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B2B buying behaviour
This chapter will help you to: 1 understand the nature and structure of B2B buying; 2 appreciate the differences between B2B and consumer buying; 3 analyse the buying process and the reasons why purchasing varies across different buying situations; and 4 link B2B buying with the development of marketing strategy.
The essence of the marketing philosophy was described at the beginning of this book as the satisfaction of customers’ needs and wants through the provision of the right products and services, at the right time, in the right place at the right price. This remains true whether that customer is an individual or an organisation. All organisations, whether making products or delivering services, purchase goods and services from a range of suppliers so that they can run their own operations. Consider, for example, a small local garage. It may purchase not only petrol, but also spare parts, tools, supplies, some capital machinery, confectionery, and accountancy services, for instance. Compare that with a large steel producer or car assembly plant and the thousands of suppliers that are dealt with regularly. There are, therefore, sufficient differences between individuals and organisations in what they purchase and the ways in which they go about their purchasing to make separate consideration worthwhile. This chapter looks at the special characteristics and problems of B2B markets, beginning with a definition of B2B marketing and a classification of B2B customers. The characteristics of B2B markets are then discussed, and attention is given to the ways in which they differ from consumer markets. The buying decision-making process is analysed, laying the foundations for looking at the roles that individuals and groups play within it. The last two sections examine the criteria, both economic and non-economic, that affect B2B purchasing and the importance of long-lasting buyer–seller relationships.
Purchasing within the health industry is big business. In the UK, £16bn is spent each year on average nationally. The shopping list includes a wide variety of goods and services, such as operating theatres, beds, ambulances, cleaning contracts, catering, buildings and maintenance, to name but a few. For each one, specifications have to be established and agreed internally, and bids and performance monitored. The Barts and The London
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NHS Trust alone deals with 24,000 purchase orders, 125,000 invoices and 20–30 major contract tenders each year and its aim is to balance fitness for purpose against value for money. Although some of the purchasing is routine, once the contracts have been set up, a number of other projects demand new purchases to meet emerging clinical and service need within the Trust. All this means that professional purchasing expertise is needed within the Trust. In the never-ending search for reductions in public expenditure, an NHS Purchasing and Supply Agency (PASA) has been formed to coordinate and utilise the buying power of all NHS organisations of which there are over 600 in England alone. PASA now has a role not just in overseeing the spend across the country but also in finding out what is available, negotiating contracts and even managing some of them. It works closely with the NHS's 28 collaborative procurement hubs (where NHS Trusts collaborate in purchasing) around England. The agency offers them advice, product and market knowledge and negotiating skills. This is all part of an effort to seek efficiency gains each year of 3 per cent. Potential suppliers to the NHS thus have to be fully aware of all these structures, their policies and processes and how to plot their sales strategy to win business (Arminas, 2005a; Persaud, 2005; Riley, 2000). In your wider reading you may come across the terms organisational marketing and industrial marketing. Generally speaking, these terms are often used interchangeably with ‘B2B’ or ‘business-to-business marketing’. This text, however, uses the term B2B marketing, although we acknowledge that not all organisations that make substantial purchases, for example government departments, universities and hospitals, are in business in the profit-making sense of the word. Thus, as pp. 149 et seq. will show, the term B2B marketing covers a wide range of purchasing relationships between a wide range of organisations. First, however, it is important to define more precisely what B2B marketing is.
Defining B2B marketing
B2B marketing is the management process responsible for the facilitation of exchange between producers of goods and services and their organisational customers. This might involve, for example, a clothing manufacturer selling uniforms to the army, a component manufacturer selling microchips to IBM, an advertising agency selling its expertise to Kellogg, Kellogg selling its breakfast cereals to a large supermarket chain, or a university selling short management training courses to local firms. Whatever the type of product or organisation, the focus is the same, centred on the exchange, the flow of goods and services that enable other organisations to operate, produce, add value and/or re-sell. Figure 4.1, even though it only offers a simplified view of this flow, gives an idea of the number and complexity of exchanges involved in getting products to the end user or consumer. The steel producer, for example, takes raw materials (and we will not even begin to consider the mining, refining and transport processes that go into the production of the iron ore and coke that the steel producer buys) and turns them into steel that is then pressed into panels or cast into components to sell on. The car producer can then assemble these components, along with others from different sources (glass, plastics, paints, fabrics, tyres, electrics, etc.), with the finished car as the output to be sold on. Both the steel producer and the car manufacturer use more than just the components and raw materials that make the physical product, however. Both of them also buy in various services and supplies that support the main production without directly providing a physical part of it. For example, proper planned maintenance of plant and machinery is essential for safe and consistent production. The steel producer will perhaps use contract engineering service companies to do this work and would consider it as contributing indirectly to the end product. Similarly, the supplies and services used by the quality control function or the managers and administrators that keep a smooth flow of goods and orders in and out of the
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Figure 4.1 Flows within a B2B market
Raw materials Support services/ Supplies Equipment/Plant
Panels/Sheets Services/Supplies Equipment/Plant
End user/ Consumer
organisation support the end product indirectly. Thus an organisation may have to purchase not only raw materials and semi-finished goods, but also financial, technical and management consultancy services. Once the cars or the spares leave the car manufacturer, the retail showroom, i.e. the car dealership, as a re-seller, takes the products and sells them to the general public with little change other than perhaps the addition of number plates and fine tuning of the engine. Most of the value added comes from intangible elements of customer service. Even at the re-seller level, there are also other support services to consider. A car dealership selling to the general public, for instance, would put a lot of thought into the design and ambience of the showroom, the training of its sales and service staff and its advertising and other promotional activities. All these services can be bought in and add to the successful sale of the physical product. All of this goes to show that B2B marketing and purchasing is a complex and risky business. An organisation may buy many thousands of products and services, costing anything from a few pennies to many millions of pounds per item. The risks are high in these markets where a bad decision, even on a minor component, can bring manufacturing to a halt or cause entire production runs to be scrapped as substandard. There are several differences between B2B and consumer marketing, as Table 4.1 shows. If a consumer goes to the supermarket and finds that their preferred brand of baked beans is not there, then it is disappointing, but not a disaster. The consumer can easily substitute an alternative brand, or go to another supermarket, or the family can have something else for lunch. If, however, a supplier fails to deliver as promised on a component, then the purchasing organisation has a big problem, especially if there are no easily accessible alternative sources of supply, and runs the risk of letting its own customers down with all the commercial damage that implies. Any failure by any link in this chain has a severe impact on the others.
