gaining popularity. their reliability and their ability to complete their part within strict time limits dictated by the overall project schedule may all affect the decision-making. com). negotiation. MacDonald and Smith (2003) Much depends. revision and reiteration at a high level with a number of potential suppliers before a final decision is made. and the existing supplier might simply be asked to tender a price for resupply. privately held. . BuyerZone's service attracts active buyers seeking purchasing guidance across more than 100 business product and service categories. However. (www. and provide even the smallest company with an efficient and cost-effective way to connect their business to their trading partners. An extranet is a VPN. the development of extranets has the potential to change this. also called an IP VPN as it is based on Internet Protocol (IP). a more serious. of course.buyerzone. Private e-marketplaces. a leading consortium for the automotive industry.g. Examples include Covisint (www.com (www. With the development and commercial adoption of the Internet. Traditional methods of exchanging business information electronically (e. are the most restrictive e-marketplaces. Another term for a B2B exchange is an e-marketplace. and private e-marketplaces. frequent purchase might not warrant that kind of search effort. or even videoconferencing technologies to mediate the exchange process.
not on prices. such as JIT. It is difficult. The process does not. quality and delivery. In a study of the European aircraft industry. wanted to improve its store security and cut wastage by the installation of EAS (Electronic Article Surveillance). covering key elements of performance. and in the avionics and power systems areas. therefore. the order and delivery schedules set. comes in two parts. the buyer of automotive components places the emphasis on quality consistency. to allow Kruidvat to strengthen the supply. Other buyers are less tolerant and keep their suppliers under constant threat. the more likely it is that remedial action can be taken with the least disruption to production schedules.QXD 29/3/06 9:36 am Page 167 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 167 eg Kruidvat. we can say that the Hill and Hillier (1977) model has provided a useful framework for discussing the complexities and influences on B2B buying. the pressure on suppliers increases. This involved detailed discussions with potential suppliers to assess alternative systems and eventually Meto. however. Some buyers adopt formal appraisal procedures for their suppliers. Of particular importance to Kruidvat was the need to protect small cosmetic items that can come in various shapes.PROM_C04. the contractual commitment and the review and evaluation process. however. Small trial orders can grow into larger batches. then again. The purchasing manager of a large computer assembly plant in Ireland was clear cut in his requirements. efficiently and effectively in order to maintain levels of customer satisfaction. a shift to single (or much reduced) sourcing forms the basis for a preferred supplier system. Airframe manufacturers increasingly expect suppliers to fund development costs from their own resources. 208). A buyer of injection moulded plastic parts. The selected supplier had to be able to provide protection for the complete range and meet the specification to provide label and tag formats that could be incorporated into manufacturers’ production lines and labelling for cost-effective protection. alternative sources will be activated. 85 per cent of the business is lost or gained on quality and delivery. In concluding this discussion of the buying process as a whole. with over 500 drugstores in the Netherlands and Belgium. to generalise about such a process. Two alternative suppliers are kept in reserve in case this happens. Linked to the labelling. a leading European supplier based in Germany. was selected. With the introduction of new purchasing strategies. The situation has to be monitored as it unfolds. Although there were many months of negotiation. Paliwoda and Bonaccorsi (1994) found a trend towards reducing the supplier base to allow closer cooperation and relationships to develop. Suppliers have to earn customer commitment through consistency. including the cosmetic suppliers. New suppliers are sometimes eased into critical supply situations so that their performance can be carefully assessed. end here. especially where technical and commercial complexity exists. In another company.meto. If a supplier falls short of quality standards. has a policy of withdrawing business from a supplier which fails to meet delivery schedules. The results of this appraisal will be discussed with the supplier concerned in the interests of improving their performance and allowing the existing buyer–seller relationship to be maintained. the contract signed. Is the supplier fulfilling promises? Is the purchased item living up to expectations? Are deliveries turning up on time? The earlier such problems are diagnosed. I Commitment The decision has been made.com). p. benefiting all players (http://www. He claimed: ‘In my experience. for example. in case there are problems with the supplier. 1992. Both these examples demonstrate the need for a true marketing orientation among suppliers of fulfilling the customer’s needs and wants exactly. If this could be overcome it would be possible to change the store layout and allow greater use of self-service. These customers are too important to lose. Various systems were compared but the Meto system is expected to reduce pilfering considerably when all 25 million product items are tagged. Meto had to provide a security system to detect theft without causing embarrassment to genuine shoppers. Failure to live up to these promises can be very costly for production schedules. Commitment. and any complaints have to be handled quickly. Stages may be compressed or merge . We want what we order when we want it’ (Pettitt. This approach is especially used where larger firms are dealing with smaller suppliers. the supply partnerships formed.
A new task situation. are we prepared to negotiate? Does the product actually meet our needs? Is the chosen supplier living up to its promises? How do we continue to motivate/evaluate this supplier? How often do we review their status? Product specification Supplier selection Commitment Thus if a decision is taken in the specification stage to adopt a certain type of technology. Then.QXD 29/3/06 9:36 am Page 168 168 PA R T 2 · C U S T O M E R S A N D M A R K E T S into each other. ability to meet specifications exactly. culture? To what extent. cost savings) are we looking for? What quantity are we likely to need? How often? What are the ‘must have’ attributes? What are the ‘would like’ attributes? What is our required quantity level? What level of service/support do we want from suppliers? What price band are we thinking of? Do we want to use existing and/or new suppliers? How do we construct a shortlist of potential suppliers? On what criteria do we select the supplier: price. it still involves the less than predictable human element.g. At each stage.4. Thus the aspiring supplier wants to know not only who is involved. The next section looks in more detail at these human elements. and where groups of people are concerned in the buying process there is plenty of scope for its smooth flow to be interrupted. Roles in the buying process A potential supplier attempting to gain an order from a purchasing firm needs to know just who is involved in the decision-making process. the process may end at any stage. Clearly. and getting a range of feedback from within the purchasing organisation to allow a comprehensive product offering to be designed. and on what features. B2B purchasing is unlikely to be the result of one person’s deliberation and decision. that may then narrow down the choice of potential suppliers. Table 4.4 Decision problems in the organisational purchasing decision-making process Stage Precipitation Decision problems Do we need to make a purchasing decision or not? What benefits (e. The process will also vary according to whether the purchase is a new task or a re-buy. the supplier’s marketers can deal most effectively with the situation. solvency. for example tailoring specific communication packages to appeal at the right time to the right people.PROM_C04. utilising both the group and individual dynamics to the best of their advantage. but at what point in the process each person is most influential and how they all interact with each other. These various decision factors are summarised in Table 4. Remember too that although B2B buying is assumed to be more rational than consumer buying. however. with the promise of either a large contract or substantial future business. A routine re-buy may consist of a telephone conversation between two individuals to confirm the availability of the product and the fine detail of the transaction in terms of exact price and delivery. depending on circumstances. As has already been established. a number of decisions have to be made that may well affect the character of the next stage. the amount of time and effort the supplier is prepared to devote to this will vary with the importance and complexity of the order. there may have to be reiteration: for example if negotiations with a chosen supplier break down at a late stage the search process may have to begin again. . past experience. provides much more scope and incentive for the supplier to research and influence the buying decision.
Purchasing acts as the interface between other internal functions. and is more focused towards offering support in such matters as contracts and supplier suitability etc. This is because a whole range of specification. evaluating offers and negotiating or reviewing performance. the role of purchasing may be Figure 4.6.QXD 29/3/06 9:36 am Page 169 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 169 The rest of this section takes a more focused look at some of the functional areas involved in the decision-making process. soliciting tenders.PROM_C04. . quality. where unit or small-batch production takes place. copyright 1982 © John Wiley & Sons Limited. (b) Mass production Supplier Production engineering Design Design Sales Sales Quality Quality etc.6 Models of buyer–seller contact in B2B markets (a) Unit production Supplier Production engineering Design Sales Quality etc. This lays the foundations for the next section (p. The role of purchasing in such a situation tends to be less central to the whole process. Purchasing Buyer Source: Adapted from Johanson (1982). for instance. or even during. design and production issues may have to be discussed before. Buyer Production engineering Design Purchasing Quality etc. such as in building a large gas turbine or specialist vehicles. I Purchasing The role of the purchasing department is to handle relationships with suppliers by. In mass production. the transactions. except in the case of very well-established routines. such as production and finance and external suppliers. reliability and possibly frequent and critical exchanges. The role of purchasing will often vary according to the technology being used and the kind of contact needed with suppliers. In Figure 4. This means that the function cannot act in isolation. and thus has to reflect and represent those internal needs. sourcing suppliers. Reproduced with permission. given the need for consistency. 172) which then examines how these functional areas operate within a group setting. detailing their interests and concerns. however. there may be considerable contact between different departments within the selling and buying organisations.
