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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
utilities. each of which represents a lot of buying power. Overall.2.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. goods handling equipment. clothes hangers and racks. design equipment. There are. Figure 4.g.g. management consultancy Suppliers of other equipment and suppliers e. which shows in detail the wide range of goods and services essential to a clothing manufacturer. linings.2 A clothing manufacturer and its suppliers Suppliers of raw materials and components e. only one kind of B2B buying situation has been considered in detail. fabrics. stationery . All these goods and services represent relationships that have to be established. however. and institutions. trimmings Suppliers of labour e. All these issues will be addressed later in this chapter. for example whether to source from one supplier only (single sourcing) or from several suppliers (multiple sourcing).g. decisions have to be made about how the purchasing process should operate (who is authorised to do what and with what safeguards). there are three main classes: commercial enterprises. In addition. maintained and sustained. sewing machines. A final reminder of the volume and variety of B2B buyer–seller relationships is provided in Figure 4. goods distribution.g.g. Policy decisions have to be made about purchasing. B2B customers So far. packaging equipment and materials. other kinds of organisation that have different philosophies and approaches to purchasing. educational establishments. pressing machinery CLOTHING MANUFACTURER Suppliers of services e. or whether to manufacture rather than outsource. job agencies Suppliers of manufacturing equipment e. cutting equipment. government bodies.PROM_C04. that of a profitmaking organisation involved in transactions with other similarly orientated concerns. office equipment. maintenance and repair. and relationships managed over time to minimise the potential problems or to diagnose them early enough for action to be taken.
cleaners. 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. 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. Re-sellers Re-sellers purchase goods for re-sale. from airline tickets to motorways. suppliers. I Government bodies Government bodies are very large. others are much more mundane and routine. the value added stems largely from service elements. paint. Take. expensive and high profile. and although this was lower than the 2003 overspend of £3.1bn. The National Audit Office (NAO) also assesses the purchasing performance of the Ministry of Defence.1 fall into this category. office equipment and management consultancy services. All the members of the flow shown in Figure 4. A full outline of the role and function of re-sellers can be found in Part five of this book. Users Users purchase goods and services to facilitate their own production. although the item purchased does not enter directly into the finished product. eg Like the NHS example considered earlier. OEMs’ purchasing is very closely linked with forecast demand for their end products. which can be further divided into a number of subgroups. caterers and travel agents thus supply services that are an indirect means to an end rather than a direct influence on production. The NAO reported that the 2004 overspend was £1. The range of purchasing is wide. This group of B2B buyers includes both local and national government. and involve very little public concern. The Head of the NAO summed it up: ‘There must be greater . Some of these components will be recognisable even after the OEM has finished with them.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. Large chemical and steel process manufacturing plants may source a wide range of services from a myriad of local. Original equipment manufacturers Original equipment manufacturers (OEMs) incorporate their purchases into their own product. as is often seen in defence procurement. In the UK. such as the paint. as well as European Commission purchasing.PROM_C04. for example. usually making no physical changes to them. 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. there was still room for improvement. 2004). and often small. Purchasing power of this magnitude makes government contracts highly attractive despite the complex procedures that need to be followed. from office supplies to public buildings. for instance a tyre is a recognisable element of a car and is usually strongly branded by the original supplier. as the car manufacturer does with the electrics. whereas others. for example. therefore. This group is the closest to the end consumer of the product and should. tracking weapon systems. Although some vetting and inspection may take place before these suppliers are allowed on to the list of approved suppliers. Plumbers. from refuse collection to management consultancy. are incorporated anonymously. equivalent to about 16 per cent of European GDP (Wood. Although some purchases may be very large. and needs good buyer–seller coordination as it has to be tied in with production schedules. involving international suppliers. As mentioned above when discussing the car dealership. etc. from army bootlaces to battleships. tyres. important purchasers of goods and services. be able to feed valuable information back up the chain on what the end market really wants. defence procurement is a high-profile activity and any significant delay or overspend soon attracts media attention.7bn. Examples of this are CAD/CAM systems. fabrics. plastics.
179 et seq. Because of the traditional bureaucracy and public accountability surrounding government sector purchasing. There are ways of getting around the law without actually breaching it. The contact and reputation building necessary for next year’s bids needs to be done this year. there are specialised purchasing procedures that are often more explicit and formal than those found in many commercial organisations. and for works €3. 2004). Other industries too have raised similar concerns about protectionism. some capabilities may have to be foregone or delayed to compensate…’ (as reported by Spiegel. More recently. Some jobs are only open to tender from organisations already on an approved list. the Germans from Germany and the British from anywhere’. i. and the Nimrod patrol aircraft slipped six months behind schedule and overspent by £408m (Spiegel. of course).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 . or the price specifications can be set so that only a state-subsidised .e. . from across all EU states access to information and opportunities to bid for business. Given the value of the public procurement market. If not. governments favouring their domestic suppliers. in general for supplies and services the threshold (as set at 1 January 2004) is €154. Such procedures might be classified under the following headings. chief executive of Siemens. therefore was commissioned by the UK government to investigate this issue. Alan Wood. Specifications within a contract can be designed to suit a specific national supplier. 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. These issues of buyer–seller relationships are expanded further at p. 2004). The laudable purpose of this is not only to try to get the best prices. . 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. 2004).834. while others are open to anyone. Assessment of tenders The submitted tenders are assessed and the winning one is chosen. in his view. The development of precise specifications for the good or service For more innovative and large-scale projects. Overruns were also experienced on the Joint Stiker Aircraft. but also to allow companies.411. Although the thresholds vary depending on the kind of govermental body that is making the purchase. His report suggested that there is indeed little competition between nations for public procurement contracts. Public procurement contracts over a certain value have to be put out to open tender and advertised in the Official Journal of the EU. the managing director of a radio communications equipment manufacturer told us that. Some years ago. 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. although all the signs suggest that largely they haven’t worked. 162 and pp. large and small. 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. it is not surprising that the EU has issued a number of directives designed to make tendering and bidding processes fairer and more transparent.gov. It is often too late to establish contact once formal bidding has begun. and there must be greater control of costs. These directives are also designed to try to reduce national protectionism. there were extended delays on the delivery of the Type 45 destroyer being assembled by BAe in Glasgow. The minimum number of potential suppliers bidding should be five (http://www.uk). Tendering for the right to supply Organisations are requested to bid or tender for the right to supply. the development of specifications may be done in conjunction with specialist consultants and the potential suppliers’ development personnel.014.ogc. ‘the French still want to buy from France.PROM_C04. reports from within the UK rail industry have suggested that between 2000 and 2003.
2004). although the bulk of purchases may come from just a few of them. It is also common practice to break a contract down into a number of smaller. A typical university may deal with over 5000 suppliers. churches and independent schools. perhaps part financed by government.int) shows that all of them require documentation and tenders to be submitted in the home language of the purchasing authority. individual contracts. for example.e. quality and quantity of paper and printing processes demanded. the increase in demand for high-quality. but in purchasing terms they are autonomous. then demand for the component parts of it will also dry up. none of which are valuable enough to fall under the procurement rules. for example. for instance. A university. I Nature of demand Derived demand All demand in B2B markets is derived demand – derived from some kind of consumer demand.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. If. and thus only about 16 per cent of public procurement ever gets as far as being advertised in the Official Journal of the EU. 2004. yet these have implications both up and down the chain. . washing machine manufacturers demand electric motors from an engineering factory. Webster. or in bulk to equip an entire office. however. The numbers of electric motors demanded. At each stage in the process. As the EU public procurement market is worth about €1500bn per year. depend on predictions of future consumer demand for washing machines. there is a recession and consumers stop buying the end product. but with a greater degree of flexibility of choice. 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. can be bought as a one-off by an individual for private use. I Institutions This group includes (largely) non-profit making organisations such as universities. may be subject to tendering and closed bidding (i. These institutions may have an element of government funding. 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. there are different influences on the activities and behaviour of the organisations. the use of the marketing mix and the interaction between buyer and seller. The basic product is identical in specification but the ways in which it is bought and sold will differ. Language barriers can also be a problem. that is. In northern Europe. as has happened. between 30 and 40 per cent of the population read newspapers. and that is a B2B market. there is perhaps still a lot of valuable business that is not being awarded as transparently as it might be (Warner. full colour special interest publications (for instance CD review magazines) affects the type.eu. a potential supplier makes a bid without knowing what price anyone else has quoted). A quick scan of some of the notices in the Official Journal of the EU (http://www. 2004. The following subsections look at some of the characteristics of B2B markets that generate these different approaches. for example. for example. Many other supplies are purchased with varying degrees of efficiency and formality from a range of different suppliers.ted.publications. The same model of personal computer. Wood. such as a new lecture theatre.3 represents the links in the chain stretching from forestry to reading material. So. Large capital projects. Similarly. They are likely to follow some of the same procedures as government bodies.PROM_C04. Figure 4. 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.
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.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. composition and surface treatment of paper Paper manufacturing • New technological processes: colour. for example. its close relationship to suppliers makes life a lot easier. It can do this because there is a high degree of vertical integration within the design and production process. 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. management Wood fibre/ Pulp processing • Level of import penetration • Cyclical demand with investment cycle • Mergers. and with sales of €5bn in 2004. subsidies. 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. the more remote it is from the end consumer and the further ahead it has to look in order to predict demand.4 presents a very traditional view of the fashion industry. eg M Figure 4.3 Influences on a B2B purchasing chain Forestry • Environmental policy. In the fashion industry. Fabric can be held in stock and then cut and dyed at the last minute to suit a fresh design. weight.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.PROM_C04. organisations such as ICI and DuPont that produce dyes and fibres have to be two years ahead of the market.000 new products per year (competing companies such as H&M and Gap produce up to 4000 products per year). Zara has started to outsource . polywrapping • Demand for coated paper Press/ Publishers • Growth of desktop publishing • Demand for advertising expenditure • Increased quality expectations • Interest segmentation (UK has over 3.4 shows how those two years are used up in the product development process. 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. international competition • New technology for grades. For a company producing some 11.