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‘FlyBE to the moon’
When an airline buys new aircraft there is often a scramble to win the order, and FlyBE is an airline with a shopping list. FlyBE is a UK-based low-cost airline, mainly serving domestic routes, but with some short-haul services from UK regional airports to France and Spain. Now that it has established its position within the low-cost sector, it is looking to expand further the number of routes it operates, particularly from airports in the north of Britain. That means expanding its fleet of aircraft and ensuring that its fleet has the range to fly from Scotland to southern Spain. The winning supplier is a Brazilian company, Embraer, and it wasn’t the obvious choice. Most of FlyBE’s competitors use 150-seater Boeing 737s or Airbus aircraft and indeed FlyBE had previously leased three Boeing 737s on a trial basis. In contrast with these two household names, Embraer has
The new BAe 146 aircraft that flyBE chose for its expanding service.
quietly established its reputation as the world’s leading manufacturer of smaller aircraft of up to 110 seats. The new 118-seater E-195 which is the subject of the FlyBE deal is the largest commercial jet it makes and is at the forefront of the company’s expansion into the mid-range aircraft market. Although the E-195 is smaller than competing models from Airbus and Boeing, FlyBE has calculated that the cost per seat
is comparable, and that the seat capacity is more appropriate for the kind of routes FlyBE services. The E-195 has been found to use 20 per cent less fuel per seat than its competitors, which not only cuts operating costs but is also compatible with moves within the airline industry towards ‘greener’ operation. FlyBE has given a firm order for fourteen aircraft with the option of a further twelve in a deal worth around £523m. The first fourteen aircraft will be delivered at the rate of nearly one per month up to December 2007. For Embraer, this deal marks a very successful launch into the mid-range aircraft market and its ability to deliver, and the extent to which FlyBE is satisfied with the performance of the aircraft and the service received from Embraer is bound to be monitored very carefully by other expanding airlines.
Sources: Clark (2005); Done (2005); The Guardian (2005); Kaminski-Morrow (2005).
Table 4.1 Differences between B2B and consumer marketing
B2B customers often/usually . . . • purchase goods and services that meet specific business needs • need emphasis on economic benefits • use formalised, lengthy purchasing policies and processes • involve large groups in purchasing decisions • buy large quantities and buy infrequently • want a customised product package • experience major problems if supply fails • find switching to another supplier difficult • negotiate on price • purchase direct from suppliers • justify an emphasis on personal selling Consumer customers often/usually . . . • purchase goods and services to meet individual or family needs • need emphasis on psychological benefits • buy on impulse or with minimal processes • purchase as individuals or as a family unit • buy small quantities and buy frequently • are content with a standardised product package targeted at a specific market segment • experience minor irritation if supply fails • find switching to another supplier easy • accept the stated price • purchase from intermediaries • justify an emphasis on mass media communication
g. Overall.2 A clothing manufacturer and its suppliers Suppliers of raw materials and components e. job agencies Suppliers of manufacturing equipment e. educational establishments. In addition. goods handling equipment. maintenance and repair. office equipment. design equipment.g. B2B customers So far. All these goods and services represent relationships that have to be established.PROM_C04. stationery . government bodies. A final reminder of the volume and variety of B2B buyer–seller relationships is provided in Figure 4. only one kind of B2B buying situation has been considered in detail. decisions have to be made about how the purchasing process should operate (who is authorised to do what and with what safeguards). and institutions. each of which represents a lot of buying power. however. Policy decisions have to be made about purchasing. that of a profitmaking organisation involved in transactions with other similarly orientated concerns. for example whether to source from one supplier only (single sourcing) or from several suppliers (multiple sourcing). and relationships managed over time to minimise the potential problems or to diagnose them early enough for action to be taken.g.g.g. utilities. or whether to manufacture rather than outsource. other kinds of organisation that have different philosophies and approaches to purchasing. management consultancy Suppliers of other equipment and suppliers e. Figure 4. There are.2. fabrics. trimmings Suppliers of labour e. sewing machines. goods distribution.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. clothes hangers and racks. pressing machinery CLOTHING MANUFACTURER Suppliers of services e. packaging equipment and materials. maintained and sustained. All these issues will be addressed later in this chapter. linings. cutting equipment. which shows in detail the wide range of goods and services essential to a clothing manufacturer. there are three main classes: commercial enterprises.
paint. and needs good buyer–seller coordination as it has to be tied in with production schedules. therefore. equivalent to about 16 per cent of European GDP (Wood. The NAO reported that the 2004 overspend was £1. defence procurement is a high-profile activity and any significant delay or overspend soon attracts media attention. although the item purchased does not enter directly into the finished product. as well as European Commission purchasing. for example. Original equipment manufacturers Original equipment manufacturers (OEMs) incorporate their purchases into their own product. for instance a tyre is a recognisable element of a car and is usually strongly branded by the original supplier. The National Audit Office (NAO) also assesses the purchasing performance of the Ministry of Defence. suppliers. for example.1 fall into this category. the value added stems largely from service elements. 2004). tyres. such as the paint. etc. tracking weapon systems.1bn. office equipment and management consultancy services. as the car manufacturer does with the electrics. whereas others. I Government bodies Government bodies are very large. usually making no physical changes to them. Purchasing power of this magnitude makes government contracts highly attractive despite the complex procedures that need to be followed. This group is the closest to the end consumer of the product and should. from office supplies to public buildings. Plumbers. Although some vetting and inspection may take place before these suppliers are allowed on to the list of approved suppliers. 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. and often small. important purchasers of goods and services. 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.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.PROM_C04. expensive and high profile. from army bootlaces to battleships. All the members of the flow shown in Figure 4. In the UK. caterers and travel agents thus supply services that are an indirect means to an end rather than a direct influence on production. there was still room for improvement. from airline tickets to motorways. plastics. This group of B2B buyers includes both local and national government. Although some purchases may be very large. OEMs’ purchasing is very closely linked with forecast demand for their end products. The range of purchasing is wide. 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. involving international suppliers. 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. and involve very little public concern. Re-sellers Re-sellers purchase goods for re-sale. others are much more mundane and routine. Take. cleaners. Examples of this are CAD/CAM systems. be able to feed valuable information back up the chain on what the end market really wants. As mentioned above when discussing the car dealership. fabrics. Users Users purchase goods and services to facilitate their own production.7bn. from refuse collection to management consultancy. and although this was lower than the 2003 overspend of £3. A full outline of the role and function of re-sellers can be found in Part five of this book. which can be further divided into a number of subgroups. Large chemical and steel process manufacturing plants may source a wide range of services from a myriad of local. as is often seen in defence procurement. eg Like the NHS example considered earlier. are incorporated anonymously.