PROM_C04. and profit (TP) where the concern is with savings and improving margins through tendering. establishing terms and liaising with them. suggest longterm supply contracts and careful selection of suppliers. therefore. it also makes an important contribution to product and service innovation. The research found that not only does purchasing play the major role in managing supply availability. except for routine re-buys or where it acquires information to suggest that a change of policy or supplier could lead to better efficiency. combating foreign competition and meeting regulatory requirements. classified by the security/risk required and the value of the purchases. This means developing a clear understanding of the relative significance of individual purchases and of different types of purchases. Purchasing rarely initiates the decision-making process. managing energy costs.QXD 29/3/06 9:36 am Page 170 170 PA R T 2 · C U S T O M E R S A N D M A R K E T S enhanced to ensure the free flow of goods into the organisation. lifetime value for money TP: Value for money Approved status for suppliers via tender process Improve efficiency/mechanise . unlikely to be its prime criterion.com). Thus its key role is in the supplier selection and commitment stages. The other internal departments may channel their efforts and be coordinated through the purchasing department. that is. The change of purchasing’s role from cost-cutting to value-adding represents a shift in emphasis. where the priority is minimising effort. The main concerns of purchasing are security and consistency of supply. raised quality levels and better integration with suppliers to strengthen their overall competitiveness in the supply chain. The more tactical areas are divided into acquisition (TA). With business travel in the Figure 4. Where cost-cutting is still a top priority. The whole area of purchasing is growing in importance as organisations seek cost savings. often procurement is being shifted to low-cost countries (O’Brien.//aberdeen. Lowest cost is. in locating ‘good’ suppliers. especially where large-scale production schedules are concerned. http:www. eg The Aberdeen Group published a report in 2005 which highlighted the significant increase in the strategic importance of purchasing since 2000. SS and SC. Strategic cells. Figure 4.7 Commodity positioning matrix High Strategic – Security (SS) Strategic – Critical (SC) Electricity and gas Library Fire equipment Software Computer repair Ads and publicity IT Security risk Reprographic repair Tactical – Acquisition (TA) Telecom Reprographic stationery Tactical – Profit (TP) Furniture Computer consumables Audio-visual equipment Cleaning Vehicle hire Postage Travel General stationery Catering Photo/Printing Audio-visual repair Low Value/Profit Suggested strategies SS: Secure supply route Long-term contract Identify new sources TA: Approved status for suppliers Minimise effort Improve efficiency/mechanise High SC: Ensure supplies Approved status for suppliers via tender process Long-term contract. 2005.7 details the various products and services purchased by a university.
then further development work has to be done to reduce the costs or find alternatives. for example. development has to be done within given cost parameters. given the supplier’s technical capacity and talents. Applications engineers may work closely with suppliers to develop solutions to problems. They can also feed specific information back to the supplier to solve a specific end-customer’s problem. therefore. I Engineering Engineering is usually concerned with specification and design. indicating the service level offered and their discount structures. texture and quality for medical use and that could withstand sterilisation. If the proposed solution to an R&D problem looks likely to push the price of the end product up beyond what the market will bear (taking into account the unique selling points offered by the new development). then it will be anxious to ensure that the component meets quality and design specifications in order to be entirely compatible with the production flow. issues relating to ease of handling. assessing returns on investments. was researching new approaches to wound dressings that involved close liaison with textile suppliers to develop fabrics of the right density. but could also be supplied in a form that would allow it to be easily and efficiently incorporated into a production run. Production staff may. as in the case of engineering. In some cases. If a critical component is concerned. somewhat reducing the role of purchasing to an administrative one. I Production/operations With prime responsibility for meeting targets for the end product in both quantity and quality terms. Johnson & Johnson. This is widespread practice in B2B markets (Johanson and Wootz. for example pooling their expertise to use CAD systems to design components that both perform to the purchaser’s specifications and are feasible. the production process may have to be adapted to accommodate a particular supplier’s technology. It takes a higher-profile role in major capital projects or other large items of expenditure. then it is likely. Valla. advising production on more efficient methods. In such cases. it also worked with another supplier to develop an adhesive that not only fulfilled its prime functions of being non-allergenic and sufficiently adhesive (although not too much so). This proved to be a somewhat sticky problem. they are not going to be entirely absent from the other stages. it is likely that the finance department will devolve budgets to appropriate managers.PROM_C04. although if they have an interest as users of the purchased product. I R&D Where R&D has been given a free-ranging brief to look for new. radical solutions to problems. for example. At the same time. fit with other organisations’ production systems and cost effectiveness may also be considered.QXD 29/3/06 9:36 am Page 171 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 171 TP cell. 1986. While some of these adaptations are driven by logistical concerns alone. R&D staff are going to have a strong influence at all stages of the decision-making process. 1986). for example when sourcing a component or designing new production facilities. be mainly involved in the precipitation and specification stages. the production function also has a great interest in the security and consistency of supply. to have close contact with suppliers in the interests of joint development. for . In addition. investigating methods of financing and costing projects. I Finance For routine production-orientated purchases. Such a matrix is a valuable guide to an organisation in selecting those product areas that require special attention. travel agencies would be required to bid on a regular basis. Finance will simply take on a monitoring role to ensure that there are no irregularities or variances and provide regular internal information.
just who is involved and in what capacity is an amalgam of many factors.5 Comparison of DMUs in consumer and B2B markets Consumer Initiator Example Child pesters parents for a new bike. looks at these non-functional roles. Marketers are likely to approve of options that enhance the offering. Influencer Mother thinks about it and says. Secretarial staff preventing influencers reaching the decision maker. reliable suppliers. perhaps in terms of better quality or improved reliability. but under restraints imposed by parents’ credit card limit. User The child.’ Father agrees and they all go to Toys ‘R’ Us where the final decision is the child’s. Influencer Decider Decider Purchaser Buyer Handles the search for and negotiations with suppliers. sales reps. Gatekeeper . Overall. external consultants. the operator reports it. may also involve R&D staff. Table 4. therefore. ‘Well. indicating the membership. are making sure that the implications of whatever is purchased do not compromise the final product offering or its competitive edge. It may not make the final decision. suppliers. Organisational size. in relation to functional roles in the decision-making process. representing the interests of the purchasing organisation’s own customers. User may influence. I Marketing The marketing function is primarily concerned with the outputs of the production process. R&D staff withholding information. for instance through the degree of delegation of responsibility and devolved decision-making. but it does have an influence in both shaping the feasible options and selecting the most appropriate supplier. Parents pay the bill. This section. Marketers’ concerns. May also be the buyer and/or influencer. therefore. perhaps he has grown out of the old one. thus initiating the process.5 compares buying centres in consumer and B2B markets. can also play different roles within the decision-making process that cross functional boundaries. as well as having functional roles and concerns. The buying centre The previous section implied that individuals within the purchasing organisation. thus favouring innovative. May also be asked to help with specs for replacement. the roles they play and the functional areas that may be involved.QXD 29/3/06 9:36 am Page 172 172 PA R T 2 · C U S T O M E R S A N D M A R K E T S instance. the more people are involved and the more formal and time consuming the process is likely to be. Table 4. The further removed the situation is from routine re-buys. May be a senior manager with either an active or a passive role in the whole process. accountants.PROM_C04. B2B User Example Machine breaks down. structure and culture will also play a role in defining the process. and how they interact to form a buying centre or decision-making unit (DMU).