The final range is then sold to the Autumn 2007 Clothing retailer Spring 2008 who then offers the final product to the Consumer . 2005. and stock-outs in stores are filled with a new product rather than more of the same. Amancio Ortega. but it is questionable just how far this can be done while maintaining the flexibility and responsiveness. less high-fashion garments to low-cost producing countries. Zara and its customers are happy to operate on a ‘when it’s gone.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. Figure 4. such as China. They then sell to the Textile mills Autumn 2006 who produce fabrics. designers also gain inspiration from the catwalk fashion shows. 2005) and that certainly seems to be at the core of Zara’s operations. it’s gone’ philosophy. 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 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. 2003. produce samples. so that designs are produced in small batches. As well as this bottom-up approach.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. The founder of Zara. They then sell on to the Clothing manufacturer Spring/Summer 2007 who. then refine the range. and keeps customers coming back to the stores regularly with a strong sense of excitement and anticipation to see what’s new. 2005). This gives designs a scarcity value that customers are prepared to pay for.PROM_C04. Saini. The Economist. making decisions on textures/prints. through market research. design the range. has to define the ‘story’ and the ‘look’ for the spring 2008 season. 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.
however. 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. offer it as either standard or optional on some of their models. and both Goodyear and Michelin work closely with the car manufacturers.PROM_C04. and they’re great for car manufacturers as the need to include a spare tyre takes up space and adds to costs.goodyear. However useful the tyre.QXD 29/3/06 9:36 am Page 155 155 marketing in action It’s dark. wants to make flat tyres a thing of the past but the problem it faces is convincing car manufacturers.goodyear. small disc brakes and electric motor in the rim to assist tracking and braking.michelin. http://www. the new tyres are great for drivers. The airless tyre is being developed to last as long as the vehicle. For example. http://eu. The Active Wheel project is also being developed by Michelin. albeit functional. demand for casings for computers is linked with the availability of disk drives. not just one. it has only been adopted on some car models such as the Audi and the Rolls Royce Phaeton as standard. and a number of them. is that it is not just a case of fitting new tyres. Mound (2002). This is a conventional tyre with active electric suspension. it’s raining. even if totally deflated. 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. On the face of it. Like Michelin.uk. Land Rover. 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. Goodyear has launched a similar tyre. in summer 2005.com (among others). One of its designs. the Pax system. Stewart (2005). it is often closely linked with demand for other B2B products. Mercedes and Mini Goodyear RunOnFlat tyres are constructed with special reinforced sidewall inserts that use new compound technology. however. with the Pax system can travel at 55 mph on a fully deflated tyre. for example. as they spell an end to those miserable episodes of roadside tyre changing. . Audi found that the Pax wheel retained agility and passenger comfort. Joint demand It is also important to note that B2B is often joint demand. Goodyear has been working hard to get the new tyre system adopted by car manufacturers. Ferrari. 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. Nissan was soon expected to follow. the French multinational tyre maker. The problem for manufacturers. Michelin has developed a tyre that can still be run while deflated. So the Audi 8. Although launched in the late 1990s. it was fitted as standard on the BMW 3-series. 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. Technology continues to move on. The increased stiffness means the tyre can bear the weight of the whole vehicle. which is bad news for the tyre retailers. If there are problems or delays with the supply of disk drives. That is. From spring 2005. Michelin and Goodyear cannot just sell it straight to tyre retailers. flat tyre. 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. especially if the spare tyre is also flat! Michelin. not just the high performance expensive models.co.V. as without the accompanying tyre pressure monitoring system there is the danger that drivers will have accidents with a less stable. thus enabling the driver to get home without changing the wheel. then the firm assembling the computer might have to stop buying casings temporarily. Source: © Goodyear Dunlop Tyres Europe B. http://eu. Michelin found it especially difficult to penetrate the Japanese car manufacturers and it wasn’t until 2004 that was it adopted by Honda. which uses RunOnFlat tyre technology and can be run for 80 km at 80 kph.com. Interestingly. and that interest and demand for these tyres is spread across drivers of all kinds of cars. Maserati. Talk about reinventing the wheel! Sources: Carty (2004). such as BMW.
A close example. will be very aware of each other and the strategies they will employ. Traditionally. available infrastructure or national and EU government incentives. since the manufacturer has obligations and orders to fulfil. quality and specifications). Geographic concentration Some industries have a strong geographic bias. in contrast. for example. Conversely. the outcomes are very public. 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. 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. expected retirement dates and the operational problems encountered are widely publicised so there are few secrets or hidden opportunities in the aircraft manufacturing industry. experience and trust can build up between buyers and suppliers. the boundaries of the market are fuzzy and malleable. A fall in the price of batteries is not going to have an impact on the quantity of cars demanded. is just one component of a car. heavy industry and large mass producers. and although negotiations may be private. means that there is a great deal of price sensitivity in the market. In this context. Whatever happens. Where there is a finite number of known customers. 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. mass markets. A small increase in price will lead to a relatively large decrease in demand. Think of the market for fast food. demand is inelastic. therefore. . Such geographic concentration might develop because of resource availability (both raw materials and labour). have acted as catalysts for the development of a range of allied suppliers. movement. It allows more focused targeting and. so that it is relatively easy to define who is or is not a potential customer. A car battery. Considerable knowledge. for example. they are diffuse. airports and seaports have given impetus to organisations concerned with freight storage. Airbus and Boeing.PROM_C04. inelastic demand means that an increase in price will make no difference to the quantity demanded. or the establishment of regional offices and/or distribution facilities. 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. however. differ in both respects. that is. is quite small and the age of the respective fleets.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. Elastic demand. most organisations in the trade know what the others are doing. 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. and the car manufacturer will demand neither more nor fewer batteries than before the price change. for instance. the coal and steel industries and the motor industry. is that demand for carpets can be linked with the level of buying and selling activity in the housing market. the dedication of specific members of staff to service that relationship. McDonald’s can persuade non-customers to try its product and become customers. such as shipbuilders. B2B markets. More recently. in that sense. The number of airlines worldwide with the need for wide-bodied jets. and indeed in any manufacturing situation where a large number of components are used. for example. demand will not change and in the short term cannot change. but the two things are not as inextricably tied as in the B2B situation above. in some cases. Inelastic demand Elasticity of demand refers to the extent to which the quantity of a product demanded changes when its price changes. Industrial concentration B2B markets tend to have a small number of easily identifiable customers. which McDonald’s has shown to have worldwide appeal to many millions of customers.
whether software specialists or marketing consultants! SKF sells bearings direct to larger OEMs across Europe. these are relatively low-risk. Often. especially in the automotive.e. These differences give rise to much more complexity in the buying process. The various dimensions of complexity are as follows. and the marketer must appreciate them when designing strategies for encouraging trial and reordering. There may be guidelines on favoured suppliers. at a rate well above that of many other German länder (Barber. Intel. With a well-educated population and the highest mobile and internet per capita use in the world. the local conditions have been favourable for more modern forms of concentration. In contrast. I Buying process complexity Consumers purchase primarily for themselves and their families. Ireland. A small. Source: SKF http://www. although there may be some economic and psychological influences affecting or constraining them. or rules on single/multiple sourcing or on the number of quotes required for comparison before a decision can be sanctioned. This . For the most part. Similarly in Germany. which implies certain differences from the consumer situation. Nokia and Siemens have set up competence and research centres in the area which in turn has spawned many smaller niche suppliers and producers. From a traditional manufacturing base.skf. the region now has thriving export businesses. B2B purchasing policy Certain systems and procedures for purchasing are likely to be imposed on the B2B buyer. the organisation). 2000). however. The net effect is a technically highly skilled workforce that favours innovation (Brown-Humes.com Concentration can. International companies such as IBM. as Chapter 3 has shown. lead to a high degree of mutual dependency. 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. The closure of a coach works in Shannon. just north of Stockholm.PROM_C04. B2B purchasers are always buying on behalf of other people (i. 2000). electrical and mechanical engineering sectors. highly specific customer base can leave a supplier very vulnerable if something goes wrong. 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. resulted in a number of small suppliers also going out of business because they could not find new markets for their skills quickly enough. This new form of geographic concentration provides obvious opportunities for a range of service providers.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. a purchasing manual is provided for all staff who may be involved in dealing with suppliers. Motorola. low-involvement decisions that are made quickly.
eg Philips is a global operator in the electronics market with factories all over the world.PROM_C04. the purchaser needs to be assured of the continuity and consistency of supply. logistics and price to gain mutual benefit. With a single source. Disadvantages • Increased costs through lack of competitive pressure • Increased supply vulnerability • Reduced market intelligence and thus flexibility • Improved supplier appraisal capacity . Table 4.2 outlines the advantages and disadvantages of alternative sourcing strategies. which in turn depends on the performance of suppliers. Philips and its suppliers develop technology. etc. as well as value for money. logistics.. Philips has three categories of supplier: 1 Supplier–partners: these are the most important suppliers and Philips builds intense. as their loss could seriously undermine Philips’ current business and future direction. and might list approved suppliers and the procedures to be undertaken for approving a new supplier. A supplier’s actual performance is measured against mutually agreed targets in terms of quality. Instead. Table 4. it is unlikely to get involved in helping the supplier to achieve it. These suppliers might well have essential knowledge and/or expertise that Philips could not otherwise access or develop for itself. costs and responsiveness (European Purchasing and Materials Management. This makes these suppliers extremely significant strategically. Philips cultivates supplier relationships based on trust and cooperation.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). solve problems. Philips cannot develop and maintain deep relationships with every one of its suppliers. learn from experience and try to avoid errors and misunderstandings. 2 Preferred suppliers: these suppliers are less important. but there is still good reason for Philips to work closely with them on issues such as quality. and together.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. Clearly. involved relationships with them. Philips also emphasises the importance of supplier re-evaluation as a basis for improving future performance. it assesses its suppliers to discover which are the most important in terms of their strategic significance to Philips’ business. 1993/94). 3 Commercial suppliers: these are the least important suppliers and although Philips will encourage better performance in terms of quality. An organisation’s decision whether to source from a single supplier or from multiple suppliers is another important aspect of purchasing policy. The company recognises that customer satisfaction depends on the quality of what happens on the production line.
3. 1990). competitive type of atmosphere. Ramsay and Wilson (1990). much would depend on the nature of the organisation. long-term relationships with suppliers. for a car manufacturer placing high volume. that other factors.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 . Clearly. might also influence the decision. Segal does concede. This would also reduce the buyer’s vulnerability to supply interruption from strikes or breakdowns. Segal (1989) found that the decision whether to adopt single or multiple sourcing was often the result of an overriding organisational attitude to suppliers. 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. and the types and methods of quotation required. or an arm’s-length.PROM_C04. however. in a study of sourcing strategy. Reprinted by kind permission of MCB University Press Ltd. (1986) and Ramsay and Wilson (1990). quality. They proposed that large. the order value categories would be completely inappropriate.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. 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. expertise. and the burden of responsibility for maintaining the necessary technology.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. The consequences. repetitive orders. 2000). then multiple sourcing could well be favoured.000 Above £20. market structure and location. highspending organisations might gain more by using competitive pressure to keep a number of suppliers on their toes. are a large base of suppliers. for what amount. 1997). however. such as product type. 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. If building a long-term partnership is not the goal of the buying firm. cost and delivery competencies rather than trusting them to suppliers (Render and Heizer. Table 4. very short-duration contracts. even in this matrix. powerful. This matrix provides clear guidelines on who should be involved. challenged the growing belief in Japanese models of long-term single sourcing. 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. arising from whether the buyer wanted close. However. and if the initial price is more important than longer-term cost efficiencies.3 Purchasing guidelines Estimated value of order Below £500 £500 – £2000 £2000 – £20.