Some jobs are only open to tender from organisations already on an approved list.834. . Other industries too have raised similar concerns about protectionism. in general for supplies and services the threshold (as set at 1 January 2004) is €154. 2004). chief executive of Siemens. His report suggested that there is indeed little competition between nations for public procurement contracts. there are specialised purchasing procedures that are often more explicit and formal than those found in many commercial organisations. These issues of buyer–seller relationships are expanded further at p. therefore was commissioned by the UK government to investigate this issue.uk). some capabilities may have to be foregone or delayed to compensate…’ (as reported by Spiegel. 2004).014.PROM_C04. ‘the French still want to buy from France. 2004). the development of specifications may be done in conjunction with specialist consultants and the potential suppliers’ development personnel. although all the signs suggest that largely they haven’t worked.e. the Germans from Germany and the British from anywhere’. Overruns were also experienced on the Joint Stiker Aircraft. and for works €3.ogc. governments favouring their domestic suppliers. Given the value of the public procurement market. large and small. reports from within the UK rail industry have suggested that between 2000 and 2003. Specifications within a contract can be designed to suit a specific national supplier. . from across all EU states access to information and opportunities to bid for business. The minimum number of potential suppliers bidding should be five (http://www. Such procedures might be classified under the following headings.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 . Because of the traditional bureaucracy and public accountability surrounding government sector purchasing. but also to allow companies. More recently. Although the thresholds vary depending on the kind of govermental body that is making the purchase. If not. The laudable purpose of this is not only to try to get the best prices. of course). 162 and pp. while others are open to anyone. 179 et seq. These directives are also designed to try to reduce national protectionism. There are ways of getting around the law without actually breaching it. Public procurement contracts over a certain value have to be put out to open tender and advertised in the Official Journal of the EU.411. 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. It is often too late to establish contact once formal bidding has begun. there were extended delays on the delivery of the Type 45 destroyer being assembled by BAe in Glasgow. and there must be greater control of costs. or the price specifications can be set so that only a state-subsidised . Assessment of tenders The submitted tenders are assessed and the winning one is chosen. it is not surprising that the EU has issued a number of directives designed to make tendering and bidding processes fairer and more transparent. 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. 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. i. The contact and reputation building necessary for next year’s bids needs to be done this year. Alan Wood. Some years ago. The development of precise specifications for the good or service For more innovative and large-scale projects. 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. and the Nimrod patrol aircraft slipped six months behind schedule and overspent by £408m (Spiegel. Tendering for the right to supply Organisations are requested to bid or tender for the right to supply. in his view. the managing director of a radio communications equipment manufacturer told us that.gov.
full colour special interest publications (for instance CD review magazines) affects the type.eu.e. A university. The same model of personal computer. for example. It is also common practice to break a contract down into a number of smaller. then demand for the component parts of it will also dry up.publications. but in purchasing terms they are autonomous.ted. The following subsections look at some of the characteristics of B2B markets that generate these different approaches. that is. I Nature of demand Derived demand All demand in B2B markets is derived demand – derived from some kind of consumer demand. washing machine manufacturers demand electric motors from an engineering factory. . 2004). Language barriers can also be a problem. At each stage in the process. there are different influences on the activities and behaviour of the organisations. can be bought as a one-off by an individual for private use. although the bulk of purchases may come from just a few of them. for example. Large capital projects. such as a new lecture theatre. none of which are valuable enough to fall under the procurement rules. These institutions may have an element of government funding. perhaps part financed by government. A quick scan of some of the notices in the Official Journal of the EU (http://www. however.int) shows that all of them require documentation and tenders to be submitted in the home language of the purchasing authority. for instance. individual contracts. a potential supplier makes a bid without knowing what price anyone else has quoted). for example. The numbers of electric motors demanded. for example. as has happened. depend on predictions of future consumer demand for washing machines. Wood. churches and independent schools. has to purchase a wide range of products and services in order to teach and undertake research and consultancy. Webster. A typical university may deal with over 5000 suppliers. whereas in southern Europe it is closer to 10 per cent. 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. or in bulk to equip an entire office.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. there is perhaps still a lot of valuable business that is not being awarded as transparently as it might be (Warner. between 30 and 40 per cent of the population read newspapers. They are likely to follow some of the same procedures as government bodies. the use of the marketing mix and the interaction between buyer and seller. 2004. may be subject to tendering and closed bidding (i.PROM_C04. If. Figure 4. the increase in demand for high-quality.3 represents the links in the chain stretching from forestry to reading material. Many other supplies are purchased with varying degrees of efficiency and formality from a range of different suppliers. The basic product is identical in specification but the ways in which it is bought and sold will differ. I Institutions This group includes (largely) non-profit making organisations such as universities. quality and quantity of paper and printing processes demanded. yet these have implications both up and down the chain. 2004. and that is a B2B market. As the EU public procurement market is worth about €1500bn per year. So. In northern Europe. 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. Similarly. there is a recession and consumers stop buying the end product. and thus only about 16 per cent of public procurement ever gets as far as being advertised in the Official Journal of the EU. but with a greater degree of flexibility of choice.
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.4 shows how those two years are used up in the product development process. composition and surface treatment of paper Paper manufacturing • New technological processes: colour. 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. weight. and with sales of €5bn in 2004.3 Influences on a B2B purchasing chain Forestry • Environmental policy. automatic Printers binding. For a company producing some 11. 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 presents a very traditional view of the fashion industry. management Wood fibre/ Pulp processing • Level of import penetration • Cyclical demand with investment cycle • Mergers. its close relationship to suppliers makes life a lot easier. the more remote it is from the end consumer and the further ahead it has to look in order to predict demand. organisations such as ICI and DuPont that produce dyes and fibres have to be two years ahead of the market. Fabric can be held in stock and then cut and dyed at the last minute to suit a fresh design.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. for example. eg M Figure 4. but some retailers are trying to achieve a competitive advantage by cutting the lead times involved in getting garments from the drawing board to the retail outlet. subsidies. In the fashion industry. Zara has started to outsource . international competition • New technology for grades.PROM_C04. It can do this because there is a high degree of vertical integration within the design and production process. 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.000 new products per year (competing companies such as H&M and Gap produce up to 4000 products per year). This means that in spring 2006 they will be deciding what colours and fabrics will be fashionable in spring 2008! Figure 4.
Amancio Ortega. This gives designs a scarcity value that customers are prepared to pay for. designers also gain inspiration from the catwalk fashion shows. Zara and its customers are happy to operate on a ‘when it’s gone. design the range. The final range is then sold to the Autumn 2007 Clothing retailer Spring 2008 who then offers the final product to the Consumer . 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.PROM_C04. They then sell on to the Clothing manufacturer Spring/Summer 2007 who. less high-fashion garments to low-cost producing countries. such as China. The Economist. The founder of Zara. 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. As well as this bottom-up approach. 2005) and that certainly seems to be at the core of Zara’s operations. 2005). produce samples. and keeps customers coming back to the stores regularly with a strong sense of excitement and anticipation to see what’s new. making decisions on textures/prints. and stock-outs in stores are filled with a new product rather than more of the same. 2005. it’s gone’ philosophy. then refine the range. They then sell to the Textile mills Autumn 2006 who produce fabrics. through market research. 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.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. Figure 4.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. has to define the ‘story’ and the ‘look’ for the spring 2008 season. but it is questionable just how far this can be done while maintaining the flexibility and responsiveness. 2003. so that designs are produced in small batches.