Bear in mind that the buying centre is not necessarily a fixed entity from transaction to transaction or even within a single transaction. Of course. Where devolved budgeting exists. or a secretary who will use a word processor. Higher expenditure levels or purchases that have a critical impact on the organisation may involve much more senior management. Influence could stem formally from expertise. I Gatekeepers Gatekeepers have some control over the decision-making process. I Buyers Buyers have the authority to select and negotiate with suppliers. present and interpret information to other members of the buying centre. The decider’s role and level of involvement. Thus. who are fed information and recommendations from below. but also at the seniority of the members. personal influence. whereas the high-cost. but be someone who also has a functional role such as R&D or marketing. and may also be consulted in setting the specifications for whatever is to be bought. for example. For example. In other words. but the eventual authority may rest at board level. or it could be an informal. information gathering and assessment. in that they can control the flow of information by denying access to key members of the buying centre.PROM_C04. a bank’s decision to introduce a new account control system may be taken at a very senior level. or intercept brochures and mailshots and throw them in the wastepaper basket before they reach the decision maker. this may be the purchasing officer or someone in a functional role.QXD 29/3/06 9:36 am Page 173 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 173 I Users Users are the people who will use the end product. When analysing the make-up of the buying centre. a secretary or purchasing manager may prevent a sales representative from talking directly to an executive. evolving to meet the changing demands of the unfolding situation. depending on individual circumstances. high-risk new buy might require a senior purchasing manager of many years’ experience. it can consist of two or three or many people. for example the advice of an accountant on the return on investment from a piece of capital machinery or that of an engineer on a supplier’s technical capability. will vary widely. I Deciders Deciders have the formal or informal authority to make the decision. Buyers with different levels of seniority may exist to handle different types of transaction. we should look not only at the allocation of roles between the different functional areas of the organisation. for example an operator who will use production machinery. For routine re-buys. input from the lower levels of the hierarchy will help to shape the decision. the buyer may not belong to a formal purchasing department at all. It can be fluid and dynamic. I Influencers Influencers can affect the outcome of the decision-making process through their influence on others. for instance) or loosely informal (a chance chat over coffee in the canteen between the purchasing manager and an R&D scientist). but organisational structures may dictate that the final decision rests with top management. it can be either formally constituted (for a major capital project. therefore. Their prime role is in specification. it is what it needs to be to do the job in hand. for example a routine re-buy could be handled by a relatively junior clerical worker. These people may trigger the purchasing process through reporting a need. Technical staff can also act as gatekeepers in the way in which they choose to gather. .
It uses 250 million components every day which are purchased from some 400 subcontractors and supply partners. openness and trust to ensure that it can plan its capacity and production schedules with a . regardless of where they were produced. in some areas closer technical cooperation is required. By aggregating demand from each of the production units. Nokia then arranges for carriers to handle the transport. It expects suppliers to take care of testing and to guarantee that they are meeting standards on a consistent basis. Nokia is able to get better terms from suppliers because of the scale of the contracts. but it is the global sourcing operation that takes the necessary action with suppliers. to ensure that components arrive on time at Nokia’s own plants. it is still important for the aspiring supplier to attempt to identify the pattern within the target organisation in order to create effective communication links. The purchasing function’s fear about such arrangements. Its primary role is not to source components. however fluid the buying centre is. Similarly. It is then the responsibility of the account manager to link with the rest of the supplier’s organisation to ensure that it all happens. however. There is a close link between global sourcing and the R&D and manufacturing experts to ensure that the right technology is available and that it will continue into the future. it is necessary for Nokia’s engineers to work closely with the supplier’s technical staff to create the most appropriate specification.PROM_C04. With ‘application-specific integrated circuits’ (purpose-designed complex microchips). however. specifying prices. local procurement deals with day-to-day purchasing for the factories. but to ensure that adequate supplies of components are available for production. Suppliers are expected to meet these standards and are monitored at a local level to ensure that they comply. quantities. etc. an individual’s contribution to it may not be limited to one role. It is up to the supplier to handle its own logistics to ensure that the various products arrive in time at that collection point. they are normally identified at the local buying points. negotiates prices and terms. marketing in action Nokia’s global sourcing Nokia is one of the market leaders in mobile phone development and manufacture. makes delivery arrangements. It is the supplier’s responsibility to adjust its own internal organisation to meet Nokia’s requirements. In a small business. for example. capacity planning and allocation can be fed through one point. This actually sources materials. for example. This arrangement simplifies the ordering procedures for Nokia’s local procurement teams. It must also be sure that suppliers are capable of producing components that are in line with expected technological advances in a market in which innovation is used to gain competitive advantage. Targets are set for failure rates and robustness. the buyer may also be the decider. the owner/manager may be influencer and buyer as well as decider.QXD 29/3/06 9:36 am Page 174 174 PA R T 2 · C U S T O M E R S A N D M A R K E T S Also. customs. By establishing clear lines of communication. in a larger organisation. the next step is to examine the criteria applied during the process. where routine re-buys are concerned. Nokia insists on each supplier nominating an account manager regarded as being responsible for the relationship between the companies on a global basis. Global sourcing is the other organisation. establishes quality procedures and sets supplier performance standards for appraisal. Given the worldwide scale of production and the need sometimes to adjust product specifications to meet local requirements. Nokia operates on formal contracts with suppliers. is that it could become locked into a single supplier and this in turn could. especially when the demand for a component is suddenly increased. Whatever the structure. quality. First. and the company asks each supplier to present its plan for meeting those targets over the lifespan of the contract. that a supplier should offer only one collection point in the world from which components can be collected. jeopardise supply continuity. When problems do occur. Nokia has refined its relationship approach to component suppliers over a number of years. as it does not inspect goods on arrival. The account manager is expected to be senior enough to be credible within Nokia and to carry influence within the supplier’s top management if urgent action is required. Although most of the collaboration is on commercial matters. It believes in partnership. purchasing has been divided into two different organisations. Nokia has to be convinced. with very little call for influencers. Having thus established decision-making structures. Quality monitoring of components is critical so that Nokia can ensure that its own products meet standards. The purchasing challenge for the company is to ensure that supplies can be regularly adjusted to meet growing demand from its production facilities spread across ten countries. it believes. It insists. etc. issues such as annual purchasing agreements to cover forecasting.
PROM_C04. functionally orientated criteria. Buying criteria In the previous sections. so the following are a summary of them. To design and develop a car can cost £1m. good relationships leading to component improvement. These suppliers are both local and international. however. The main criteria have already been discussed in the previous sections of this chapter.saunalahti. Lead times can. Taimi (1996). to fall into the trap of forgetting that behind every job title lurks an individual whose motives and goals are not necessarily geared towards the greater good of the organisation. I Economic influences As has been stressed throughout this chapter so far. price is nearly always of secondary importance in the buying decision. The buying criteria are led completely by design and performance technology and the high specification of such cars often means locating special suppliers. the emphasis in terms of decision-making has largely been on rational. or that the supplier will be able to meet increasing and . This route can also result in lower total costs.fi) Product specification Product specification involves finding the right product to meet the purchaser’s specified needs. they can certainly cause friction and influence the outcomes of it.QXD 29/3/06 9:36 am Page 175 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 175 high degree of certainty that suppliers will not let it down. Instead. however. (2003). then it can offer a better package to its own customers. and also improves the quality consistency of the purchaser’s own end product. These task-related or economic criteria are certainly important and reinforce the view of the organisation as a rational thinking entity. better customer service and other technical or logistical supports from its suppliers. If the purchasing organisation can make the best use of increased reliability. superior performance. Serant (2001). Sadowski et al. After all. but one representing good value for money taking into account the whole service package on offer. thus reducing the costs of handling complaints and replacing goods. formally recognised part of the decision-making process. safety and quality are dominant (Nolan. various trade-offs between specification and price. It is dangerous. Appropriate prices The appropriate price is not necessarily the lowest. since it reduces production delays due to substandard components or delivery failures. Thus by pursuing international supply alliances Nokia is better able to keep at the forefront of its own rapidly changing technology. who wants to be the buyer who saved a few pence on the component that caused a breakdown during the big race? (http://www. be short. but nevertheless. The costs per car can be staggering. neither more nor less. The main point is the closeness of the match and the certainty that it will be maintained throughout the order cycle. and then some £5m of spares are needed every season. it is not always a matter of finding the lowest priced supplier. eg Building a Formula One racing car from scratch is not an easy business. Such motives and goals may not form a direct. with the rewards that brings. 1997). reliability. Sources: Kandell (2001). of course. especially if a re-work is necessary on a component that needs to be upgraded. The latter are considered important so that Nokia can benefit from technological skills and capabilities that may not be available in the local market. Stewart Grand Prix’s three racing cars are each made from 1400 components sourced from over 1000 suppliers. a similar amount is spent on tyres. Because of the high specification. There are.