for example the family unit. according to Hallén (1980). fair competition and the declaration of vested interests. the system will be severely impaired. In addition. 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. the number of suppliers has been cut from 14. to find individuals given absolute autonomy in organisational spending. It is rare. Mattson (1988) found that product related aspects of the purchase strongly influenced the area of the organisation involved in the purchase. but also address issues such as confidentiality. The auction lasted two hours compared with the five days it would have normally taken by traditional methods. Professional purchasing The risk and accountability aspects of B2B purchasing mean that it needs to be done professionally. A full discussion of the role and structure of groups (buying centres or decision-making units) can be found at pp. defining the terms of supply so that they are consistent and compatible with production requirements (for example performance specification.5 per cent. guidelines are often produced on ethical codes of practice. where close discussion and joint development may take place to develop designs and specifications that meet the requirements of the application. other than in the smallest organisations or for the most minor purchases. This contrasts with unit production.000 to 2000. 1981). It is thus critical for the suppliers in such a system to be able to meet the demands of the customer’s technology.PROM_C04. Using e-auctions is part of the strategy employed by BA to reduce its procurement bill by over 7. with clearly defined price. . Most consumer purchasing does not involve so great a degree of flexibility: the product is standard and on the shop shelf. streamlining costs and helping the procurement function to make a direct contribution to BA’s profitability (Arminas. 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. 172 et seq. On a turnover of £8bn and a procurement expenditure budget of £4bn. 2005b). 1977). delivery schedules and quality standards) is a significant job. such as a continuous production plant. there may be an opportunity for the supplier to adopt new technical solutions. At times of model changes and reorganisation. While there are group influences in consumer buying. but often it is the buyer who will determine requirements and dominate the supply situation. An inflexible or technology-driven manufacturing organisation. adherence to procedures and accountability tends to lead towards groups rather than individuals being responsible for purchasing decisions (Johnson and Bonoma. usage and function. These do not just cover the obvious concerns of remaining within the law and not abusing authority for personal gain. even for small components used in manufacturing. Originally. but due to the loss of face-to-face contact. eg BA decided to use an e-auction to help reduce its European public relations spend by 25 per cent. Furthermore. Mass production systems are often rigid in the short term. while the size of expenditure influenced the managerial level of those involved.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. Much negotiation is required where complex customised technical products are concerned and. business gifts and hospitality. they are likely to be less formally constituted than in the B2B purchasing situation. BA was very careful to ensure that the specifications for the contract were very tightly defined in the first place. take it or leave it. although with careful planning they can be reorganised and modified to accommodate new products. if there is no guaranteed economic and stable flow of materials at a consistent quality level. Group decision-making The need for full information. Different types of production and operating systems will help to shape an organisation’s purchasing task. every saving matters.
.e. these types of purchase form part of computer-based automatic reordering systems from approved suppliers. The decision-making process here is likely to involve very few people and be more a matter of paperwork than anything else. etc. This too involves a detailed. An obvious example would be the sourcing of goods from nations under various international trade embargoes. 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. Laws and regulations As we saw in Chapter 2. For instance. The former type may be decided by technical personnel. regulations affect all areas of business. whereas the latter is more likely to concern the purchasing department. Increasingly. The decision-making here will be a longer. that has not stopped alternative methods being used. especially where it involves a high-risk or high-cost product. New task purchasing is the most complex category. but with the benefit of drawing on past experience. The schedule may be regarded as definite and binding for one month ahead. Another situation. as it could lead to regular future business (i. However. routine or modified re-buys). where new models and price changes make review necessary. therefore. with Singapore. An example of this is the purchase of a fleet of cars. London and other cities being used to avoid export controls. electricity. more formal and involved process. the organisation has bought this product before and has already established suppliers. These products may be relatively low-risk. the illegal operators face being shut down and prosecuted (Hosenball. 1967). such as Iraq in the 1990s.PROM_C04. One example of this might be the sourcing of raw materials for a completely new product. Iran has set up networks of front companies to buy materials from US suppliers that eventually end up in Iranian arsenals. in the case of a routine re-buy. 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. eg Iran still uses a lot of military hardware purchased during the time of the Shah. Bearings for the car and electrical motor industries are sold in this way. inexpensive supplies such as office stationery or utilities (water. Precise dates and quantities can then be adjusted and agreed month by month nearer the time. gas. and high levels of negotiation. . but in B2B markets. or a feeling that the current supplier is not the best. as does the fierce competition between suppliers who will therefore be prepared to negotiate hard for the business. but there is also a need to review current practice. governments may seek to regulate sourcing within certain industrial sectors. frequently purchased. A technical modified re-buy.). is related to changing design and performance specifications. and therefore needs a great deal of information and wide participation in the process. such as utilities. some regulations specifically influence the sourcing of products and services. If caught. which happens less frequently in an organisation’s life. schedules may even be day or hour specific! A modified re-buy implies that there is some experience of buying this product. Perhaps there have been significant technological developments since the organisation last purchased this item. or a desire to renegotiate the parameters of the purchase. The organisation has no previous experience of this kind of purchase. while a commercial modified re-buy involves issues such as price and delivery. for example. 2003).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. A blanket contract may cover a specific period and a schedule of deliveries over that time is agreed. Increasingly. many-faceted decision-making process with wide involvement from both internal members of staff and external consultants. with JIT systems. More specifically. but as provisional for the following three months. The routes taken are often circuitous. is the commissioning of new plant or buildings.
They are also more likely to lead to long-term. It could also be something more sudden and dramatic than that. 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. .5 shows two models of organisational decision-making and.PROM_C04. in that information search. then it is possible for the buyer and the seller to build experience. leading to long-term relationships with joint development potential. the individuals involved. the level of their experience in purchasing. 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. such as the failure of a piece of plant or machinery. therefore. Figure 4. interdependent relationships between specific buyers and sellers. Where there is a small number of identifiable customers. on the basis of these. a problem that a purchase can solve. or a lack of stock. It could be a planned new buy precipitated. accountants and shareholders. knowledge and trust in each other to an intimate level that consumer marketers can only dream of. to be based on more solid information and to reflect more collective responsibility than a consumer decision. and the formal and informal influences on marketing. the following subsections discuss the constituent stages. 167 et seq. a small injection moulding firm found itself selling 80 per cent of its output to a large multinational manufacturer of domestic vacuum cleaners. as formalised in a negotiated. the purchaser comes to rely on regular supplies conforming to quality standards. is dependency. while over a longer period. there are also less concrete factors shaping the way in which two organisations do business. I Precipitation Clearly. There are many models of organisational decision-making behaviour. for example Sheth (1973). the start of the process has to be the realisation that there is a need. How the model is formulated depends on the type of organisations and products involved. by the implementation of expansion plans or the imminent production of a new product. choice and post-purchase evaluation also exist here. Webster and Wind (1972) and Robinson et al. Suppliers can tailor their offerings to suit particular buyers. legally drawn-up contract that lays out both parties’ responsibilities. B2B buying decisions have to be justified to managers. however. for example. For example. more formalised process than in consumer markets. organisational purchasing policies. (1967). These issues are covered more fully at pp. either party may come to regard the other as essential. but the interaction of human and organisational elements makes the B2B model more complex. likely to be more rationally made. In the short term. it was able to exert considerable influence over the small supplier who could not afford to lose the business. Since the purchasing organisation also had two alternative suppliers on the sidelines. The formulation of marketing strategies that will succeed in implementation depends on this understanding. The processes involved are similar to those presented in the model of consumer decision-making described in Chapter 3. The result of all the above complex factors working together is to make B2B purchasing a much longer. The stimulation could be internal and entirely routine: it is the time of year to renew the photocopier maintenance contract. mutually valuable. and are. with different levels of detail. One of the problems of such close relationships. analysis. for instance).
Tesco and Abbey National have appointed energy buyers with responsibility for undertaking a modified re-buy review of the electricity supply market. talking to visiting sales representatives or reading the trade press might also generate awareness of opportunities. whether based on new technology.5 Models of organisational buying decision-making Robinson et al. 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. then other organisations will have to consider their response. Thus changes in the energy environment have precipitated changes in purchasing decisions and processes.PROM_C04. Attending trade exhibitions. cost reduction or quality improvements. which would stimulate the buying process. Changes in the wider business environment can also trigger a need. .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. (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. The privatisation of electricity supply in the UK created a competitive market for supplying large industrial users. Organisations such as Ford. If the competition has invested in new technology.
com Not all needs can or will be fulfilled and it is possible for the decision-making process to stop here. Through its innovative design and its equipment. some opportunities will be followed through and these move on to the next stage. Alstom’s Marine Sector has been working on this problem and has developed a troubleshooting trimaran called the Oil Sea Harvester. the company uses telemarketing to raise the awareness of risk. there’s usually an accompanying PR spillage too and the critical attention of the media and various ‘green’ groups turn to the site.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. Nevertheless.com). it can work its way through the zone. 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. Source: © Alstom http://www. product specification. and offering a solution that they may not have realised was available. . has to stimulate potential clients to be aware of the importance of storing essential data away from their normal premises. or be postponed until the organisational or environmental conditions are better. Artist’s impression of the Alstom oil harvester. This means exposing potential clients to a problem that they may not have even thought about. for instance. In offering an automatic off-site backup service for PCs and networks.alstom. outline the cost and arrange a follow-up meeting to discuss the client’s needs in detail. birds and beaches. eg Potential suppliers may have to help the customer to realise that they have a need. It can operate in extreme conditions and travel quickly to a disaster 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.PROM_C04. Security Backup Systems. in case of fire or theft.
If a machine has suddenly broken down. the inclination to search for potential suppliers can be quite low. The physical characteristics of that component must be specified. discounts and after-sales service for various product categories. A typical edition reviews such issues as supplier lists. there is often a bias towards existing suppliers who are known and trusted. Sometimes. for whom half the fun of shopping is often not quite knowing exactly what is wanted. but the fine detail will be deliberately vague to allow the agency plenty of creative scope. A key decision early on will be whether to develop a specification based on known particular needs and then locate a suitable supplier. good working relationships between members of staff within the two organisations and an appreciation of the constraints under which each of them works. the more true this is. then makes proposals to the client who can reject or negotiate from there. production managers. for example. The brief may specify the number of pages for the brochure. Existing suppliers are at least a known quantity. These specifications will need the combined expertise of engineers. but is not appropriate in all circumstances. balancing ideals against cost and practicality. I Supplier selection The next stage involves the search for a suitable supplier who can best meet all the specified criteria. Even external consultants and suppliers could be involved in particularly complex situations. its design. but a more detailed one would follow later. guidelines on running costs. reviews in detail a wide range of business equipment and services. then they are likely to be favoured. In the first instance. In the case of new technology. for example. might have a certain amount of in-house expertise within its marketing department.PROM_C04. A level of fine detail in specifications is understandable in an engineering context. The agency ‘interprets’ the brief. 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.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. a general specification will be issued to potential suppliers. technical data. an organisation must determine in some detail precisely what is required. Think about buying a component to be incorporated into another end product. reports and publications can be used to compare the different features and performance of competing products. the target audience and an indication of the price that the organisation is prepared to pay. Automatically pushing business towards the existing supplier does. then speed of delivery and installation may be of the essence. All of this helps the B2B buyer to make a more informed choice. An organisation wanting to develop a corporate brochure. among others. Nevertheless. It is also worthwhile at this stage to define the criteria or priorities for choice. from franking machines to company health insurance. the future prospects for upgrading it or the service support offered. and the purchasing organisation will have experience and a realistic view of their capacity to perform. There are some advantages in this approach. and the greater the strategic significance of the purchase. in terms of its function. The existing relationship means that there should be better mutual understanding. purchasing specialists and marketers (representing the interests of the end customer). its relationship and compatibility with other components. On other occasions. however. Where specifications are largely set by the seller rather than the buyer. expected quality and performance levels. it may be necessary for buyers to be proactive by openly seeking new suppliers and encouraging quotations from those who could meet their requirements. delivery schedules and service backup. the choice may hinge on compatibility with existing facilities. and the purchasing department will keep files on who can do what. It may not necessarily be cost. . the scope of the content. The publication What to Buy for Business. perhaps after a shortlist of two or three suppliers has been drawn up. but there are also the less tangible but no less important considerations of quantity required. 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. If existing suppliers can do the job. have its risks. or to locate the supplier first and then adapt the specifications to suit what they can offer.