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. even if totally deflated. small disc brakes and electric motor in the rim to assist tracking and braking. . One of its designs. From spring 2005. The problem for manufacturers. it was fitted as standard on the BMW 3-series. especially if the spare tyre is also flat! Michelin. which is bad news for the tyre retailers. 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. and that interest and demand for these tyres is spread across drivers of all kinds of cars.co. with the Pax system can travel at 55 mph on a fully deflated tyre. http://eu. http://eu. however. and both Goodyear and Michelin work closely with the car manufacturers. the Pax system. the French multinational tyre maker. then the firm assembling the computer might have to stop buying casings temporarily. Michelin and Goodyear cannot just sell it straight to tyre retailers. is that it is not just a case of fitting new tyres. http://www. Michelin has developed a tyre that can still be run while deflated. such as BMW. 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. for example. and they’re great for car manufacturers as the need to include a spare tyre takes up space and adds to costs. On the face of it. So the Audi 8. demand for casings for computers is linked with the availability of disk drives.com. However useful the tyre. This emphasises that there is often a need to plan and coordinate production schedules between the buyer and a number of suppliers. Goodyear has launched a similar tyre. Interestingly. For example. Audi found that the Pax wheel retained agility and passenger comfort. This is a conventional tyre with active electric suspension. flat tyre. which uses RunOnFlat tyre technology and can be run for 80 km at 80 kph. 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. The airless tyre is being developed to last as long as the vehicle. offer it as either standard or optional on some of their models. Goodyear was using television advertising to generate awareness and understanding of its RunOnFlat brand concept.michelin. as without the accompanying tyre pressure monitoring system there is the danger that drivers will have accidents with a less stable.uk. as they spell an end to those miserable episodes of roadside tyre changing. Like Michelin. wants to make flat tyres a thing of the past but the problem it faces is convincing car manufacturers. not just the high performance expensive models. Talk about reinventing the wheel! Sources: Carty (2004). Although launched in the late 1990s. Joint demand It is also important to note that B2B is often joint demand.PROM_C04. it’s raining.com (among others). it has only been adopted on some car models such as the Audi and the Rolls Royce Phaeton as standard. 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. the new tyres are great for drivers. If there are problems or delays with the supply of disk drives. Nissan was soon expected to follow. not just one.QXD 29/3/06 9:36 am Page 155 155 marketing in action It’s dark.V. Stewart (2005). Mercedes and Mini Goodyear RunOnFlat tyres are constructed with special reinforced sidewall inserts that use new compound technology. That is. Ferrari. The Active Wheel project is also being developed by Michelin. and a number of them. Michelin found it especially difficult to penetrate the Japanese car manufacturers and it wasn’t until 2004 that was it adopted by Honda. Source: © Goodyear Dunlop Tyres Europe B. Technology continues to move on.goodyear. Mound (2002). Maserati. Land Rover. albeit functional. it is often closely linked with demand for other B2B products. The increased stiffness means the tyre can bear the weight of the whole vehicle.goodyear. in summer 2005. thus enabling the driver to get home without changing the wheel. however. Goodyear has been working hard to get the new tyre system adopted by car manufacturers.
the outcomes are very public. heavy industry and large mass producers. is quite small and the age of the respective fleets. however. More recently. they are diffuse. is just one component of a car. mass markets. that is. available infrastructure or national and EU government incentives. or the establishment of regional offices and/or distribution facilities. since the manufacturer has obligations and orders to fulfil. Such geographic concentration might develop because of resource availability (both raw materials and labour). B2B markets. Geographic concentration Some industries have a strong geographic bias. inelastic demand means that an increase in price will make no difference to the quantity demanded. but the two things are not as inextricably tied as in the B2B situation above. demand is inelastic. experience and trust can build up between buyers and suppliers. 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. Airbus and Boeing. for instance. It allows more focused targeting and. Traditionally. A car battery. in some cases. the dedication of specific members of staff to service that relationship. A small increase in price will lead to a relatively large decrease in demand. have acted as catalysts for the development of a range of allied suppliers. In this context. . A fall in the price of batteries is not going to have an impact on the quantity of cars demanded. A close example. most organisations in the trade know what the others are doing. differ in both respects. for example. so that it is relatively easy to define who is or is not a potential customer. will be very aware of each other and the strategies they will employ. Considerable knowledge. McDonald’s can persuade non-customers to try its product and become customers. 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. and the car manufacturer will demand neither more nor fewer batteries than before the price change. Think of the market for fast food. therefore. Whatever happens. the coal and steel industries and the motor industry. such as shipbuilders. 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. in contrast. is that demand for carpets can be linked with the level of buying and selling activity in the housing market. for example. expected retirement dates and the operational problems encountered are widely publicised so there are few secrets or hidden opportunities in the aircraft manufacturing industry. in that sense. the boundaries of the market are fuzzy and malleable. Elastic demand. The number of airlines worldwide with the need for wide-bodied jets. Conversely.PROM_C04. Industrial concentration B2B markets tend to have a small number of easily identifiable customers. 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. airports and seaports have given impetus to organisations concerned with freight storage. movement. which McDonald’s has shown to have worldwide appeal to many millions of customers. means that there is a great deal of price sensitivity in the market. Inelastic demand Elasticity of demand refers to the extent to which the quantity of a product demanded changes when its price changes. 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. Where there is a finite number of known customers.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. for example. and indeed in any manufacturing situation where a large number of components are used. insurance and other related services. quality and specifications). demand will not change and in the short term cannot change. and although negotiations may be private.
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. These differences give rise to much more complexity in the buying process. Often. Source: SKF http://www. There may be guidelines on favoured suppliers. 2000). resulted in a number of small suppliers also going out of business because they could not find new markets for their skills quickly enough. as Chapter 3 has shown. This . especially in the automotive. the local conditions have been favourable for more modern forms of concentration. 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.PROM_C04. Ireland.skf. In contrast. these are relatively low-risk. I Buying process complexity Consumers purchase primarily for themselves and their families. B2B purchasers are always buying on behalf of other people (i. electrical and mechanical engineering sectors. highly specific customer base can leave a supplier very vulnerable if something goes wrong. Intel. The net effect is a technically highly skilled workforce that favours innovation (Brown-Humes. This new form of geographic concentration provides obvious opportunities for a range of service providers. A small. lead to a high degree of mutual dependency. 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. Similarly in Germany. a purchasing manual is provided for all staff who may be involved in dealing with suppliers. at a rate well above that of many other German länder (Barber. B2B purchasing policy Certain systems and procedures for purchasing are likely to be imposed on the B2B buyer. 2000). which implies certain differences from the consumer situation. The closure of a coach works in Shannon. With a well-educated population and the highest mobile and internet per capita use in the world.com Concentration can. or rules on single/multiple sourcing or on the number of quotes required for comparison before a decision can be sanctioned. the organisation). the region now has thriving export businesses. just north of Stockholm. The various dimensions of complexity are as follows. From a traditional manufacturing base. International companies such as IBM. however. For the most part. and the marketer must appreciate them when designing strategies for encouraging trial and reordering. low-involvement decisions that are made quickly. whether software specialists or marketing consultants! SKF sells bearings direct to larger OEMs across Europe. although there may be some economic and psychological influences affecting or constraining them.e. Motorola. Nokia and Siemens have set up competence and research centres in the area which in turn has spawned many smaller niche suppliers and producers.