but at the back of the mind there is always the question. This aspect might also include an appraisal of the supplier’s longer-term capacity and willingness to become involved in joint development activities. eg Velden Engineering (UK) manufactures a wide range of component parts and assemblies for various industries and applications. Quality consistency It is important to find a supplier with adequate quality controls to minimise defects so that the purchaser can use the product with confidence. Supply reliability and continuity The purchaser needs to be sure that adequate supplies of the product will be available as and when needed. they may be prepared to spend a little more when the office accommodation is refurbished on better-quality furnishings. They may well be chiefly and genuinely concerned with finding the best solution to the problem. Some customer service is delivered even before the sale is made. such as medical and aeronautical. one which is safe. This may mean sacrificing the economies of scale achieved through sourcing from one supplier for the risk-spreading advantages to be had from sourcing smaller amounts from a number of suppliers. it needs to ensure that everything supplied is right first time. but promises a high return. This is particularly important in areas such as electronics where product lifecycles are getting shorter and shorter. So. instil confidence or even intimidate visitors to the site. and other personal needs. This is especially true for JIT systems. especially where JIT systems are involved. for example. there is the risk element. ‘What does this mean for my job?’. decor and facilities to impress. and one which is high risk. This is a crucial factor in supplier selection. friendship and social needs. Second. In such sensitive areas. or more specifically the individuals who make up organisations. career security. where there is little room for failure. They want to be seen to be doing better than their competitors or other divisions within the same organisation. hanker after ‘status’. Its customers expect not only compliance with standards such as BS5750 and ISO9002 but also to be supplied with finished components or tested assemblies that can go straight into the production process on a JIT basis. A problem may have two alternative solutions. I Non-economic influences Powers (1991) summarises non-economic influences under four main headings: prestige. We look at each of these in turn.QXD 29/3/06 9:36 am Page 176 176 PA R T 2 · C U S T O M E R S A N D M A R K E T S changing demands as technology progresses. If the high-risk decision is made and it all goes wrong. what are the consequences? The individual may not want to be associated with such an outcome and thus will push for the safe route. Customer service Buyers require reassurance that the supplier is prepared to take responsibility for its product by providing fast and flexible backup service in case of problems. Career security Few people involved in the decision-making process are truly objective about it. . Prestige Organisations. as failure can be very expensive indeed. First. predictable and unspectacular.PROM_C04. there is the awareness of how others are judging the individual’s behaviour in the decision-making process: ‘Am I prepared to go against the main body of opinion on a particular issue that I feel strongly about or will that brand me as a trouble-maker and jeopardise my promotion prospects?’.
but their emphasis is still on the relationship between the individual. Business colleagues talking at a conference. Trust is the belief that another organisation will act in such a way that the outcomes will be beneficial to both parties and that it will not act in such a way as to bring about negative effects (Anderson and Narus. attitudes and beliefs. even if the graduate’s views are valid. found from a study of subcontracting in France that personal contacts were a major cause of organisational trust. . as considered in the following section. Remember too the individual’s personal profile. These. may provoke negative reactions in older managers who have progressed through more traditional routes and feel that they have accumulated a wealth of experience. 1986). can all shape the extent to which that individual is allowed to participate in and influence the outcome of the decision-making process. It does help to reduce the perceived risk of the buyer–seller relationship. From that trust can come a whole series of activities that can enhance the relationship. recent business graduate with forthright views.PROM_C04. coupled with factors like self-confidence and communication skills. to value trust. Lorenz (1988).QXD 29/3/06 9:36 am Page 177 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 177 Friendship and social needs Needs such as friendship can be dangerous and can sometimes stray very close to ethical boundaries. however. for example. the job and the organisation. Source: © Corbis Other personal factors The three categories discussed above all provide useful insights into the human elements of organisational behaviour. discussed in Chapter 3 in the context of consumer behaviour. for example. issues such as demographic characteristics. Trust can be built at an organisational level. but can also stem from a series of personal relationships between employees. confidence and respect built on a personal level between individuals in the buying and selling organisations. A further dimension of non-economic forces is trust. A young. It is necessary.
Bribery comes in many forms. to win contracts that would not otherwise have been awarded to your company. not least your own.9m of profit relating to the illegal transactions had to be handed over. Libya. given the economic and competitive pressures. Kazakhstan. some decide to go further and build personal fortunes. is based in Switzerland. extending good practice from Sweden and the United States. the power and automation technology company. involving over 100 lawyers. criminal proceedings were brought against two of the ABB subsidiaries that were being sold. indeed in some countries ‘facilitating agents’ are widely advertised to help importers find their way through the bureaucracy to progress contracts in a strange country. 2005). but a year later than planned. permits etc. What would you do? These are the dilemmas of B2B negotiations in some countries. You may not like it. The sale of the subsidiaries did then proceed. Do you agree? OK.5m were imposed and $5. Most countries involved have taken practical steps to ratify the protocols. to custom officials to avoid import or export duties. Of course. Ecuador. universal code of ethics. It claims that bribery in government procurement adds between 20 and 25 per cent to costs and causes losses of some $400bn per year. So whether you paid the $10 and/or the 10 per cent commission you have given a bribe and participated in corruption. The Chairman of TI. Transparency International (TI) is a global non-governmental organisation. In 1999. but legal experts say this is due to lack of necessary evidence and that more should be done to expose those people and organisations that ask for bribes. a public official will give your company’s tender for a new £50m construction project favourable consideration. B2B marketers will therefore need to take a much more careful approach in future.1m to government officials in Nigeria. Azerbaijan. Indonesia. Iraq. For 10 per cent ‘commission’. Russia. Cash or gifts to avoid legal punishment for breaches of the rules. Venezuela and Yemen all . Fines of $10. is endemic in some countries. The investigation was thorough. been slow to prosecute directors responsible for bribery offences. Chile and Brazil) to adopt common rules to punish companies and individuals found guilty. certain subsidiaries had offered and/or paid over $1. i. They make a legitimate charge for their services and at times that might be shared with other officials! The World Bank has estimated that 5 per cent of the value of exports to developing countries is actually spent on one or other form of bribes. and 60 of those scored less than 3. This convention also implicates the giver as well as the receiver of bribes. said ‘Corruption robs countries of their potential. As the Corruption Perceptions Index 2004 shows. but it is real and depending upon who you listen to. the OECD introduced an anti-bribery convention.PROM_C04. undertaken with the full cooperation of ABB and the investment group. The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions commits all 30 OECD members and four non-members (Argentina. Hamra (2000) defined bribery as ‘an inducement that influences a public official to perform his or her duties in a manner contrary to the course that would otherwise be adopted’. try this one then. The rate of ‘commission’ can go as high as 20–30 per cent. Bulgaria. Business customs vary widely across nations and there is no single. This can have serious and expensive consequences. The UK has. The problem is in defining the boundaries. Peter Eigen. as the US authorities have begun to enforce the FCPA more strictly and thus US companies seeking acquisitions or mergers at home or abroad have in their turn started to scrutinise their targets’ business dealings more closely (Koehler. scrutiny of its accounts showed that over a five-year period. Chad. Facilitating payments may also be considered as legitimate.QXD 29/3/06 9:36 am Page 178 178 PA R T 2 · C U S T O M E R S A N D M A R K E T S corporate social responsibility in action It takes two to tango So what would you do? Your flight is about to depart and the queue to get through passport control could take at least an hour when a kind public servant offers to fast-track you for $10. Sudan. despite the OECD convention. A list quoted in Hamra (2000) includes: I I I I Bribes or kickbacks of cash or expensive gifts. It may be common practice in some countries to allow public officials business dealings to supplement their meagre salaries. Iran. ‘Grease payments’ to expedite performance. Worryingly. ABB. 100 interviews in 20 different countries and 4 million documents. Cash to custom officials to avoid import or export duties. with its stated mission ‘to create change towards a world free of corruption’. This is contrary to the US Foreign Corrupt Practices Act (FCPA) and after further investigation. Nigeria. however.e. 106 out of 146 countries included in the survey scored less than 5. That’s $50–80bn. where 10 represents very low levels of perceived corruption. ABB is certainly not alone. Its Corruption Perceptions Index 2004 rated countries for ‘cleanliness’ on a 10-point scale. suggesting rampant corruption. You believe you are offering the best deal anyway and it will guarantee hundreds of jobs back home. One country’s normal practice of gift giving may be another’s bribe. paying to jump the queue for licences. oilrich Angola. When it wanted to sell some of these subsidiaries to a US investment group in 2004. Angola and Kazakhstan in order to gain or retain business. but has subsidiaries all over the world.