an annual growth rate of nearly 40 per cent. also called an IP VPN as it is based on Internet Protocol (IP). Ford Motor Company (www. infrequent purchase (i. . 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. With the range and sophistication of technologies available. For example. just as a checking procedure to make sure that the existing supplier is not taking advantage of the established relationship. will directly affect the buyer's intention to do business with that seller in the future (MacDonald and Smith. a more serious. and provide even the smallest company with an efficient and cost-effective way to connect their business to their trading partners.g. such as on the building of a new manufacturing plant. However.000 auto parts suppliers and 6900 dealers in an electronic network. Thus.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.com) links 30.9bn savings each year (Businesss Week 2000). a buyer's satisfaction with a seller's use of technology. its compatibility with supporting the buyer/seller relationship and the quality of service delivery.com) which provides a B2B exchange centre for the raw materials industry. 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. There will be complex discussion.com) for the healthcare industry. industry or consortia. Their compatibility with each other. also known as virtual private networks (VPN). Electronic Data Interchange (EDI) and extranets have at times been confused with each other. businesses are increasingly harnessing the potential of information and communication technologies to facilitate and consummate businessto-business (B2B) exchanges. the principal difference being that an extranet operates over an internet protocol network.3bn in 2009. privately held. Another term for a B2B exchange is an e-marketplace. The first is in simply facilitating sales transactions between businesses. sales of IP VPN services in the US in 2004 amounted to US$640m.buyerzone. IP VPN are fast gaining popularity. the second involves facilitating the relationship between organisations and their suppliers in the value chain.covisint. meeting both buyer and seller expectations in terms of the type of technology used. Sources: Business Week (2000). An extranet is a VPN. or even videoconferencing technologies to mediate the exchange process. are the most restrictive e-marketplaces. revision and reiteration at a high level with a number of potential suppliers before a final decision is made. a consortium or industry e-marketplace is jointly developed and owned by two or more industry incumbents.medmarket. providing a collaboration network with suppliers. MedMarket (www. suppliers. According to Hamblen (2005). and private e-marketplaces. E-marketplaces can be classified according to their openness.urms. 2003). on the nature of the purchasing task. sometimes including a blend of industry-specific buyers.PROM_C04. However.e. is of increasing importance in B2B e-marketplaces. while EDI uses proprietary formats or legacy systems developed and implemented by the organisation. the new task situation). extranets allow both small and large parties to participate. Private e-marketplaces. and the existing supplier might simply be asked to tender a price for resupply. Examples include Covisint (www. (www. Additional problems may be caused where different suppliers will be expected to work closely together. and beyond the reach of most SMEs. This is a profitable. frequent purchase might not warrant that kind of search effort. the development of extranets has the potential to change this. EDI) are costly and complex to set up and maintain. Hamblen (2005). Traditional methods of exchanging business information electronically (e. With more than US$2bn in business purchasing transactions facilitated through BuyerZone. An example of a public online marketplace is BuyerZone. of course. requiring invitation from the host company. whether it be EDI or extranets. Electronic technologies can assist business-to-business exchanges in two direct ways. Public e-marketplaces are generally owned by third-party providers and are open to any company that wants to purchase and/or sell products. the leading online marketplace for business purchasing. lengthy selection procedure is likely to be implemented.com (www. and United Raw Materials Solutions (URMS) Inc. With the development and commercial adoption of the Internet. In a high-risk. MacDonald and Smith (2003) Much depends. A low-risk. with forecasts that sales will grow to US$3. negotiation. BuyerZone's service attracts active buyers seeking purchasing guidance across more than 100 business product and service categories. a leading consortium for the automotive industry. customers and other business parties. for instance. with three specific types: public. resulting in an estimated US$8. com). and distributors. One or two other known suppliers might also be requested to quote for the job.ford.com). In contrast.com since 2003.
com). If a supplier falls short of quality standards. quality and delivery. for example. Suppliers have to earn customer commitment through consistency. then again.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. especially where technical and commercial complexity exists. He claimed: ‘In my experience.PROM_C04. With the introduction of new purchasing strategies. The situation has to be monitored as it unfolds. A buyer of injection moulded plastic parts. 208). wanted to improve its store security and cut wastage by the installation of EAS (Electronic Article Surveillance). If this could be overcome it would be possible to change the store layout and allow greater use of self-service. Linked to the labelling. The process does not. Both these examples demonstrate the need for a true marketing orientation among suppliers of fulfilling the customer’s needs and wants exactly. the more likely it is that remedial action can be taken with the least disruption to production schedules. and in the avionics and power systems areas. we can say that the Hill and Hillier (1977) model has provided a useful framework for discussing the complexities and influences on B2B buying. to generalise about such a process. therefore. 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. This involved detailed discussions with potential suppliers to assess alternative systems and eventually Meto. benefiting all players (http://www. the supply partnerships formed. p. Of particular importance to Kruidvat was the need to protect small cosmetic items that can come in various shapes. Various systems were compared but the Meto system is expected to reduce pilfering considerably when all 25 million product items are tagged. the contractual commitment and the review and evaluation process. however. the buyer of automotive components places the emphasis on quality consistency. including the cosmetic suppliers. I Commitment The decision has been made. 85 per cent of the business is lost or gained on quality and delivery. New suppliers are sometimes eased into critical supply situations so that their performance can be carefully assessed. the order and delivery schedules set. 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. Meto had to provide a security system to detect theft without causing embarrassment to genuine shoppers. Commitment. has a policy of withdrawing business from a supplier which fails to meet delivery schedules. and any complaints have to be handled quickly. These customers are too important to lose. alternative sources will be activated. It is difficult. In another company. This approach is especially used where larger firms are dealing with smaller suppliers. covering key elements of performance. the contract signed. was selected. end here. Small trial orders can grow into larger batches. We want what we order when we want it’ (Pettitt. Airframe manufacturers increasingly expect suppliers to fund development costs from their own resources. however. in case there are problems with the supplier. the pressure on suppliers increases. such as JIT. not on prices. a leading European supplier based in Germany. In concluding this discussion of the buying process as a whole. 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. comes in two parts. Although there were many months of negotiation. efficiently and effectively in order to maintain levels of customer satisfaction. Failure to live up to these promises can be very costly for production schedules. a shift to single (or much reduced) sourcing forms the basis for a preferred supplier system. 1992.meto. In a study of the European aircraft industry. Some buyers adopt formal appraisal procedures for their suppliers. Other buyers are less tolerant and keep their suppliers under constant threat. Stages may be compressed or merge . to allow Kruidvat to strengthen the supply. The purchasing manager of a large computer assembly plant in Ireland was clear cut in his requirements. Paliwoda and Bonaccorsi (1994) found a trend towards reducing the supplier base to allow closer cooperation and relationships to develop. Two alternative suppliers are kept in reserve in case this happens. with over 500 drugstores in the Netherlands and Belgium.
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. and on what features. B2B purchasing is unlikely to be the result of one person’s deliberation and decision.PROM_C04. 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. At each stage. it still involves the less than predictable human element. the process may end at any stage. A new task situation. for example tailoring specific communication packages to appeal at the right time to the right people. past experience.g.4. provides much more scope and incentive for the supplier to research and influence the buying decision. 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. with the promise of either a large contract or substantial future business. The process will also vary according to whether the purchase is a new task or a re-buy. Clearly. however. 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. 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. solvency. .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. The next section looks in more detail at these human elements. the supplier’s marketers can deal most effectively with the situation. and where groups of people are concerned in the buying process there is plenty of scope for its smooth flow to be interrupted. Table 4. Thus the aspiring supplier wants to know not only who is involved. but at what point in the process each person is most influential and how they all interact with each other. Remember too that although B2B buying is assumed to be more rational than consumer buying. that may then narrow down the choice of potential suppliers. ability to meet specifications exactly.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. culture? To what extent. As has already been established. a number of decisions have to be made that may well affect the character of the next stage. utilising both the group and individual dynamics to the best of their advantage. depending on circumstances. and getting a range of feedback from within the purchasing organisation to allow a comprehensive product offering to be designed. the amount of time and effort the supplier is prepared to devote to this will vary with the importance and complexity of the order. These various decision factors are summarised in Table 4. Then.
I Purchasing The role of the purchasing department is to handle relationships with suppliers by.6. (b) Mass production Supplier Production engineering Design Design Sales Sales Quality Quality etc. the role of purchasing may be Figure 4. The role of purchasing will often vary according to the technology being used and the kind of contact needed with suppliers. or even during. there may be considerable contact between different departments within the selling and buying organisations. such as production and finance and external suppliers. design and production issues may have to be discussed before. sourcing suppliers.6 Models of buyer–seller contact in B2B markets (a) Unit production Supplier Production engineering Design Sales Quality etc. soliciting tenders. for instance. and is more focused towards offering support in such matters as contracts and supplier suitability etc. except in the case of very well-established routines. copyright 1982 © John Wiley & Sons Limited. 172) which then examines how these functional areas operate within a group setting. reliability and possibly frequent and critical exchanges. evaluating offers and negotiating or reviewing performance. where unit or small-batch production takes place. . Purchasing Buyer Source: Adapted from Johanson (1982). however. This means that the function cannot act in isolation. In mass production. and thus has to reflect and represent those internal needs. the transactions. Reproduced with permission.PROM_C04. given the need for consistency.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. Purchasing acts as the interface between other internal functions. This lays the foundations for the next section (p. detailing their interests and concerns. quality. The role of purchasing in such a situation tends to be less central to the whole process. In Figure 4. This is because a whole range of specification. Buyer Production engineering Design Purchasing Quality etc. such as in building a large gas turbine or specialist vehicles.