PROM_C04. This makes these suppliers extremely significant strategically. the purchaser needs to be assured of the continuity and consistency of supply. Philips and its suppliers develop technology. An organisation’s decision whether to source from a single supplier or from multiple suppliers is another important aspect of purchasing policy. Philips cultivates supplier relationships based on trust and cooperation. A supplier’s actual performance is measured against mutually agreed targets in terms of quality. costs and responsiveness (European Purchasing and Materials Management..2 outlines the advantages and disadvantages of alternative sourcing strategies. logistics. 1993/94). 3 Commercial suppliers: these are the least important suppliers and although Philips will encourage better performance in terms of quality. involved relationships with them. eg Philips is a global operator in the electronics market with factories all over the world. Table 4. and might list approved suppliers and the procedures to be undertaken for approving a new supplier. etc. but there is still good reason for Philips to work closely with them on issues such as quality. as well as value for money. which in turn depends on the performance of suppliers. 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 . Philips cannot develop and maintain deep relationships with every one of its suppliers.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). Instead. Table 4. learn from experience and try to avoid errors and misunderstandings. Philips has three categories of supplier: 1 Supplier–partners: these are the most important suppliers and Philips builds intense. logistics and price to gain mutual benefit. Philips also emphasises the importance of supplier re-evaluation as a basis for improving future performance. solve problems. These suppliers might well have essential knowledge and/or expertise that Philips could not otherwise access or develop for itself. 2 Preferred suppliers: these suppliers are less important. it is unlikely to get involved in helping the supplier to achieve it. it assesses its suppliers to discover which are the most important in terms of their strategic significance to Philips’ business.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. The company recognises that customer satisfaction depends on the quality of what happens on the production line. and together. Clearly. as their loss could seriously undermine Philips’ current business and future direction.
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 . Reprinted by kind permission of MCB University Press Ltd. highspending organisations might gain more by using competitive pressure to keep a number of suppliers on their toes. Segal does concede.QXD 29/3/06 9:36 am Page 159 C H A P T E R 4 · B 2 B B U Y I N G B E H AV I O U R 159 Table 4. that other factors. much would depend on the nature of the organisation. If building a long-term partnership is not the goal of the buying firm. and if the initial price is more important than longer-term cost efficiencies. Segal (1989) found that the decision whether to adopt single or multiple sourcing was often the result of an overriding organisational attitude to suppliers. however. 1990).3. even in this matrix. for a car manufacturer placing high volume. 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. challenged the growing belief in Japanese models of long-term single sourcing. arising from whether the buyer wanted close.3 Purchasing guidelines Estimated value of order Below £500 £500 – £2000 £2000 – £20. for what amount. This would also reduce the buyer’s vulnerability to supply interruption from strikes or breakdowns. cost and delivery competencies rather than trusting them to suppliers (Render and Heizer. Clearly. (1986) and Ramsay and Wilson (1990). and the burden of responsibility for maintaining the necessary technology. very short-duration contracts. competitive type of atmosphere. might also influence the decision. are a large base of suppliers. Ramsay and Wilson (1990). 1997). market structure and location. 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. 2000). or an arm’s-length. quality. 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. in a study of sourcing strategy. and the types and methods of quotation required. powerful. repetitive orders.000 Above £20. They proposed that large. The consequences. 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. however. expertise. the order value categories would be completely inappropriate. This matrix provides clear guidelines on who should be involved. such as product type. However.PROM_C04.2 Contd (b) Multiple sourcing Advantages • Increased competitive pressure • Improved supply continuity • Improved market intelligence • Improved supplier appraisal effectiveness Disadvantages • Perceived lack of commitment • Increased costs • Less supplier investment • Reduced willingness to adapt • Higher operating costs Source: Adapted from Hahn et al. then multiple sourcing could well be favoured. long-term relationships with suppliers. Table 4.
2005b). At times of model changes and reorganisation. In addition. This contrasts with unit production. Most consumer purchasing does not involve so great a degree of flexibility: the product is standard and on the shop shelf. 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. defining the terms of supply so that they are consistent and compatible with production requirements (for example performance specification. It is rare. 1977). 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. Using e-auctions is part of the strategy employed by BA to reduce its procurement bill by over 7. such as a continuous production plant.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. The auction lasted two hours compared with the five days it would have normally taken by traditional methods. On a turnover of £8bn and a procurement expenditure budget of £4bn.5 per cent. A full discussion of the role and structure of groups (buying centres or decision-making units) can be found at pp. It is thus critical for the suppliers in such a system to be able to meet the demands of the customer’s technology. but often it is the buyer who will determine requirements and dominate the supply situation. even for small components used in manufacturing. for example the family unit. other than in the smallest organisations or for the most minor purchases. Group decision-making The need for full information. they are likely to be less formally constituted than in the B2B purchasing situation. usage and function. streamlining costs and helping the procurement function to make a direct contribution to BA’s profitability (Arminas. every saving matters. take it or leave it. 172 et seq. Different types of production and operating systems will help to shape an organisation’s purchasing task. Originally. but due to the loss of face-to-face contact. with clearly defined price. if there is no guaranteed economic and stable flow of materials at a consistent quality level. but also address issues such as confidentiality. there may be an opportunity for the supplier to adopt new technical solutions. Mass production systems are often rigid in the short term. While there are group influences in consumer buying.000 to 2000. the number of suppliers has been cut from 14. adherence to procedures and accountability tends to lead towards groups rather than individuals being responsible for purchasing decisions (Johnson and Bonoma.PROM_C04. BA was very careful to ensure that the specifications for the contract were very tightly defined in the first place. although with careful planning they can be reorganised and modified to accommodate new products. Professional purchasing The risk and accountability aspects of B2B purchasing mean that it needs to be done professionally. to find individuals given absolute autonomy in organisational spending. business gifts and hospitality. while the size of expenditure influenced the managerial level of those involved. according to Hallén (1980). Much negotiation is required where complex customised technical products are concerned and. guidelines are often produced on ethical codes of practice. These do not just cover the obvious concerns of remaining within the law and not abusing authority for personal gain. eg BA decided to use an e-auction to help reduce its European public relations spend by 25 per cent. 1981). . Mattson (1988) found that product related aspects of the purchase strongly influenced the area of the organisation involved in the purchase. where close discussion and joint development may take place to develop designs and specifications that meet the requirements of the application. delivery schedules and quality standards) is a significant job. fair competition and the declaration of vested interests. the system will be severely impaired. Furthermore. An inflexible or technology-driven manufacturing organisation.