watch out. Paperclips for the office. or the integration of some business functions (Selnes.transparency. The changing nature of supply chains One matter that has been emphasised repeatedly in this chapter is the potential risks inherent in poor purchasing decisions. or setting up middlemen and agents or offshore accounts. Economic dimension Joint development has already been mentioned a few times in this chapter. been an increased focus in recent years on the place of buyer–seller relationships in explanations of marketing and decision-making in B2B markets. expectations and perhaps an active desire to continue to trade. http://www. low risk purchasing situation there may be minimal concern about commitment to the relationship. and whether it should be enhanced in scope (increased commitment to the supplier) (Selnes. investing jointly in product development. next time you are offered a free afternoon of corporate hospitality. the OECD convention may be difficult to enforce. well-tuned relationship. If a supplier has invested time. OECD (2000). There is no such thing as a free lunch. committed relationship emerges from two dimensions: economic and social. are a standard product and there is plenty of choice in the market. as complexity increases and as it becomes apparent that value can be created by developing a stable. Cockcroft (1996). despite the trend towards relationship marketing.org. Sources: Arminas (2004). Continuity of a relationship is a type of repetitive decision making and may very well continue ‘at an arm’s length’ distance: in a low cost. middlemen and local officials’ (as quoted on http://www. Moss (1997). 1998).. Hamra (2000) calls for leadership and value statements from senior management.QXD 29/3/06 9:36 am Page 179 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 179 have extremely low scores. effort and money in improving quality or products. public contracting in the oil sector is plagued by revenues vanishing into the pockets of western oil executives. especially in dealings with countries where corruption is rampant. After a first-time purchase. Hamra (2000). This final section of the chapter looks at some of the characteristics of buyer–seller relationships that add a further dimension to the understanding of the decision-making processes already covered. or in developing special . So. A decision to continue (repurchase) is different from a decision to enhance or commit to a relationship. Porter (1990) goes further in suggesting that an organisation with advantageous relationships with supplier networks has a competitive edge. However. It may be at the other end of the spectrum but it is a continuum. The history of previous transactions between two organisations leads to understanding. even at the cost of short-term sacrifice. Not all exchanges evolve into long-term durable relationships. In these countries. The value of building a closer. However. The quality of the relationship between the buying organisation and an existing supplier could prove to be a major factor in reducing those risks.oecd. clear policies and guidelines. and is inevitably going to influence decision-making processes. http://www.PROM_C04. there are avoidance approaches.transparency. It is also fair to say that the lower-scoring countries are not those who have signed up to the OECD Convention. Where there is a will .org.. and thus convenience and possibly low price will be the main concerns. Culture and habits will not change overnight. There has. then there may be mutual advantage in continuity. despite it being agreed by all members. therefore. such as becoming more covert. 1998). the buyer has to decide whether a relationship should be continued (repurchase) or not. I Durability Durability refers to the longevity of relationships in B2B markets that might even outlast individuals and managerial generations. training and a willingness to undergo external scrutiny as part of an essentially ethical approach to international contracting. especially now that the OECD acknowledges that it ‘takes two to tango’.org). for example. The decision to commit to a relationship is often a strategic one and can involve exchanging confidential strategic information. Koehler (2005). because of the synergy between them in terms of joint problem solving and information exchange. Barnett (2000).
. flexible scheduling and delivery. Some suppliers have the potential to be long-term important partners in joint innovative development. thereby reducing the risks of taking on a new supplier or customer. Strengths and weaknesses are known quantities. A number of studies have been undertaken into the duration of buyer–seller relationships. If the relationship has led to a specialist complex package. Decisions to single source. According to Spekman (1988). I Supplier relationship portfolio The focus so far has been on the relationship between one purchaser and one supplier. close ties are forged between buyer and seller and there is much interest and value in close cooperation and integration. reliable . advanced production processes. Over long periods. secure. but can deliver significant economic benefits to both parties. 1993). for example.6 shows. It is difficult for an outsider to break into such well-developed and managed relationships.PROM_C04. In other words. neatly summarising the reasons that collaboration rather than confrontation should be considered in critical supply situations. reliability or intentions. by insisting on short-term contracts and using multiple sourcing. This purchaser will rarely need special products and services and certainly will rarely be prepared to pay for such things. trust can provide a key competitive difference. This is a legitimate approach in appropriate circumstances. based on need and value. the risks of becoming too ‘cosy’. and therefore the purchaser may encourage cooperation in improving both technical capability and quality. despite the temptations of competitors’ marketing wiles. Adversarial approach The purchasing organisation pressurises the supplier to minimise prices and. Social dimension There is a certain security and comfort in dealing with someone you know. while others will be developed as guaranteed. specification and quality. Some relationships can be very long lasting and resistant to change.QXD 29/3/06 9:36 am Page 180 180 PA R T 2 · C U S T O M E R S A N D M A R K E T S operating processes or services to suit a particular customer. a purchaser is likely to maintain a portfolio of suppliers and to develop different levels and intensity of relationship with each. The purchaser is unlikely to be interested in helping the supplier unless there is a direct cost saving to be had. To Bistritz et al. where there are plenty of alternative sources of supply. Similarly. the purchaser will not want to start the process from scratch with a new supplier. the product is fairly standard and price really is the driving criterion. operate a JIT system. knowledge and friendship to build on. Collaborative approaches are particularly crucial in JIT environments. as well as the inherent dangers of mutual dependency. There is an existing level of trust. and special inventory. Although trust can create vulnerability. Collaborative approach In a collaborative approach. keeps the supplier alert and sweating. or to delegate component building to one supplier. (1998). Trust has been defined as ‘a willingness to rely on an exchange partner in whom one has confidence’ (Moorman et al. it can still be a very powerful bond: if you believe that the other party will not let you down on expertise. the nature of the buyer–seller allocation of roles and responsibilities can change. high degrees of personal and organisational trust can develop. however. complacent and blinkered. all require a lot of trust. then either party may become dependent on the other. as Table 4. there are two polarised approaches that lead to very different relationships. In reality. then the supplier will want the relationship to be sustained so that returns on that investment can be realised. I Approaches to supplier handling The way in which the purchasing organisation decides to deal with its suppliers can have a fundamental effect on the future of the buyer–seller relationship. Such an approach can support valuable work in product design. the purchaser cannot easily get the same thing from an alternative supplier and the supplier cannot easily find an alternative customer. There are.