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. Thus its key role is in the supplier selection and commitment stages. in locating ‘good’ suppliers. Figure 4. The more tactical areas are divided into acquisition (TA). classified by the security/risk required and the value of the purchases. The main concerns of purchasing are security and consistency of supply. Strategic cells.com). The other internal departments may channel their efforts and be coordinated through the purchasing department.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. lifetime value for money TP: Value for money Approved status for suppliers via tender process Improve efficiency/mechanise . unlikely to be its prime criterion. eg The Aberdeen Group published a report in 2005 which highlighted the significant increase in the strategic importance of purchasing since 2000.//aberdeen. Lowest cost is. Purchasing rarely initiates the decision-making process. and profit (TP) where the concern is with savings and improving margins through tendering. establishing terms and liaising with them. combating foreign competition and meeting regulatory requirements. With business travel in the Figure 4. Where cost-cutting is still a top priority. especially where large-scale production schedules are concerned.7 details the various products and services purchased by a university. therefore. suggest longterm supply contracts and careful selection of suppliers. http:www. raised quality levels and better integration with suppliers to strengthen their overall competitiveness in the supply chain. managing energy costs. where the priority is minimising effort. it also makes an important contribution to product and service innovation. The whole area of purchasing is growing in importance as organisations seek cost savings. The change of purchasing’s role from cost-cutting to value-adding represents a shift in emphasis. The research found that not only does purchasing play the major role in managing supply availability. SS and SC. that is. except for routine re-buys or where it acquires information to suggest that a change of policy or supplier could lead to better efficiency. 2005. This means developing a clear understanding of the relative significance of individual purchases and of different types of purchases.PROM_C04. often procurement is being shifted to low-cost countries (O’Brien.
Such a matrix is a valuable guide to an organisation in selecting those product areas that require special attention. but could also be supplied in a form that would allow it to be easily and efficiently incorporated into a production run. They can also feed specific information back to the supplier to solve a specific end-customer’s problem. issues relating to ease of handling. In such cases.PROM_C04. While some of these adaptations are driven by logistical concerns alone. I Production/operations With prime responsibility for meeting targets for the end product in both quantity and quality terms. Valla. for . although if they have an interest as users of the purchased product. the production function also has a great interest in the security and consistency of supply. indicating the service level offered and their discount structures. In addition. radical solutions to problems. In some cases. texture and quality for medical use and that could withstand sterilisation. I R&D Where R&D has been given a free-ranging brief to look for new. given the supplier’s technical capacity and talents. somewhat reducing the role of purchasing to an administrative one. 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). Applications engineers may work closely with suppliers to develop solutions to problems. they are not going to be entirely absent from the other stages. fit with other organisations’ production systems and cost effectiveness may also be considered. for example. I Finance For routine production-orientated purchases. R&D staff are going to have a strong influence at all stages of the decision-making process. advising production on more efficient methods. to have close contact with suppliers in the interests of joint development. If a critical component is concerned. investigating methods of financing and costing projects. the production process may have to be adapted to accommodate a particular supplier’s technology. assessing returns on investments. therefore. 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. This is widespread practice in B2B markets (Johanson and Wootz. I Engineering Engineering is usually concerned with specification and design. travel agencies would be required to bid on a regular basis. for example when sourcing a component or designing new production facilities. as in the case of engineering. It takes a higher-profile role in major capital projects or other large items of expenditure. be mainly involved in the precipitation and specification stages. 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). Johnson & Johnson. for example. Production staff may. then it is likely. This proved to be a somewhat sticky problem. At the same time. 1986).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. development has to be done within given cost parameters. Finance will simply take on a monitoring role to ensure that there are no irregularities or variances and provide regular internal information. for example pooling their expertise to use CAD systems to design components that both perform to the purchaser’s specifications and are feasible. was researching new approaches to wound dressings that involved close liaison with textile suppliers to develop fabrics of the right density. 1986. then further development work has to be done to reduce the costs or find alternatives. it is likely that the finance department will devolve budgets to appropriate managers.
the operator reports it.’ Father agrees and they all go to Toys ‘R’ Us where the final decision is the child’s.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. are making sure that the implications of whatever is purchased do not compromise the final product offering or its competitive edge. thus initiating the process. looks at these non-functional roles. representing the interests of the purchasing organisation’s own customers.PROM_C04. reliable suppliers. This section. Gatekeeper . May be a senior manager with either an active or a passive role in the whole process. and how they interact to form a buying centre or decision-making unit (DMU).5 Comparison of DMUs in consumer and B2B markets Consumer Initiator Example Child pesters parents for a new bike. Influencer Decider Decider Purchaser Buyer Handles the search for and negotiations with suppliers. can also play different roles within the decision-making process that cross functional boundaries. User The child. just who is involved and in what capacity is an amalgam of many factors. suppliers. Secretarial staff preventing influencers reaching the decision maker. Table 4. therefore. but under restraints imposed by parents’ credit card limit. Organisational size. User may influence. Marketers’ concerns. the roles they play and the functional areas that may be involved. It may not make the final decision. as well as having functional roles and concerns. Table 4. may also involve R&D staff. perhaps in terms of better quality or improved reliability. sales reps. ‘Well. Marketers are likely to approve of options that enhance the offering. the more people are involved and the more formal and time consuming the process is likely to be. R&D staff withholding information. but it does have an influence in both shaping the feasible options and selecting the most appropriate supplier. The buying centre The previous section implied that individuals within the purchasing organisation. May also be asked to help with specs for replacement. thus favouring innovative. for instance through the degree of delegation of responsibility and devolved decision-making. Parents pay the bill. structure and culture will also play a role in defining the process. The further removed the situation is from routine re-buys. in relation to functional roles in the decision-making process. therefore. I Marketing The marketing function is primarily concerned with the outputs of the production process.5 compares buying centres in consumer and B2B markets. accountants. May also be the buyer and/or influencer. perhaps he has grown out of the old one. B2B User Example Machine breaks down. external consultants. indicating the membership. Overall. Influencer Mother thinks about it and says.
for instance) or loosely informal (a chance chat over coffee in the canteen between the purchasing manager and an R&D scientist). for example a routine re-buy could be handled by a relatively junior clerical worker. I Gatekeepers Gatekeepers have some control over the decision-making process. the buyer may not belong to a formal purchasing department at all. it is what it needs to be to do the job in hand. for example an operator who will use production machinery. Technical staff can also act as gatekeepers in the way in which they choose to gather. In other words.PROM_C04. Thus. or it could be an informal. information gathering and assessment. 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. a secretary or purchasing manager may prevent a sales representative from talking directly to an executive. The decider’s role and level of involvement. it can be either formally constituted (for a major capital project. Of course. depending on individual circumstances. . will vary widely. I Influencers Influencers can affect the outcome of the decision-making process through their influence on others.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. but the eventual authority may rest at board level. a bank’s decision to introduce a new account control system may be taken at a very senior level. Buyers with different levels of seniority may exist to handle different types of transaction. For routine re-buys. for example. personal influence. Bear in mind that the buying centre is not necessarily a fixed entity from transaction to transaction or even within a single transaction. For example. present and interpret information to other members of the buying centre. but organisational structures may dictate that the final decision rests with top management. it can consist of two or three or many people. therefore. I Deciders Deciders have the formal or informal authority to make the decision. When analysing the make-up of the buying centre. but be someone who also has a functional role such as R&D or marketing. we should look not only at the allocation of roles between the different functional areas of the organisation. and may also be consulted in setting the specifications for whatever is to be bought. this may be the purchasing officer or someone in a functional role. Higher expenditure levels or purchases that have a critical impact on the organisation may involve much more senior management. Their prime role is in specification. or intercept brochures and mailshots and throw them in the wastepaper basket before they reach the decision maker. whereas the high-cost. in that they can control the flow of information by denying access to key members of the buying centre. high-risk new buy might require a senior purchasing manager of many years’ experience. These people may trigger the purchasing process through reporting a need. input from the lower levels of the hierarchy will help to shape the decision. or a secretary who will use a word processor. Where devolved budgeting exists. who are fed information and recommendations from below. Influence could stem formally from expertise. I Buyers Buyers have the authority to select and negotiate with suppliers. It can be fluid and dynamic. evolving to meet the changing demands of the unfolding situation. but also at the seniority of the members.
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. they are normally identified at the local buying points. but to ensure that adequate supplies of components are available for production. the buyer may also be the decider. however.PROM_C04. etc. marketing in action Nokia’s global sourcing Nokia is one of the market leaders in mobile phone development and manufacture. By aggregating demand from each of the production units. Targets are set for failure rates and robustness. and the company asks each supplier to present its plan for meeting those targets over the lifespan of the contract. 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. First. This arrangement simplifies the ordering procedures for Nokia’s local procurement teams. Similarly. but it is the global sourcing operation that takes the necessary action with suppliers. jeopardise supply continuity. regardless of where they were produced. to ensure that components arrive on time at Nokia’s own plants. quantities. specifying prices. in some areas closer technical cooperation is required. for example. Given the worldwide scale of production and the need sometimes to adjust product specifications to meet local requirements.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. establishes quality procedures and sets supplier performance standards for appraisal. for example. When problems do occur. It believes in partnership. Nokia has refined its relationship approach to component suppliers over a number of years. Whatever the structure. as it does not inspect goods on arrival. It is the supplier’s responsibility to adjust its own internal organisation to meet Nokia’s requirements. quality. Although most of the collaboration is on commercial matters. With ‘application-specific integrated circuits’ (purpose-designed complex microchips). it is necessary for Nokia’s engineers to work closely with the supplier’s technical staff to create the most appropriate specification. capacity planning and allocation can be fed through one point. Having thus established decision-making structures. 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. Its primary role is not to source components. local procurement deals with day-to-day purchasing for the factories. This actually sources materials. Quality monitoring of components is critical so that Nokia can ensure that its own products meet standards. however fluid the buying centre is. customs. The purchasing function’s fear about such arrangements. it believes. Global sourcing is the other organisation. Nokia insists on each supplier nominating an account manager regarded as being responsible for the relationship between the companies on a global basis. makes delivery arrangements. the next step is to examine the criteria applied during the process. in a larger organisation. openness and trust to ensure that it can plan its capacity and production schedules with a . Nokia operates on formal contracts with suppliers. etc. It insists. that a supplier should offer only one collection point in the world from which components can be collected. is that it could become locked into a single supplier and this in turn could. purchasing has been divided into two different organisations. where routine re-buys are concerned. with very little call for influencers. It expects suppliers to take care of testing and to guarantee that they are meeting standards on a consistent basis. especially when the demand for a component is suddenly increased. It uses 250 million components every day which are purchased from some 400 subcontractors and supply partners. Nokia then arranges for carriers to handle the transport. Nokia has to be convinced. By establishing clear lines of communication. however. 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. issues such as annual purchasing agreements to cover forecasting. negotiates prices and terms. 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 is up to the supplier to handle its own logistics to ensure that the various products arrive in time at that collection point. In a small business. an individual’s contribution to it may not be limited to one role. the owner/manager may be influencer and buyer as well as decider. Suppliers are expected to meet these standards and are monitored at a local level to ensure that they comply. Nokia is able to get better terms from suppliers because of the scale of the contracts. 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.