PROM_C04. for example. London and other cities being used to avoid export controls. A technical modified re-buy. while a commercial modified re-buy involves issues such as price and delivery. is the commissioning of new plant or buildings. where new models and price changes make review necessary. and therefore needs a great deal of information and wide participation in the process. is related to changing design and performance specifications. 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. The organisation has no previous experience of this kind of purchase. governments may seek to regulate sourcing within certain industrial sectors. If caught. many-faceted decision-making process with wide involvement from both internal members of staff and external consultants. The schedule may be regarded as definite and binding for one month ahead. but in B2B markets. A blanket contract may cover a specific period and a schedule of deliveries over that time is agreed. The former type may be decided by technical personnel. routine or modified re-buys). but with the benefit of drawing on past experience.). Perhaps there have been significant technological developments since the organisation last purchased this item. the illegal operators face being shut down and prosecuted (Hosenball. Increasingly. these types of purchase form part of computer-based automatic reordering systems from approved suppliers. New task purchasing is the most complex category. However. which happens less frequently in an organisation’s life. This represents a big opportunity for a supplier. that has not stopped alternative methods being used. Another situation.e. 2003). inexpensive supplies such as office stationery or utilities (water. Laws and regulations As we saw in Chapter 2. in the case of a routine re-buy. especially where it involves a high-risk or high-cost product. More specifically. Iran has set up networks of front companies to buy materials from US suppliers that eventually end up in Iranian arsenals. The routes taken are often circuitous. some regulations specifically influence the sourcing of products and services. more formal and involved process. such as utilities. regulations affect all areas of business. schedules may even be day or hour specific! A modified re-buy implies that there is some experience of buying this product. An example of this is the purchase of a fleet of cars. etc. 1967). These products may be relatively low-risk. This too involves a detailed. whereas the latter is more likely to concern the purchasing department. For instance. Precise dates and quantities can then be adjusted and agreed month by month nearer the time.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. as it could lead to regular future business (i. The decision-making process here is likely to involve very few people and be more a matter of paperwork than anything else. but there is also a need to review current practice. An obvious example would be the sourcing of goods from nations under various international trade embargoes. with JIT systems. the organisation has bought this product before and has already established suppliers. such as Iraq in the 1990s. and high levels of negotiation. as does the fierce competition between suppliers who will therefore be prepared to negotiate hard for the business. frequently purchased. eg Iran still uses a lot of military hardware purchased during the time of the Shah. with Singapore. Increasingly. but as provisional for the following three months. gas. or a desire to renegotiate the parameters of the purchase. One example of this might be the sourcing of raw materials for a completely new product. The decision-making here will be a longer. electricity. or a feeling that the current supplier is not the best. . therefore. Bearings for the car and electrical motor industries are sold in this way.. 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.
PROM_C04. For example. the following subsections discuss the constituent stages. mutually valuable. the start of the process has to be the realisation that there is a need. Where there is a small number of identifiable customers. . It could also be something more sudden and dramatic than that. and the formal and informal influences on marketing. The processes involved are similar to those presented in the model of consumer decision-making described in Chapter 3. Suppliers can tailor their offerings to suit particular buyers. 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. 167 et seq. Webster and Wind (1972) and Robinson et al. therefore. The stimulation could be internal and entirely routine: it is the time of year to renew the photocopier maintenance contract. choice and post-purchase evaluation also exist here. then it is possible for the buyer and the seller to build experience. obligations and penalty schemes (for late delivery. a problem that a purchase can solve. legally drawn-up contract that lays out both parties’ responsibilities. as formalised in a negotiated. is dependency. knowledge and trust in each other to an intimate level that consumer marketers can only dream of. for example Sheth (1973). organisational purchasing policies. It could be a planned new buy precipitated. a small injection moulding firm found itself selling 80 per cent of its output to a large multinational manufacturer of domestic vacuum cleaners. more formalised process than in consumer markets. for instance). such as the failure of a piece of plant or machinery. or a lack of stock. for example. with different levels of detail. however. the individuals involved. Since the purchasing organisation also had two alternative suppliers on the sidelines. and are. In the short term. in that information search.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. but the interaction of human and organisational elements makes the B2B model more complex. (1967). it was able to exert considerable influence over the small supplier who could not afford to lose the business. They are also more likely to lead to long-term. there are also less concrete factors shaping the way in which two organisations do business. accountants and shareholders. interdependent relationships between specific buyers and sellers. on the basis of these. Figure 4. One of the problems of such close relationships.5 shows two models of organisational decision-making and. to be based on more solid information and to reflect more collective responsibility than a consumer decision. I Precipitation Clearly. How the model is formulated depends on the type of organisations and products involved. There are many models of organisational decision-making behaviour. while over a longer period. The formulation of marketing strategies that will succeed in implementation depends on this understanding. the purchaser comes to rely on regular supplies conforming to quality standards. These issues are covered more fully at pp. B2B buying decisions have to be justified to managers. either party may come to regard the other as essential. analysis. leading to long-term relationships with joint development potential. by the implementation of expansion plans or the imminent production of a new product. The result of all the above complex factors working together is to make B2B purchasing a much longer. likely to be more rationally made.
PROM_C04. talking to visiting sales representatives or reading the trade press might also generate awareness of opportunities. The energy buyers ensure that what was always considered a routine repurchase in the past can now be bought with the most advantageous long-term supply contracts from the most appropriate supplier.5 Models of organisational buying decision-making Robinson et al. Attending trade exhibitions.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. Tesco and Abbey National have appointed energy buyers with responsibility for undertaking a modified re-buy review of the electricity supply market. cost reduction or quality improvements. Thus changes in the energy environment have precipitated changes in purchasing decisions and processes. Organisations such as Ford. then other organisations will have to consider their response. (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. which would stimulate the buying process. Changes in the wider business environment can also trigger a need. . whether based on new technology. If the competition has invested in new technology.
Alstom’s Marine Sector has been working on this problem and has developed a troubleshooting trimaran called the Oil Sea Harvester. 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. birds and beaches. or be postponed until the organisational or environmental conditions are better. has to stimulate potential clients to be aware of the importance of storing essential data away from their normal premises. In offering an automatic off-site backup service for PCs and networks. eg Potential suppliers may have to help the customer to realise that they have a need. . Nevertheless. outline the cost and arrange a follow-up meeting to discuss the client’s needs in detail. Through its innovative design and its equipment. the company uses telemarketing to raise the awareness of risk. Security Backup Systems. it can work its way through the zone. for instance. Artist’s impression of the Alstom oil harvester.alstom.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.alstom. in case of fire or theft.com Not all needs can or will be fulfilled and it is possible for the decision-making process to stop here. This means exposing potential clients to a problem that they may not have even thought about. product specification. some opportunities will be followed through and these move on to the next stage. and offering a solution that they may not have realised was available.PROM_C04. there’s usually an accompanying PR spillage too and the critical attention of the media and various ‘green’ groups turn to the site.com). 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. Source: © Alstom http://www. It can operate in extreme conditions and travel quickly to a disaster zone.