Most relationships remain in this stage. but as with any kind of relationship. There is high mutual trust and respect. Others.QXD 29/3/06 9:36 am Page 181 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 181 Table 4. a trade exhibition or any other means of making an initial contact. It is about gaining experience.PROM_C04. changes its nature over time and is unlikely to last indefinitely. valuing the benefits. sources of supply. (1987) suggested that buyer–seller relationships evolve over a number of stages over time as both parties gain experience and learn to trust each other. There is a rising level of commitment and the partners may even be making special adaptations to suit each other better. This could mean small trial orders and perhaps even some pre-order assessment. It is the job of purchasing to advise on an appropriate portfolio. This evolution can be broken down into five stages of the relationship lifecycle. Dwyer et al. The uncertainty is much reduced. Kelley School of Business. planned communication • Integrated operations • Quality and time scales ‘designed in’ • Emphasis on lowest overall cost Source: Adapted from Spekman (1988). mutual investment • Partnerships • Frequent. The stages are: Awareness Awareness occurs as each party learns of each other’s existence and potential. the novelty has worn off. will merit no special consideration. Slater (1997) has argued that maintaining relationships is becoming increasingly difficult in complex and turbulent marketing environments. Commitment In the commitment stage. Baxter and Simon (1993) similarly believe that dynamic environments mean that there have to be more frequent revisions of the nature of the dealings between the parties. Partners are working together. I Relationship lifecycle Much emphasis has been put on the potential durability of a buyer–seller relationship. Exploration Exploration is about discovery and has all the insecurities of adolescent relationships. stable nest round themselves. and the seller has become a major supplier of special products and services. and members of staff from the two organisations may be starting to build sound working and social relationships. however. copyright © 1988 by The Trustees at Indiana University. Expansion Expansion has the characteristics of romance and the early days of marriage. Both of these will deserve a collaborative approach to handling. perhaps to the point where there is a high level of mutual dependency. . and will be retained at arm’s length somewhere nearer the adversarial end of the handling spectrum. but a few move on to the next stage. for example where there are plenty of alternative sources readily available.6 Collaborative vs adversarial approaches to supplier handling Adversarial • Multiple suppliers • Regular price quotes • Adversarial negotiations • Sporadic communication • Little cooperation • Quality and time scales to meet lowest threshold • Emphasis on lowest unit price Collaborative • Few suppliers • Long-term relationship. building orders and mutual trust. but the partners are comfortable with each other and have built a predictable. This could come about as a result of a sales visit. it is dynamic. testing each other out with no real commitment and with high uncertainty over the outcomes. well-developed personal networks.
1987) supported by partner-specific adaptations. Within the overall buyer–seller relationship. for example. Jeyes was able to focus on its core business. and Jeyes. but acted responsibly by phasing the supplier out over time rather than all at once. freed of the responsibility of churning out plastic bottles. Jeyes needed 200 different types of plastic bottle in a variety of sizes from 250 ml to 5 litre. found that its major customer was going to phase out its purchases from that supplier over the next two years. If stability and satisfaction have been reached in the maturity stage. LMG had a long-term sevenyear supply contract with flexibility to allow for changing raw material prices. . establishing and building successful customer relationships is not just a job for marketing and sales specialists but may also involve other staff such as customer service. Lack of innovation or service responsiveness on the seller’s part. The customer had decided to make the components itself.PROM_C04. to give up something of value to show you want to keep the relationship going. for example. Jeyes switched from in-house production to buying in from LMG. At least it now had two years to find alternative customers or to reorganise the business. The risks of thus extending the supply chain were reduced when LMG located its factory next door to Jeyes’. Withdrawal. yet retaining security and flexibility of supply. eg Sometimes the dissolution can be carried out with respect and dignity. Contending. delivery reliability. identified a range of behaviours that could be adopted to produce a desired outcome. Walter and Gemünden (2000) proposed that relationship promoters in both the . . Good and Evans (2001) in an examination of the difficult periods in a relationship. more versatile supplier with a good marketing-orientated approach (‘I can tell your current supplier doesn’t understand you any more. Instant termination of the contract would have had a devastating effect on the supplier. which depended on this customer for 60 per cent of its business. could encourage the purchaser to turn to a younger. depending upon whether the parties wanted the relationship to be retained or dissolved. 1995.. The neatness of the stages should not suggest that relationships just happen or are bound to develop in a certain way. A small supplier of engineering components. and maintaining quality standards. The overall relationship usually evolves incrementally (Dwyer et al. social and structural bonding and other benefits. giving it a secure foundation for building a wider customer base. Problem solving. All these activities have to be coordinated within a broader range of other relationship management activities to enable the relationship to grow (Gemünden and Ritter. Seventeen machines were needed to produce the required volume of containers. Dissolution This stage is possibly the equivalent to disillusionment and divorce. 2001).’). Let me show you my blueprints . with a conveyor belt running between the two for continuous production and supply.QXD 29/3/06 9:36 am Page 182 182 PA R T 2 · C U S T O M E R S A N D M A R K E T S eg A good example of the benefits of collaboration is seen in the relationship between the Lawson Mardon Group (LMG). engineering or R&D personnel. a plastic blow moulder. a complex bundle of individual relationships can flourish to achieve a wide range of necessary tasks (Möller and Wilson. Narus and Anderson. These include: I I I I Concession making. cooperative behaviour. to force the other party to yield if one partner believes they are in a dominant position. Both parties benefited from this arrangement. to allow the relationship to deteriorate towards termination. 1997). a consumer cleaning goods manufacturer. Dissolution is a strategic decision and managers should consider carefully its impact and how best to handle it (Giller and Matear. then the most likely source of danger is complacency. As mentioned in Chapter 1. 1995). to work together to find a new way of operating in a win-win framework.
coordinated and develops for mutual benefit from an economic and social perspective. the complexity of the buying process and the risks inherent in it. social needs. organisations have to decide which relationships to initiate. Increasingly. However. engineering. The membership of the buying centre. I B2B marketing is about exchanges between organisations. their underlying determinants and the specific factors that trigger change. Other less significant relationships can. Organisations also have to recognise that relationships develop over time and pass through a number of developmental stages. etc. patterns of evolution do emerge and the key decision points that shape the relationship become apparent.PROM_C04. accounting. security. until dissolution. perhaps through complacency. or one party’s neglect of the other. joint and inelastic). it is clear that when the relationship between two parties is examined in depth. B2B markets have a number of distinct characteristics. the structure of demand (concentrated in size and in geography). less frequently placed orders for products that are more likely to be customised than in consumer markets. develop. supplier selection. therefore. This allows satisfaction. will be involved in the process and form a buying centre. production and R&D. and plan their marketing activities accordingly. leading to mutual cooperation and the full exploitation of synergy between the two organisations. I I I I Key words and phrases B2B marketing Buying centre Decision-making unit (DMU) Derived demand Joint demand Modified re-buy Multiple sourcing New task purchasing Product specification Purchasing policy Relationship lifecycle Routine re-buy Single sourcing . be kept deliberately superficial. whether they are commercial enterprises. however. Relationships can be durable and resistant to change. but is likely to be formalised. service.). measurable economic criteria (price. specification. product specification. Chapter summary The focus of this chapter has been B2B buying behaviour and buyer–seller relationships. personality) emanating from the individuals involved. Staff with various functional backgrounds. marketing. such as purchasing.QXD 29/3/06 9:36 am Page 183 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 183 supplier’s and buyer’s organisations have a significant impact on the extent to which the relationship is focused. and/or continue to invest in. The purchasing organisation has to develop a portfolio of different relationships of varying closeness and depth to suit the whole spectrum of its needs. B2B buying is likely to involve higher value. to take longer and to involve more people. including the nature of demand (derived. the roles played and who takes the lead may vary from transaction to transaction or even from stage to stage within a single process. The decision-making process is affected not only by rational. The ongoing buyer–seller relationship is increasingly being recognised as a major influencer of B2B marketing strategies. but also by non-economic influences (prestige. trust and commitment to grow and strengthen the durability of the relationship against external challenges. The stages in the decision-making process include precipitation. Much remains to be explored in the evolution of buyer–seller relationships. The decision-making process that B2B purchasers go through has elements in common with consumer decision-making. Little is really known about the stages. government bodies or institutions. and commitment to a long-term relationship. quality.