who wants to be the buyer who saved a few pence on the component that caused a breakdown during the big race? (http://www. various trade-offs between specification and price. and also improves the quality consistency of the purchaser’s own end product. The buying criteria are led completely by design and performance technology and the high specification of such cars often means locating special suppliers. Such motives and goals may not form a direct. This route can also result in lower total costs. Serant (2001). These task-related or economic criteria are certainly important and reinforce the view of the organisation as a rational thinking entity. If the purchasing organisation can make the best use of increased reliability. I Economic influences As has been stressed throughout this chapter so far. The latter are considered important so that Nokia can benefit from technological skills and capabilities that may not be available in the local market. the emphasis in terms of decision-making has largely been on rational. Sources: Kandell (2001). The costs per car can be staggering. be short.saunalahti. or that the supplier will be able to meet increasing and . but nevertheless. reliability. neither more nor less. so the following are a summary of them. good relationships leading to component improvement. eg Building a Formula One racing car from scratch is not an easy business. a similar amount is spent on tyres. Taimi (1996). price is nearly always of secondary importance in the buying decision. The main criteria have already been discussed in the previous sections of this chapter. with the rewards that brings. Lead times can. especially if a re-work is necessary on a component that needs to be upgraded. It is dangerous. The main point is the closeness of the match and the certainty that it will be maintained throughout the order cycle.PROM_C04. superior performance. safety and quality are dominant (Nolan. formally recognised part of the decision-making process. they can certainly cause friction and influence the outcomes of it. 1997). Appropriate prices The appropriate price is not necessarily the lowest. Stewart Grand Prix’s three racing cars are each made from 1400 components sourced from over 1000 suppliers. After all.fi) Product specification Product specification involves finding the right product to meet the purchaser’s specified needs. Because of the high specification. better customer service and other technical or logistical supports from its suppliers. but one representing good value for money taking into account the whole service package on offer. since it reduces production delays due to substandard components or delivery failures. functionally orientated criteria. Sadowski et al.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. (2003). These suppliers are both local and international. Instead. Buying criteria In the previous sections. thus reducing the costs of handling complaints and replacing goods. however. however. it is not always a matter of finding the lowest priced supplier. and then some £5m of spares are needed every season. To design and develop a car can cost £1m. Thus by pursuing international supply alliances Nokia is better able to keep at the forefront of its own rapidly changing technology. There are. of course. then it can offer a better package to its own customers. 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.
So. and other personal needs. hanker after ‘status’. friendship and social needs. there is the risk element. but promises a high return. This is particularly important in areas such as electronics where product lifecycles are getting shorter and shorter. what are the consequences? The individual may not want to be associated with such an outcome and thus will push for the safe route. they may be prepared to spend a little more when the office accommodation is refurbished on better-quality furnishings. instil confidence or even intimidate visitors to the site. 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?’. A problem may have two alternative solutions. one which is safe. 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. I Non-economic influences Powers (1991) summarises non-economic influences under four main headings: prestige. career security. it needs to ensure that everything supplied is right first time.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. 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. First. ‘What does this mean for my job?’. or more specifically the individuals who make up organisations. If the high-risk decision is made and it all goes wrong. especially where JIT systems are involved. In such sensitive areas. They may well be chiefly and genuinely concerned with finding the best solution to the problem. This is especially true for JIT systems. Second.PROM_C04. Some customer service is delivered even before the sale is made. but at the back of the mind there is always the question. where there is little room for failure. Career security Few people involved in the decision-making process are truly objective about it. such as medical and aeronautical. for example. This aspect might also include an appraisal of the supplier’s longer-term capacity and willingness to become involved in joint development activities. as failure can be very expensive indeed. We look at each of these in turn. and one which is high risk. 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. They want to be seen to be doing better than their competitors or other divisions within the same organisation. eg Velden Engineering (UK) manufactures a wide range of component parts and assemblies for various industries and applications. decor and facilities to impress. This is a crucial factor in supplier selection. . predictable and unspectacular. Prestige Organisations. 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. Supply reliability and continuity The purchaser needs to be sure that adequate supplies of the product will be available as and when needed.
attitudes and beliefs. as considered in the following section. even if the graduate’s views are valid. for example. 1986). issues such as demographic characteristics. to value trust. may provoke negative reactions in older managers who have progressed through more traditional routes and feel that they have accumulated a wealth of experience. coupled with factors like self-confidence and communication skills. confidence and respect built on a personal level between individuals in the buying and selling organisations. These. A further dimension of non-economic forces is trust. discussed in Chapter 3 in the context of consumer behaviour. A young. Remember too the individual’s personal profile.PROM_C04. recent business graduate with forthright views. for example. Lorenz (1988). It is necessary. Business colleagues talking at a conference. It does help to reduce the perceived risk of the buyer–seller relationship.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. found from a study of subcontracting in France that personal contacts were a major cause of organisational trust. . can all shape the extent to which that individual is allowed to participate in and influence the outcome of the decision-making process. Source: © Corbis Other personal factors The three categories discussed above all provide useful insights into the human elements of organisational behaviour. 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. but can also stem from a series of personal relationships between employees. From that trust can come a whole series of activities that can enhance the relationship. however. Trust can be built at an organisational level. the job and the organisation. but their emphasis is still on the relationship between the individual.
with its stated mission ‘to create change towards a world free of corruption’. is endemic in some countries. ABB is certainly not alone. 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. ABB. 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. Cash or gifts to avoid legal punishment for breaches of the rules. That’s $50–80bn. The UK has. is based in Switzerland.1m to government officials in Nigeria. The sale of the subsidiaries did then proceed. It may be common practice in some countries to allow public officials business dealings to supplement their meagre salaries. where 10 represents very low levels of perceived corruption. to custom officials to avoid import or export duties. and 60 of those scored less than 3. The problem is in defining the boundaries. Indonesia. Do you agree? OK. 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’. You may not like it. said ‘Corruption robs countries of their potential.5m were imposed and $5. This is contrary to the US Foreign Corrupt Practices Act (FCPA) and after further investigation. This can have serious and expensive consequences. Nigeria. Venezuela and Yemen all . involving over 100 lawyers. suggesting rampant corruption. Of course. i. This convention also implicates the giver as well as the receiver of bribes. universal code of ethics. but it is real and depending upon who you listen to. given the economic and competitive pressures. Chile and Brazil) to adopt common rules to punish companies and individuals found guilty. paying to jump the queue for licences. however. 106 out of 146 countries included in the survey scored less than 5. 100 interviews in 20 different countries and 4 million documents. You believe you are offering the best deal anyway and it will guarantee hundreds of jobs back home. The investigation was thorough. certain subsidiaries had offered and/or paid over $1. So whether you paid the $10 and/or the 10 per cent commission you have given a bribe and participated in corruption. It claims that bribery in government procurement adds between 20 and 25 per cent to costs and causes losses of some $400bn per year. B2B marketers will therefore need to take a much more careful approach in future. The rate of ‘commission’ can go as high as 20–30 per cent. Chad. 2005).PROM_C04.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. been slow to prosecute directors responsible for bribery offences. Bribery comes in many forms.e. some decide to go further and build personal fortunes. In 1999. Transparency International (TI) is a global non-governmental organisation. When it wanted to sell some of these subsidiaries to a US investment group in 2004. ‘Grease payments’ to expedite performance. Kazakhstan. scrutiny of its accounts showed that over a five-year period.9m of profit relating to the illegal transactions had to be handed over. Its Corruption Perceptions Index 2004 rated countries for ‘cleanliness’ on a 10-point scale. Angola and Kazakhstan in order to gain or retain business. Fines of $10. despite the OECD convention. Facilitating payments may also be considered as legitimate. Most countries involved have taken practical steps to ratify the protocols. Iran. permits etc. Sudan. Russia. Libya. Worryingly. 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. to win contracts that would not otherwise have been awarded to your company. but a year later than planned. Iraq. Peter Eigen. Business customs vary widely across nations and there is no single. undertaken with the full cooperation of ABB and the investment group. Bulgaria. The Chairman of TI. 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. Cash to custom officials to avoid import or export duties. the OECD introduced an anti-bribery convention. Ecuador. the power and automation technology company. As the Corruption Perceptions Index 2004 shows. A list quoted in Hamra (2000) includes: I I I I Bribes or kickbacks of cash or expensive gifts. Azerbaijan. One country’s normal practice of gift giving may be another’s bribe. oilrich Angola. The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions commits all 30 OECD members and four non-members (Argentina. not least your own. What would you do? These are the dilemmas of B2B negotiations in some countries. but has subsidiaries all over the world. try this one then. For 10 per cent ‘commission’. a public official will give your company’s tender for a new £50m construction project favourable consideration. extending good practice from Sweden and the United States.
for example. effort and money in improving quality or products. despite it being agreed by all members. Where there is a will . low risk purchasing situation there may be minimal concern about commitment to the relationship. committed relationship emerges from two dimensions: economic and social. 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. expectations and perhaps an active desire to continue to trade. public contracting in the oil sector is plagued by revenues vanishing into the pockets of western oil executives. In these countries.org. clear policies and guidelines. Hamra (2000). 1998). well-tuned relationship. I Durability Durability refers to the longevity of relationships in B2B markets that might even outlast individuals and managerial generations. However. Moss (1997). middlemen and local officials’ (as quoted on http://www. It is also fair to say that the lower-scoring countries are not those who have signed up to the OECD Convention. A decision to continue (repurchase) is different from a decision to enhance or commit to a relationship. Culture and habits will not change overnight. Barnett (2000). there are avoidance approaches. or in developing special . the buyer has to decide whether a relationship should be continued (repurchase) or not. The history of previous transactions between two organisations leads to understanding. There has. Paperclips for the office. as complexity increases and as it becomes apparent that value can be created by developing a stable. training and a willingness to undergo external scrutiny as part of an essentially ethical approach to international contracting. the OECD convention may be difficult to enforce. Hamra (2000) calls for leadership and value statements from senior management. investing jointly in product development. watch out.. Cockcroft (1996).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. are a standard product and there is plenty of choice in the market. Porter (1990) goes further in suggesting that an organisation with advantageous relationships with supplier networks has a competitive edge. After a first-time purchase. then there may be mutual advantage in continuity. The quality of the relationship between the buying organisation and an existing supplier could prove to be a major factor in reducing those risks.org). especially now that the OECD acknowledges that it ‘takes two to tango’. or setting up middlemen and agents or offshore accounts.transparency. So. and thus convenience and possibly low price will be the main concerns. http://www. been an increased focus in recent years on the place of buyer–seller relationships in explanations of marketing and decision-making in B2B markets. OECD (2000). especially in dealings with countries where corruption is rampant. next time you are offered a free afternoon of corporate hospitality. and is inevitably going to influence decision-making processes. However.oecd. such as becoming more covert. despite the trend towards relationship marketing. There is no such thing as a free lunch. http://www. 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. The decision to commit to a relationship is often a strategic one and can involve exchanging confidential strategic information..org. even at the cost of short-term sacrifice. Sources: Arminas (2004). Koehler (2005). The value of building a closer. 1998).PROM_C04. and whether it should be enhanced in scope (increased commitment to the supplier) (Selnes. Economic dimension Joint development has already been mentioned a few times in this chapter. or the integration of some business functions (Selnes. If a supplier has invested time.transparency. therefore. because of the synergy between them in terms of joint problem solving and information exchange. 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. Not all exchanges evolve into long-term durable relationships. It may be at the other end of the spectrum but it is a continuum.