balancing ideals against cost and practicality. The physical characteristics of that component must be specified. delivery schedules and service backup. If existing suppliers can do the job. reviews in detail a wide range of business equipment and services. If a machine has suddenly broken down. reports and publications can be used to compare the different features and performance of competing products. The agency ‘interprets’ the brief. among others. purchasing specialists and marketers (representing the interests of the end customer). but there are also the less tangible but no less important considerations of quantity required. it may be necessary for buyers to be proactive by openly seeking new suppliers and encouraging quotations from those who could meet their requirements. from franking machines to company health insurance. The existing relationship means that there should be better mutual understanding. and the greater the strategic significance of the purchase. Existing suppliers are at least a known quantity. the choice may hinge on compatibility with existing facilities. It may not necessarily be cost. Nevertheless. in terms of its function. an organisation must determine in some detail precisely what is required.PROM_C04. might have a certain amount of in-house expertise within its marketing department. Where specifications are largely set by the seller rather than the buyer. a general specification will be issued to potential suppliers. but is not appropriate in all circumstances. and the purchasing department will keep files on who can do what. It is also worthwhile at this stage to define the criteria or priorities for choice. expected quality and performance levels. discounts and after-sales service for various product categories. Think about buying a component to be incorporated into another end product. its design. All of this helps the B2B buyer to make a more informed choice. for whom half the fun of shopping is often not quite knowing exactly what is wanted. 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. There are some advantages in this approach. guidelines on running costs. the more true this is. good working relationships between members of staff within the two organisations and an appreciation of the constraints under which each of them works. and the purchasing organisation will have experience and a realistic view of their capacity to perform. the scope of the content. for example. the inclination to search for potential suppliers can be quite low. perhaps after a shortlist of two or three suppliers has been drawn up. there is often a bias towards existing suppliers who are known and trusted. Sometimes. or to locate the supplier first and then adapt the specifications to suit what they can offer. The publication What to Buy for Business.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. for example. The brief may specify the number of pages for the brochure. production managers. have its risks. I Supplier selection The next stage involves the search for a suitable supplier who can best meet all the specified criteria. In the case of new technology. Even external consultants and suppliers could be involved in particularly complex situations. These specifications will need the combined expertise of engineers. the target audience and an indication of the price that the organisation is prepared to pay. A key decision early on will be whether to develop a specification based on known particular needs and then locate a suitable supplier. the future prospects for upgrading it or the service support offered. then speed of delivery and installation may be of the essence. then they are likely to be favoured. A level of fine detail in specifications is understandable in an engineering context. On other occasions. then makes proposals to the client who can reject or negotiate from there. An organisation wanting to develop a corporate brochure. its relationship and compatibility with other components. however. In the first instance. technical data. . but a more detailed one would follow later. A typical edition reviews such issues as supplier lists. Automatically pushing business towards the existing supplier does. but the fine detail will be deliberately vague to allow the agency plenty of creative scope. 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.
on the nature of the purchasing task. Traditional methods of exchanging business information electronically (e. However. In a high-risk. com). MedMarket (www. meeting both buyer and seller expectations in terms of the type of technology used. According to Hamblen (2005). sales of IP VPN services in the US in 2004 amounted to US$640m.com) for the healthcare industry. Ford Motor Company (www.g. the second involves facilitating the relationship between organisations and their suppliers in the value chain. such as on the building of a new manufacturing plant. also called an IP VPN as it is based on Internet Protocol (IP). are the most restrictive e-marketplaces. industry or consortia. and the existing supplier might simply be asked to tender a price for resupply. will directly affect the buyer's intention to do business with that seller in the future (MacDonald and Smith. and private e-marketplaces. is of increasing importance in B2B e-marketplaces. and provide even the smallest company with an efficient and cost-effective way to connect their business to their trading partners.urms. privately held. with forecasts that sales will grow to US$3. and United Raw Materials Solutions (URMS) Inc. extranets allow both small and large parties to participate.3bn in 2009. the leading online marketplace for business purchasing. its compatibility with supporting the buyer/seller relationship and the quality of service delivery. a consortium or industry e-marketplace is jointly developed and owned by two or more industry incumbents.com) links 30. frequent purchase might not warrant that kind of search effort. IP VPN are fast gaining popularity. providing a collaboration network with suppliers. with three specific types: public.medmarket. 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. Thus. An example of a public online marketplace is BuyerZone. also known as virtual private networks (VPN). E-marketplaces can be classified according to their openness. while EDI uses proprietary formats or legacy systems developed and implemented by the organisation. or even videoconferencing technologies to mediate the exchange process.com since 2003.com) which provides a B2B exchange centre for the raw materials industry. for instance. lengthy selection procedure is likely to be implemented. Their compatibility with each other. However. There will be complex discussion. negotiation. 2003). an annual growth rate of nearly 40 per cent. Additional problems may be caused where different suppliers will be expected to work closely together.buyerzone. BuyerZone's service attracts active buyers seeking purchasing guidance across more than 100 business product and service categories. a buyer's satisfaction with a seller's use of technology. With the development and commercial adoption of the Internet. The first is in simply facilitating sales transactions between businesses. Electronic technologies can assist business-to-business exchanges in two direct ways. EDI) are costly and complex to set up and maintain. Private e-marketplaces. suppliers.com). Another term for a B2B exchange is an e-marketplace. businesses are increasingly harnessing the potential of information and communication technologies to facilitate and consummate businessto-business (B2B) exchanges. a leading consortium for the automotive industry. Examples include Covisint (www. (www. requiring invitation from the host company. the development of extranets has the potential to change this.com (www. One or two other known suppliers might also be requested to quote for the job.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.e.ford. a more serious.9bn savings each year (Businesss Week 2000). revision and reiteration at a high level with a number of potential suppliers before a final decision is made. and distributors. resulting in an estimated US$8.PROM_C04. customers and other business parties. Electronic Data Interchange (EDI) and extranets have at times been confused with each other. Hamblen (2005).covisint. MacDonald and Smith (2003) Much depends. A low-risk. This is a profitable. An extranet is a VPN. of course. just as a checking procedure to make sure that the existing supplier is not taking advantage of the established relationship. With more than US$2bn in business purchasing transactions facilitated through BuyerZone. Public e-marketplaces are generally owned by third-party providers and are open to any company that wants to purchase and/or sell products. 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. For example. sometimes including a blend of industry-specific buyers. the new task situation). the principal difference being that an extranet operates over an internet protocol network. In contrast. and beyond the reach of most SMEs. . infrequent purchase (i. Sources: Business Week (2000). With the range and sophistication of technologies available. whether it be EDI or extranets.000 auto parts suppliers and 6900 dealers in an electronic network.
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. In concluding this discussion of the buying process as a whole. Some buyers adopt formal appraisal procedures for their suppliers. With the introduction of new purchasing strategies. In another company. Of particular importance to Kruidvat was the need to protect small cosmetic items that can come in various shapes. Linked to the labelling. Stages may be compressed or merge . the supply partnerships formed.meto. Other buyers are less tolerant and keep their suppliers under constant threat. however. 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. The situation has to be monitored as it unfolds. These customers are too important to lose. end here. therefore. p. the contractual commitment and the review and evaluation process. covering key elements of performance. 208). alternative sources will be activated. Failure to live up to these promises can be very costly for production schedules. the buyer of automotive components places the emphasis on quality consistency. Both these examples demonstrate the need for a true marketing orientation among suppliers of fulfilling the customer’s needs and wants exactly. in case there are problems with the supplier. and any complaints have to be handled quickly. not on prices.com). then again. the more likely it is that remedial action can be taken with the least disruption to production schedules. Paliwoda and Bonaccorsi (1994) found a trend towards reducing the supplier base to allow closer cooperation and relationships to develop. Although there were many months of negotiation. 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. including the cosmetic suppliers. Various systems were compared but the Meto system is expected to reduce pilfering considerably when all 25 million product items are tagged. Small trial orders can grow into larger batches. comes in two parts. we can say that the Hill and Hillier (1977) model has provided a useful framework for discussing the complexities and influences on B2B buying. If this could be overcome it would be possible to change the store layout and allow greater use of self-service. We want what we order when we want it’ (Pettitt. especially where technical and commercial complexity exists.PROM_C04. 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. a shift to single (or much reduced) sourcing forms the basis for a preferred supplier system. Two alternative suppliers are kept in reserve in case this happens. the order and delivery schedules set. to allow Kruidvat to strengthen the supply. such as JIT. Suppliers have to earn customer commitment through consistency. however. The process does not. quality and delivery. If a supplier falls short of quality standards. the contract signed. with over 500 drugstores in the Netherlands and Belgium. was selected. A buyer of injection moulded plastic parts. wanted to improve its store security and cut wastage by the installation of EAS (Electronic Article Surveillance). Meto had to provide a security system to detect theft without causing embarrassment to genuine shoppers. In a study of the European aircraft industry. benefiting all players (http://www. efficiently and effectively in order to maintain levels of customer satisfaction. the pressure on suppliers increases. This approach is especially used where larger firms are dealing with smaller suppliers. and in the avionics and power systems areas. I Commitment The decision has been made. for example. Commitment. New suppliers are sometimes eased into critical supply situations so that their performance can be carefully assessed. to generalise about such a process. 1992. He claimed: ‘In my experience. has a policy of withdrawing business from a supplier which fails to meet delivery schedules. The purchasing manager of a large computer assembly plant in Ireland was clear cut in his requirements. Airframe manufacturers increasingly expect suppliers to fund development costs from their own resources. This involved detailed discussions with potential suppliers to assess alternative systems and eventually Meto. It is difficult. a leading European supplier based in Germany. 85 per cent of the business is lost or gained on quality and delivery.