4 How might people in different functional roles (for example R&D or marketing) participate in B2B buying? 4.PROM_C04.000 megawatts each year at a cost annually of €18. According to Geoff Ball.000 people in over 70 countries. close buyer–seller relationships? case study 4.2 How are supplier-handling strategies changing as organisations seek to improve their competitiveness? 4. He should know.75bn.4 You are the purchasing manager of a large organisation with an enormous annual spend. In the energy field. and to what extent would they influence your decision-making: (a) A bottle of whisky at Christmas? (b) An invitation to lunch to discuss your requirements? (c) An offer of the free use of the supplier’s managing director’s Spanish villa for two weeks? (d) £1. With 60 new power stations in various stages of construction that means an awful lot of potential business for Alstom to target. President of Alstom China. a position achieved by carefully building a reputation through effective B2B relationships with key decision makers. to be successful in doing business in China one must ‘be patient.1 From the supplier’s point of view. be local and be prepared to wait five years before gaining a reasonable return on investment’.1 Alstom China Alstom is a France-based global organisation with sales of over €22bn. manufacture and commission power generation infrastructure to customers’ specifications. What would your attitude be to the following offers from potential suppliers. Questions for discussion 4. systems and services to design.5 Define the main economic and non-economic influences on B2B decision-making. It is able to combine components. It is already involved in 17 . it is perhaps not surprising that the Chinese authorities have taken a keen interest in accessing Alstom technology.500? 4. and how is each characterised? What difference might the stages make to the seller’s marketing approaches? 4.2 What are the main differences between B2B and consumer buying behaviour? 4. With that kind of expertise. Most of your contracts are awarded by tender.5 What do you think are the advantages and disadvantages of long-term. founded on state-ofthe-art research and development and considerable project experience.3 What are the stages in the buyer–seller relationship lifecycle. employing over 140. often on a turnkey (ready to run) basis. as Alstom is now a major supplier of energy and transport infrastructure to China.QXD 29/3/06 9:36 am Page 184 184 PA R T 2 · C U S T O M E R S A N D M A R K E T S Questions for review 4.3 What factors influence the complexity and the amount of time spent on each stage of the organisational decision-making process? 4.1 What are the different categories of B2B customer and how do they differ from each other? 4. how might the marketing approaches aimed at a customer making a new task purchase differ from those aimed at a routine re-buy customer? 4. it has around 20 per cent of the world’s installed power generation capacity – that’s 650 gigawatts. The rapid industrial development of China in recent years has been well documented and this is the main driver for the plan to increase the output of electricity generation to 290 gigawatts at a rate of 15.
gas. It has tough competition from Siemens.com Feasibility study The state-owned Electrical Design Institute is one of the pivotal organisations that can influence outcomes. This stage can take between six months and one year and the output is a report to the State Development and Planning Committee (SPDC). It could take anything up to two years before projects are started and a further two to three years before they are finally commissioned. etc. attracting financial . for example. the Shanghai Waigaoqiao phase three power plant which provides high steam conditions but reduces the heat and emission rate by 10 per cent. Although the systems and solutions offered may be different. The rapid development of China’s industrial infrastructure is a good opportunity for Alstom to further develop its long-term business interests there. Project initiation Each provincial government is responsible for ensuring the economic development of its region within the framework of the state economic and political policy. Late in 2004. performance output is often very similar. as every project is very high profile across the nation. Alstom is not alone in targeting the market. but even the more advanced eastern provinces need to invest in new capacity to support growth and to upgrade or replace coal-fired stations because of tightening pollution controls. The size of individual orders can be very large. In total. therefore. Alstom signed two separate contracts worth €56m for hydro power projects on the Yuan river in Hunan province and on the Lancang River in Yunnan province in South-west China. hopefully. the various influencers and deciders need to be identified and a communications strategy developed to move from project conception to the final bid acceptance. although their role in the buying process is not that great. Energy power planning is a critical part of the industrial infrastructure and with such a dynamic economy. GE and Mitsubishi. it is becoming increasingly difficult to differentiate between the global players on quality. Its role is to examine the expected demand for power proposed by the provincial governments. coal. Issues such as foreign exchange considerations. the largest of its kind in the world. Lead times tend to be a minimum of three years and. along with smaller niche manufacturers. For more advanced projects. Source: Alstom http://www. For effective B2G (business to government) marketing. these plans need to be at least five years ahead. including the Three Gorges hydroelectric power plant. as well as an increasing number of local Chinese companies which are often in alliance with the global players. In reality. to establish specifications.alstom. The industrialisation of the western provinces of China and Tibet is currently a major priority for increasing power generation capability. It is important for Alstom to keep a close watch on market developments in China to spot opportunities early. and to gain formal approval for the project from the state. Within the Institute are the technical specialists capable of advising on various alternative solutions and their cost profiles. Maintaining good relations with the technical specialists in the Design Institute is. favoured. efficiency.QXD 29/3/06 9:36 am Page 185 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 185 projects. It also decides the type of power generation required. Alstom had an order intake of €600m from the power generation sector in 2004. however. and finally the Daya Bay nuclear power plant. performance and even bid prices. the technical staff of the Institute may initiate discussions about state-of-the-art alternatives. Alstom thus has to perform to high standards. Geoff Ball outlined the following broad stages in the buying process that his business development staff must be able to influence if they are to succeed. all global players. indicating the importance of the market in China as well as its importance to Alstom’s global organisation. hydro. Most power generation purchases are made by the eventual users. Potential suppliers have to be especially active at this stage as it is the major opportunity to influence specifications in directions that will favour your own organisation. critical in ensuring that the technical solutions offered are well understood and. any slip-up soon becomes well known among other potential buyers.PROM_C04. Project decision The SDPC in Beijing is the formal body that considers economic and political factors before making a decision to proceed. the provincial governments.
Once formal bidding is initiated the specifications tend to be rigid. the percentage of localised production or the technical requirements are not met. The meetings often . Even when a price has been tendered. Sometimes the final decision can be ‘political’ to ensure that each of the main global competitors retains a continued interest in bidding. involve all the parties involved with the project. for example on the Lanzhou power generation project it was 40 per cent for phase one and 60 per cent for phase two. and the fortunes of US companies seeking business in China tends to fluctuate with the freeze–thaw in international relations.QXD 29/3/06 9:36 am Page 186 186 PA R T 2 · C U S T O M E R S A N D M A R K E T S support from the UN or World Bank. serious technology transfer has to be built into the project along with appropriate management development strategies. it is the degree of localisation that is the key factor after technical and cost criteria have been met. however: unless the overseas supplier remains ahead in R&D. However. having eliminated many initial bidders. Contracts for coal-fired power stations up to 6 gigawatts now tend to be awarded only to local companies. meeting with a large number of experts from the buying committee. local and international. If a supplier cannot meet the requirements at this stage it means disqualification. This can be a long process with extensive discussions involving specialists from both sides. so the work will be shared around to some Clarification meetings with potential suppliers After the pre-quotes have been submitted the first ‘formal’ meeting is held with potential suppliers. Global suppliers are primarily used to supply cutting-edge technologies at a time when China does not have the expertise. formal proposal evaluation takes place to reduce the number of bidders down to two or three. Normally. pre-quotes are requested as an initial expression of interest. there is little point in a prospective supplier spending further time on the project. local companies will eventually be substituted. The suppliers know who they are up against and must prepare a winning bid based on the specification and any intelligence as to what the others will be offering. This enables those with a dubious record or an uncompetitive proposal to be weeded out early on. for example. Some high-level lobbying is possible at this stage. so a localisation policy such as that operated by Alstom whereby alliances are formed with Chinese companies can be a sensible way of maintaining an involvement in long-term market development. it is not unusual for two or three further attempts to be made to reduce it still further. Normally a two. although access to all the decision makers can be difficult. whether to seek local or global bids or the political issues associated with dealing with certain countries are all considered. The SPDC has the power to overrule any recommendation from the Design Institute. Draft contracts prepared As part of the tendering stage. draft contracts are often issued so that all the clauses can be considered and discussed before a final selection is made. The trend is clear to see. Bid evaluation and decision The committee’s final evaluation and decision often revolves around the final contract negotiation. if the SPDC approves the specifications the formal bidding process can begin subject to any policy restrictions. More subtle PR and indirect communications strategies may be needed. A committee of between eight and ten experts shortlists bids on the basis of: I I I I I I Specification fit Price and cost factors Warranty offered Performance guarantees Reliability record Localised supply proposals. allowing more time to be spent with the preferred bidders. Bidding specification approved At this stage. Preliminary evaluation of proposals At this stage. This enables questions to be asked and clarification to be sought before initial evaluation. Typically it may mean between ten and fifteen people on each side around the negotiation table. If.or three-month timescale is allowed. the Design Institute’s technical proposals are accepted by the SPDC although some reshaping may be required. but are conducted the night before on an informal basis. The localisation of supply contracts can be an important feature at this stage. Usually at this stage.PROM_C04. for example. In addition. China tends to use its international ordering as an extension of its international relations policy but any period of ‘failed bids’ tends to pass quickly if the supplier concerned is commercially reliable. In the experience of Alstom. as often the other technical factors have been used to pre-qualify bids. then invites named suppliers to prepare a detailed tender and to enter into formal negotiations. French companies. these negotiations rarely take place in formal sessions. went through a difficult period for a few months after Thomson supplied satellite technology to Taiwan. Formal tender invitations The committee.