the purchaser cannot easily get the same thing from an alternative supplier and the supplier cannot easily find an alternative customer. then the supplier will want the relationship to be sustained so that returns on that investment can be realised. 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. operate a JIT system. close ties are forged between buyer and seller and there is much interest and value in close cooperation and integration. Some relationships can be very long lasting and resistant to change. In other words.6 shows.. as Table 4. by insisting on short-term contracts and using multiple sourcing. based on need and value. Strengths and weaknesses are known quantities. a purchaser is likely to maintain a portfolio of suppliers and to develop different levels and intensity of relationship with each. where there are plenty of alternative sources of supply. The purchaser is unlikely to be interested in helping the supplier unless there is a direct cost saving to be had. however.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. secure. Similarly. flexible scheduling and delivery. It is difficult for an outsider to break into such well-developed and managed relationships. (1998). and therefore the purchaser may encourage cooperation in improving both technical capability and quality. reliability or intentions. Over long periods. There are. Such an approach can support valuable work in product design. all require a lot of trust. high degrees of personal and organisational trust can develop. there are two polarised approaches that lead to very different relationships. A number of studies have been undertaken into the duration of buyer–seller relationships. In reality. it can still be a very powerful bond: if you believe that the other party will not let you down on expertise. Decisions to single source. There is an existing level of trust. then either party may become dependent on the other. the purchaser will not want to start the process from scratch with a new supplier. I Supplier relationship portfolio The focus so far has been on the relationship between one purchaser and one supplier. This is a legitimate approach in appropriate circumstances. while others will be developed as guaranteed. Although trust can create vulnerability. the nature of the buyer–seller allocation of roles and responsibilities can change. specification and quality. This purchaser will rarely need special products and services and certainly will rarely be prepared to pay for such things. Trust has been defined as ‘a willingness to rely on an exchange partner in whom one has confidence’ (Moorman et al. If the relationship has led to a specialist complex package. the product is fairly standard and price really is the driving criterion. knowledge and friendship to build on. keeps the supplier alert and sweating. 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. Collaborative approach In a collaborative approach. According to Spekman (1988). but can deliver significant economic benefits to both parties. advanced production processes. To Bistritz et al. complacent and blinkered. and special inventory. reliable . Social dimension There is a certain security and comfort in dealing with someone you know. the risks of becoming too ‘cosy’. 1993).PROM_C04. as well as the inherent dangers of mutual dependency. Adversarial approach The purchasing organisation pressurises the supplier to minimise prices and. despite the temptations of competitors’ marketing wiles. trust can provide a key competitive difference. or to delegate component building to one supplier. Collaborative approaches are particularly crucial in JIT environments. for example. neatly summarising the reasons that collaboration rather than confrontation should be considered in critical supply situations.
It is the job of purchasing to advise on an appropriate portfolio. Commitment In the commitment stage. Dwyer et al. and members of staff from the two organisations may be starting to build sound working and social relationships. This evolution can be broken down into five stages of the relationship lifecycle. . I Relationship lifecycle Much emphasis has been put on the potential durability of a buyer–seller relationship. The uncertainty is much reduced. a trade exhibition or any other means of making an initial contact. Both of these will deserve a collaborative approach to handling. The stages are: Awareness Awareness occurs as each party learns of each other’s existence and potential. will merit no special consideration.PROM_C04. the novelty has worn off. building orders and mutual trust. valuing the benefits. perhaps to the point where there is a high level of mutual dependency. mutual investment • Partnerships • Frequent. well-developed personal networks.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. Partners are working together. Kelley School of Business. stable nest round themselves. Expansion Expansion has the characteristics of romance and the early days of marriage.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. Slater (1997) has argued that maintaining relationships is becoming increasingly difficult in complex and turbulent marketing environments. however. (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. it is dynamic. for example where there are plenty of alternative sources readily available. Others. Exploration Exploration is about discovery and has all the insecurities of adolescent relationships. and the seller has become a major supplier of special products and services. but as with any kind of relationship. changes its nature over time and is unlikely to last indefinitely. and will be retained at arm’s length somewhere nearer the adversarial end of the handling spectrum. Most relationships remain in this stage. This could come about as a result of a sales visit. testing each other out with no real commitment and with high uncertainty over the outcomes. sources of supply. There is high mutual trust and respect. There is a rising level of commitment and the partners may even be making special adaptations to suit each other better. copyright © 1988 by The Trustees at Indiana University. This could mean small trial orders and perhaps even some pre-order assessment. It is about gaining experience. 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. planned communication • Integrated operations • Quality and time scales ‘designed in’ • Emphasis on lowest overall cost Source: Adapted from Spekman (1988). but the partners are comfortable with each other and have built a predictable. but a few move on to the next stage.
could encourage the purchaser to turn to a younger. freed of the responsibility of churning out plastic bottles. a consumer cleaning goods manufacturer. cooperative behaviour. Jeyes switched from in-house production to buying in from LMG. The overall relationship usually evolves incrementally (Dwyer et al. 2001). Dissolution This stage is possibly the equivalent to disillusionment and divorce. 1995. 1995). Good and Evans (2001) in an examination of the difficult periods in a relationship. Jeyes was able to focus on its core business. Seventeen machines were needed to produce the required volume of containers. to allow the relationship to deteriorate towards termination. a plastic blow moulder. Contending. The customer had decided to make the components itself.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). for example. with a conveyor belt running between the two for continuous production and supply. The risks of thus extending the supply chain were reduced when LMG located its factory next door to Jeyes’. engineering or R&D personnel. to give up something of value to show you want to keep the relationship going. If stability and satisfaction have been reached in the maturity stage. Instant termination of the contract would have had a devastating effect on the supplier. The neatness of the stages should not suggest that relationships just happen or are bound to develop in a certain way. Both parties benefited from this arrangement. and Jeyes. Lack of innovation or service responsiveness on the seller’s part. As mentioned in Chapter 1. These include: I I I I Concession making. eg Sometimes the dissolution can be carried out with respect and dignity. social and structural bonding and other benefits. for example. Dissolution is a strategic decision and managers should consider carefully its impact and how best to handle it (Giller and Matear. . which depended on this customer for 60 per cent of its business. identified a range of behaviours that could be adopted to produce a desired outcome. A small supplier of engineering components. 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. more versatile supplier with a good marketing-orientated approach (‘I can tell your current supplier doesn’t understand you any more. Problem solving. 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. Let me show you my blueprints . to work together to find a new way of operating in a win-win framework. giving it a secure foundation for building a wider customer base. yet retaining security and flexibility of supply. delivery reliability. depending upon whether the parties wanted the relationship to be retained or dissolved. Within the overall buyer–seller relationship. . 1987) supported by partner-specific adaptations.’). then the most likely source of danger is complacency. but acted responsibly by phasing the supplier out over time rather than all at once. to force the other party to yield if one partner believes they are in a dominant position. 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. a complex bundle of individual relationships can flourish to achieve a wide range of necessary tasks (Möller and Wilson. 1997).PROM_C04.. At least it now had two years to find alternative customers or to reorganise the business. and maintaining quality standards. Walter and Gemünden (2000) proposed that relationship promoters in both the . Narus and Anderson. Withdrawal.
security. Increasingly. measurable economic criteria (price. such as purchasing. until dissolution.). marketing. accounting.PROM_C04. supplier selection. will be involved in the process and form a buying centre. patterns of evolution do emerge and the key decision points that shape the relationship become apparent. or one party’s neglect of the other. The purchasing organisation has to develop a portfolio of different relationships of varying closeness and depth to suit the whole spectrum of its needs. Chapter summary The focus of this chapter has been B2B buying behaviour and buyer–seller relationships. Little is really known about the stages. government bodies or institutions. but is likely to be formalised. their underlying determinants and the specific factors that trigger change. leading to mutual cooperation and the full exploitation of synergy between the two organisations. The stages in the decision-making process include precipitation. less frequently placed orders for products that are more likely to be customised than in consumer markets. service. B2B buying is likely to involve higher value. production and R&D. Relationships can be durable and resistant to change. joint and inelastic). and commitment to a long-term relationship. The decision-making process is affected not only by rational.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. to take longer and to involve more people. trust and commitment to grow and strengthen the durability of the relationship against external challenges. however. therefore. This allows satisfaction. personality) emanating from the individuals involved. and/or continue to invest in. specification. social needs. product specification. 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 . quality. B2B markets have a number of distinct characteristics. etc. Other less significant relationships can. engineering. organisations have to decide which relationships to initiate. However. develop. Much remains to be explored in the evolution of buyer–seller relationships. perhaps through complacency. Organisations also have to recognise that relationships develop over time and pass through a number of developmental stages. coordinated and develops for mutual benefit from an economic and social perspective. and plan their marketing activities accordingly. I B2B marketing is about exchanges between organisations. The membership of the buying centre. including the nature of demand (derived. the complexity of the buying process and the risks inherent in it. 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 that B2B purchasers go through has elements in common with consumer decision-making. it is clear that when the relationship between two parties is examined in depth. Staff with various functional backgrounds. be kept deliberately superficial. the structure of demand (concentrated in size and in geography). whether they are commercial enterprises. but also by non-economic influences (prestige. The ongoing buyer–seller relationship is increasingly being recognised as a major influencer of B2B marketing strategies.
With 60 new power stations in various stages of construction that means an awful lot of potential business for Alstom to target. it is perhaps not surprising that the Chinese authorities have taken a keen interest in accessing Alstom technology.1 From the supplier’s point of view. often on a turnkey (ready to run) basis.1 What are the different categories of B2B customer and how do they differ from each other? 4.000 megawatts each year at a cost annually of €18. 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.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. With that kind of expertise.2 What are the main differences between B2B and consumer buying behaviour? 4. and how is each characterised? What difference might the stages make to the seller’s marketing approaches? 4. systems and services to design. 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. President of Alstom China.3 What factors influence the complexity and the amount of time spent on each stage of the organisational decision-making process? 4. a position achieved by carefully building a reputation through effective B2B relationships with key decision makers. In the energy field. close buyer–seller relationships? case study 4.4 You are the purchasing manager of a large organisation with an enormous annual spend.75bn.1 Alstom China Alstom is a France-based global organisation with sales of over €22bn.500? 4.5 What do you think are the advantages and disadvantages of long-term. 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. It is able to combine components. to be successful in doing business in China one must ‘be patient. Questions for discussion 4.4 How might people in different functional roles (for example R&D or marketing) participate in B2B buying? 4.2 How are supplier-handling strategies changing as organisations seek to improve their competitiveness? 4. be local and be prepared to wait five years before gaining a reasonable return on investment’.PROM_C04. founded on state-ofthe-art research and development and considerable project experience. as Alstom is now a major supplier of energy and transport infrastructure to China.000 people in over 70 countries. it has around 20 per cent of the world’s installed power generation capacity – that’s 650 gigawatts.3 What are the stages in the buyer–seller relationship lifecycle. employing over 140. It is already involved in 17 .5 Define the main economic and non-economic influences on B2B decision-making. manufacture and commission power generation infrastructure to customers’ specifications. He should know. What would your attitude be to the following offers from potential suppliers. Most of your contracts are awarded by tender. According to Geoff Ball.
it is becoming increasingly difficult to differentiate between the global players on quality. 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. For more advanced projects. the technical staff of the Institute may initiate discussions about state-of-the-art alternatives. favoured. any slip-up soon becomes well known among other potential buyers. 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 Shanghai Waigaoqiao phase three power plant which provides high steam conditions but reduces the heat and emission rate by 10 per cent. attracting financial . Energy power planning is a critical part of the industrial infrastructure and with such a dynamic economy. Late in 2004. indicating the importance of the market in China as well as its importance to Alstom’s global organisation. This stage can take between six months and one year and the output is a report to the State Development and Planning Committee (SPDC). to establish specifications. The size of individual orders can be very large. 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. Project decision The SDPC in Beijing is the formal body that considers economic and political factors before making a decision to proceed. Alstom thus has to perform to high standards. It is important for Alstom to keep a close watch on market developments in China to spot opportunities early. as well as an increasing number of local Chinese companies which are often in alliance with the global players. In total. etc. however. coal. hydro. although their role in the buying process is not that great. Source: Alstom http://www. the largest of its kind in the world.com Feasibility study The state-owned Electrical Design Institute is one of the pivotal organisations that can influence outcomes. therefore. performance output is often very similar. and finally the Daya Bay nuclear power plant. Alstom had an order intake of €600m from the power generation sector in 2004. Most power generation purchases are made by the eventual users. 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. The industrialisation of the western provinces of China and Tibet is currently a major priority for increasing power generation capability. hopefully. 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. It also decides the type of power generation required. For effective B2G (business to government) marketing. performance and even bid prices. Its role is to examine the expected demand for power proposed by the provincial governments. these plans need to be at least five years ahead. Maintaining good relations with the technical specialists in the Design Institute is.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. for example. GE and Mitsubishi. including the Three Gorges hydroelectric power plant. Alstom is not alone in targeting the market. The rapid development of China’s industrial infrastructure is a good opportunity for Alstom to further develop its long-term business interests there. and to gain formal approval for the project from the state. It has tough competition from Siemens. Issues such as foreign exchange considerations. Lead times tend to be a minimum of three years and. the various influencers and deciders need to be identified and a communications strategy developed to move from project conception to the final bid acceptance. Within the Institute are the technical specialists capable of advising on various alternative solutions and their cost profiles. Although the systems and solutions offered may be different. It could take anything up to two years before projects are started and a further two to three years before they are finally commissioned. as every project is very high profile across the nation.PROM_C04. gas. all global players.alstom. along with smaller niche manufacturers. critical in ensuring that the technical solutions offered are well understood and. efficiency. In reality. the provincial governments.
whether to seek local or global bids or the political issues associated with dealing with certain countries are all considered. there is little point in a prospective supplier spending further time on the project. for example. 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. Usually at this stage. the percentage of localised production or the technical requirements are not met. Normally. If a supplier cannot meet the requirements at this stage it means disqualification. Bid evaluation and decision The committee’s final evaluation and decision often revolves around the final contract negotiation. local and international. Global suppliers are primarily used to supply cutting-edge technologies at a time when China does not have the expertise. The trend is clear to see. French companies. This enables questions to be asked and clarification to be sought before initial evaluation. went through a difficult period for a few months after Thomson supplied satellite technology to Taiwan. serious technology transfer has to be built into the project along with appropriate management development strategies. Even when a price has been tendered. Draft contracts prepared As part of the tendering 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. the Design Institute’s technical proposals are accepted by the SPDC although some reshaping may be required. for example. Typically it may mean between ten and fifteen people on each side around the negotiation table. then invites named suppliers to prepare a detailed tender and to enter into formal negotiations. for example on the Lanzhou power generation project it was 40 per cent for phase one and 60 per cent for phase two. Bidding specification approved At this stage. Contracts for coal-fired power stations up to 6 gigawatts now tend to be awarded only to local companies. 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. local companies will eventually be substituted. This enables those with a dubious record or an uncompetitive proposal to be weeded out early on. but are conducted the night before on an informal basis. The localisation of supply contracts can be an important feature at this stage. This can be a long process with extensive discussions involving specialists from both sides. involve all the parties involved with the project. 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. The SPDC has the power to overrule any recommendation from the Design Institute. pre-quotes are requested as an initial expression of interest.PROM_C04. Once formal bidding is initiated the specifications tend to be rigid. The meetings often . However. draft contracts are often issued so that all the clauses can be considered and discussed before a final selection is made. Preliminary evaluation of proposals At this stage. 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. it is the degree of localisation that is the key factor after technical and cost criteria have been met.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. however: unless the overseas supplier remains ahead in R&D. In the experience of Alstom. having eliminated many initial bidders. meeting with a large number of experts from the buying committee. these negotiations rarely take place in formal sessions. allowing more time to be spent with the preferred bidders. Normally a two. Formal tender invitations The committee. and the fortunes of US companies seeking business in China tends to fluctuate with the freeze–thaw in international relations. if the SPDC approves the specifications the formal bidding process can begin subject to any policy restrictions. Sometimes the final decision can be ‘political’ to ensure that each of the main global competitors retains a continued interest in bidding. In addition. although access to all the decision makers can be difficult. Some high-level lobbying is possible at this stage. as often the other technical factors have been used to pre-qualify bids. If. it is not unusual for two or three further attempts to be made to reduce it still further.or three-month timescale is allowed. formal proposal evaluation takes place to reduce the number of bidders down to two or three.
President. The industry is characterised by feast and famine. 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. Some care is taken.4bn to refurbish 1738 cars for London Underground.com. suppliers like Alstom have to consider when to lobby and when to enter into normal sales and technical discussions. This means identifying projects early and getting in early to lobby for that position during the negotiation stage. increasingly. This allows the possibility for decision makers to meet a wider range of staff and to look at installations in practice. the tenyear period from 1996 was regarded as a feast. Siemens and Alstom. Alstom. The high-speed trains.PROM_C04. 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. franchised and regional operators. Alstom corporate literature. produced a photograph for the corporate literature that ‘says a thousand words’. to replace rolling stock. Class 125. China. which could take up to two years. http://www. By the end of 2005 only Bombardier’s Derby plant represented significant UK manufacturing capacity because it had future large orders worth £3. in terms of safety. 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. but especially in the early and late stages. Either at this stage. Pierre Bilger with Chinese Premier Zhu Rongji. During the whole process. In the UK. 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 challenge throughout the process. 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. as it now has one of the youngest train fleets in Europe. a delegation is formed to visit Alstom in France if it is bidding. marked the beginning of a famine period for the UK. Virgin. economic and political issues.2 Supplying rolling stock The journey to work by train in Europe would not be the same without specialist builders such as Bombardier. is to position the company to make most of the opportunity by demonstrating that the best technical and economic solution lies with them. 2005. 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.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. completely renewed its fleets for the West Coast and Cross Country lines. The lifecycle of rolling stock means that replacement will not be necessary for another ten years or more. In a risk-avoidance environment. 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. as the new train operating franchisees placed large orders to modernise their fleets. The meeting of Chairman and CEO of Alstom. As that order will not . Given that build cycles vary around the world. Lobbying can take place at the most senior level under the guise of invitations and gestures. for example. launched in 1976 are still going strong in 2006! This poses a challenge to manufacturers in deciding how much capacity they should retain. This is a far cry from the days in the 1920s when every private railway company had its own manufacturing facility. They are normally signed with the maximum publicity. however. given the size of the order and its political significance to both parties. such a high level of contact reduces the personal risks for lower-order decision-makers in selecting the company. to ensure that such visits are not regarded as ‘jollies’ or free holidays. 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. Sources: with grateful thanks to Geoff Ball.alstom. however. for example.
Manufacturing locally is therefore becoming less and less important to the industry. on time and within agreed reliability and performance levels. In the feast times. Siemens. Central to any marketing strategy is the ability to produce on cost. Bombardier has been undergoing a pan-European rationalisation programme. Companies scoring below 50 per cent face a bleak future unless they are in a strategic supply area in which choices are limited. Although it became the preferred bidder. the rolling stock buyers. CSR Ziyang. The remaining suppliers will be required to work even closer with Siemens during the specification and contract negotiation with . The only other option for a plant.000. There is little point in saving money today only to have to spend more three years down the line. It aggressively pitched for the Heathrow Express Class 332 contract and won the order. especially when cancelled or late services can invite financial penalties.000 suppliers down to around half that number. 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). When the Northern franchise declared an interest in replacing its Pacer fleet. are now taking a keen interest. although the aftersales maintenance and refurbishment work is very useful to the manufacturers for bridging the gaps between large new build orders. provided the rolling stock for the Docklands Light Railway. 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. although it has been suggested that it lost money on the contract in order to gain a foothold in the UK.com come into full swing until 2008. the German multinational. Siemens went on to win contracts for West Yorkshire trains and a large order for South West Trains franchise. and although Hitachi priced its bid for the West Coast regional trains competitively. while in famine it can be a struggle to retain capacity. the company decided to switch some interim work to Derby from elsewhere to offset the 55 per cent capacity usage. it was just pipped by Siemens. This included cars for the Neihu line in Taiwan. a French company. the lifecycle cost of components must also be considered. Siemens estimates that 70 per cent of its supplies by volume come from just 300 suppliers so there is scope for considerable rationalisation. the rate of replacement of stock in central Europe where EU membership is bringing funds for upgrading. the Chinese builder. however. All suppliers are being ranked on a points system that covers delivery performance and quality consistency as well as unit cost. Asian manufacturers such as Hitachi don’t compete just on price: Japanese trains have tended to perform better. Furthermore. as manufacturers are increasingly taking responsibility for maintaining the vehicles they supply. but the rate of change will be determined by factors such as whether the German Deutsche Bahn would start placing orders again. Asian firms. if it is not manufacturing. the Chinese company bid at £650.PROM_C04. Source: Bombardier http://www.000 and 12. From that base. Again the technology is tried and tested and highly dependable with no technological leap. provides a good example of how national boundaries count for little in this market. Siemens is now one of the top two suppliers in the UK. the eventual order was delayed due to a change of franchise arrangements. This places a premium on the efficiency and effectiveness of the builder’s supply chain. 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. having insufficient capacity can be an issue. is to use the slack time to engage in refurbishment and heavy repairs. such as Hitachi from Japan. other customers can be attracted and the order book expanded. The manufacturers have to assess a range of markets to determine where the best opportunities lie and their own capacity to respond.bombardier. and orders for high-speed trains in Spain. 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. aiming to cut a typical supply base from between 10. expecting a price per vehicle of around £1m. also deliberately used price to try to enter the UK market. 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. From this early prototype. The whole sector is under pressure from the penultimate customer.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. Reliability and performance are vital to a train operator. The manufacturers are undertaking a supplier rationalisation programme.
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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. internal and external. are likely to influence their choice of MTV. 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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