Lobbying can take place at the most senior level under the guise of invitations and gestures. Siemens and Alstom. By the end of 2005 only Bombardier’s Derby plant represented significant UK manufacturing capacity because it had future large orders worth £3. and why? 3 What are the biggest risks facing the SPDC and what could Alstom do to minimise those risks? 4 How much of a role should ‘international politics’ play in B2G marketing? case study 4. as it now has one of the youngest train fleets in Europe. such a high level of contact reduces the personal risks for lower-order decision-makers in selecting the company. completely renewed its fleets for the West Coast and Cross Country lines. They operate in a sector dominated by a small number of global players who are dependent upon the level of refurbishment and new orders from either state railway companies or. Alstom corporate literature. launched in 1976 are still going strong in 2006! This poses a challenge to manufacturers in deciding how much capacity they should retain. franchised and regional operators. to replace rolling stock. In a risk-avoidance environment. as the new train operating franchisees placed large orders to modernise their fleets. is to position the company to make most of the opportunity by demonstrating that the best technical and economic solution lies with them. Either at this stage. They are normally signed with the maximum publicity. Given that build cycles vary around the world. http://www.4bn to refurbish 1738 cars for London Underground. or earlier in the process. to ensure that the wider decision-making units are contacted and that all the resources of the company are marshalled to prepare and win the bids. The lifecycle of rolling stock means that replacement will not be necessary for another ten years or more. The industry is characterised by feast and famine. Some care is taken. a delegation is formed to visit Alstom in France if it is bidding. suppliers like Alstom have to consider when to lobby and when to enter into normal sales and technical discussions. During the whole process. The challenge throughout the process. however. to ensure that such visits are not regarded as ‘jollies’ or free holidays.com. increasingly. Pierre Bilger with Chinese Premier Zhu Rongji. economic and political issues. Best and final offer accepted Only after all the negotiations are complete and the decision made and ratified by the SPDC are formal and final contracts issued. Virgin.QXD 29/3/06 9:36 am Page 187 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 187 extent. This means identifying projects early and getting in early to lobby for that position during the negotiation stage. 2005. the tenyear period from 1996 was regarded as a feast. As that order will not . marked the beginning of a famine period for the UK. This allows the possibility for decision makers to meet a wider range of staff and to look at installations in practice. In the UK. Class 125. Such highlevel contact by the Chairman and Geoff Ball’s more regular contact with senior officials helps to cultivate more positive attitudes and understanding towards Alstom. for example. for example. however. The meeting of Chairman and CEO of Alstom. given the size of the order and its political significance to both parties. Alstom decided to close its works near Southampton when it was running at 50 per cent of capacity and Bombardier closed its refurbishment works at Doncaster. President. produced a photograph for the corporate literature that ‘says a thousand words’. This is a far cry from the days in the 1920s when every private railway company had its own manufacturing facility. which could take up to two years. Alstom. in terms of safety. Questions 1 To what extent and how do the stages in the buying process presented in this case match the more generalised models presented in this chapter? 2 Which stage of the buying process do you think is easiest for Alstom to influence.PROM_C04. Sources: with grateful thanks to Geoff Ball.2 Supplying rolling stock The journey to work by train in Europe would not be the same without specialist builders such as Bombardier.alstom. The high-speed trains. manufacturers need to spot emerging opportunities early on and keep up-to-date information on the age of operators’ fleets and the pressures on them. China. but especially in the early and late stages.
while in famine it can be a struggle to retain capacity. although the aftersales maintenance and refurbishment work is very useful to the manufacturers for bridging the gaps between large new build orders. aiming to cut a typical supply base from between 10. Siemens. it was just pipped by Siemens. as manufacturers are increasingly taking responsibility for maintaining the vehicles they supply. It has been estimated that there has been a 30 per cent fall in prices over the last ten years as buyers have driven efficiency gains and made use of the level of competition and over-capacity in the industry. Companies scoring below 50 per cent face a bleak future unless they are in a strategic supply area in which choices are limited.PROM_C04. Siemens estimates that 70 per cent of its supplies by volume come from just 300 suppliers so there is scope for considerable rationalisation. Siemens went on to win contracts for West Yorkshire trains and a large order for South West Trains franchise. although it has been suggested that it lost money on the contract in order to gain a foothold in the UK.bombardier. This included cars for the Neihu line in Taiwan. a French company. expecting a price per vehicle of around £1m. and orders for high-speed trains in Spain. useful for raising a company’s market profile and eventually a toehold was achieved when Hitachi was selected as the preferred bidder for the high-speed commuter trains for the Channel Tunnel rail link. have proven to be more reliable and have focused on small incremental improvements rather than the design breakthroughs which can prove problematic (such as the tilting train). the German multinational. In the feast times.QXD 29/3/06 9:36 am Page 188 188 PA R T 2 · C U S T O M E R S A N D M A R K E T S Bombardier. Asian manufacturers such as Hitachi don’t compete just on price: Japanese trains have tended to perform better. Central to any marketing strategy is the ability to produce on cost. the Chinese company bid at £650. other customers can be attracted and the order book expanded. When the Northern franchise declared an interest in replacing its Pacer fleet. on time and within agreed reliability and performance levels. This places a premium on the efficiency and effectiveness of the builder’s supply chain. especially when cancelled or late services can invite financial penalties. the rate of replacement of stock in central Europe where EU membership is bringing funds for upgrading. The whole sector is under pressure from the penultimate customer. CSR Ziyang. the company decided to switch some interim work to Derby from elsewhere to offset the 55 per cent capacity usage. The remaining suppliers will be required to work even closer with Siemens during the specification and contract negotiation with . From this early prototype. the rolling stock buyers. having insufficient capacity can be an issue. also deliberately used price to try to enter the UK market. Asian firms. The only other option for a plant.com come into full swing until 2008. Siemens is now one of the top two suppliers in the UK.000 suppliers down to around half that number. The intention is to build a pre-production unit as soon as an order is placed (lead times can often be several years ahead) so that full testing and performance reviews can be undertaken. Again the technology is tried and tested and highly dependable with no technological leap. Reliability and performance are vital to a train operator. It aggressively pitched for the Heathrow Express Class 332 contract and won the order. Such bidding is. Cultivating a smaller number of strategic supply relationships creates opportunities for closer working and joint problem solving as well as transaction efficiencies.000. provides a good example of how national boundaries count for little in this market. There is little point in saving money today only to have to spend more three years down the line. provided the rolling stock for the Docklands Light Railway. The manufacturers are undertaking a supplier rationalisation programme. Although it became the preferred bidder. Furthermore. the eventual order was delayed due to a change of franchise arrangements. Source: Bombardier http://www. the Chinese builder. the lifecycle cost of components must also be considered. such as Hitachi from Japan. Bombardier has been undergoing a pan-European rationalisation programme. Manufacturing locally is therefore becoming less and less important to the industry. The manufacturers have to assess a range of markets to determine where the best opportunities lie and their own capacity to respond. From that base. but the rate of change will be determined by factors such as whether the German Deutsche Bahn would start placing orders again. is to use the slack time to engage in refurbishment and heavy repairs. however. All suppliers are being ranked on a points system that covers delivery performance and quality consistency as well as unit cost.000 and 12. and although Hitachi priced its bid for the West Coast regional trains competitively. are now taking a keen interest. if it is not manufacturing.
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internal and external. are likely to influence their choice of MTV.page282 31/3/06 13:32 Page 1 282 PA R T 2 · C U S T O M E R S A N D M A R K E T S part 2 video review case questions 1 Why do you think MTV felt that it was necessary and worthwhile to develop 38 locally programmed MTV channels? What are the risks of this? Is MTV right to divide Europe into separate regions or could be treated as a single pan-European market? 2 What is the viewer actually ‘buying’ when they tune into MTV? What factors. and their attitude towards it? video c a s 3 What segmentation variables are reflected in the two audience profiles presented in the case? What other variables could usefully be incorporated into these profiles? e 4 Why should MTV invest in market research? For what purposes could MTV use (a) focus groups and (b) questionnaire-based surveys? .
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