and getting a range of feedback from within the purchasing organisation to allow a comprehensive product offering to be designed. but at what point in the process each person is most influential and how they all interact with each other. Then. These various decision factors are summarised in Table 4.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. solvency. At each stage. that may then narrow down the choice of potential suppliers. The process will also vary according to whether the purchase is a new task or a re-buy. it still involves the less than predictable human element. and on what features. Thus the aspiring supplier wants to know not only who is involved. B2B purchasing is unlikely to be the result of one person’s deliberation and decision. 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. utilising both the group and individual dynamics to the best of their advantage.4.g. culture? To what extent. the supplier’s marketers can deal most effectively with the situation. for example tailoring specific communication packages to appeal at the right time to the right people. The next section looks in more detail at these human elements. As has already been established. provides much more scope and incentive for the supplier to research and influence the buying decision. Remember too that although B2B buying is assumed to be more rational than consumer buying. .PROM_C04. 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. A new task situation.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. 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. however. Table 4. with the promise of either a large contract or substantial future business. 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. ability to meet specifications exactly. the process may end at any stage. 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. and where groups of people are concerned in the buying process there is plenty of scope for its smooth flow to be interrupted. Clearly. past experience. a number of decisions have to be made that may well affect the character of the next stage. depending on circumstances. the amount of time and effort the supplier is prepared to devote to this will vary with the importance and complexity of the order.
(b) Mass production Supplier Production engineering Design Design Sales Sales Quality Quality etc. 172) which then examines how these functional areas operate within a group setting. the role of purchasing may be Figure 4. and thus has to reflect and represent those internal needs. or even during. however. I Purchasing The role of the purchasing department is to handle relationships with suppliers by. This lays the foundations for the next section (p. for instance. quality. such as in building a large gas turbine or specialist vehicles. except in the case of very well-established routines.6. Reproduced with permission. . soliciting tenders. detailing their interests and concerns.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. sourcing suppliers.6 Models of buyer–seller contact in B2B markets (a) Unit production Supplier Production engineering Design Sales Quality etc. Buyer Production engineering Design Purchasing Quality etc. In mass production. the transactions. The role of purchasing will often vary according to the technology being used and the kind of contact needed with suppliers. Purchasing acts as the interface between other internal functions.PROM_C04. This means that the function cannot act in isolation. evaluating offers and negotiating or reviewing performance. In Figure 4. copyright 1982 © John Wiley & Sons Limited. design and production issues may have to be discussed before. The role of purchasing in such a situation tends to be less central to the whole process. and is more focused towards offering support in such matters as contracts and supplier suitability etc. Purchasing Buyer Source: Adapted from Johanson (1982). where unit or small-batch production takes place. there may be considerable contact between different departments within the selling and buying organisations. such as production and finance and external suppliers. This is because a whole range of specification. reliability and possibly frequent and critical exchanges. given the need for consistency.
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.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. The research found that not only does purchasing play the major role in managing supply availability.7 details the various products and services purchased by a university. The more tactical areas are divided into acquisition (TA). except for routine re-buys or where it acquires information to suggest that a change of policy or supplier could lead to better efficiency. Lowest cost is. and profit (TP) where the concern is with savings and improving margins through tendering. managing energy costs. This means developing a clear understanding of the relative significance of individual purchases and of different types of purchases. that is. where the priority is minimising effort. eg The Aberdeen Group published a report in 2005 which highlighted the significant increase in the strategic importance of purchasing since 2000. unlikely to be its prime criterion. it also makes an important contribution to product and service innovation. Purchasing rarely initiates the decision-making process. Where cost-cutting is still a top priority. The whole area of purchasing is growing in importance as organisations seek cost savings. The main concerns of purchasing are security and consistency of supply. The change of purchasing’s role from cost-cutting to value-adding represents a shift in emphasis. especially where large-scale production schedules are concerned.com). combating foreign competition and meeting regulatory requirements. raised quality levels and better integration with suppliers to strengthen their overall competitiveness in the supply chain. therefore. in locating ‘good’ suppliers. often procurement is being shifted to low-cost countries (O’Brien. The other internal departments may channel their efforts and be coordinated through the purchasing department. Figure 4. classified by the security/risk required and the value of the purchases. lifetime value for money TP: Value for money Approved status for suppliers via tender process Improve efficiency/mechanise . suggest longterm supply contracts and careful selection of suppliers. Strategic cells. establishing terms and liaising with them. With business travel in the Figure 4.PROM_C04. SS and SC.//aberdeen. 2005. http:www.
texture and quality for medical use and that could withstand sterilisation. I Production/operations With prime responsibility for meeting targets for the end product in both quantity and quality terms. advising production on more efficient methods. I Engineering Engineering is usually concerned with specification and design. given the supplier’s technical capacity and talents. as in the case of engineering. This is widespread practice in B2B markets (Johanson and Wootz. be mainly involved in the precipitation and specification stages. While some of these adaptations are driven by logistical concerns alone. radical solutions to problems. It takes a higher-profile role in major capital projects or other large items of expenditure.PROM_C04. Such a matrix is a valuable guide to an organisation in selecting those product areas that require special attention. for example when sourcing a component or designing new production facilities. somewhat reducing the role of purchasing to an administrative one. investigating methods of financing and costing projects. issues relating to ease of handling. R&D staff are going to have a strong influence at all stages of the decision-making process. I R&D Where R&D has been given a free-ranging brief to look for new. If a critical component is concerned. development has to be done within given cost parameters. They can also feed specific information back to the supplier to solve a specific end-customer’s problem. This proved to be a somewhat sticky problem. to have close contact with suppliers in the interests of joint development. for example. was researching new approaches to wound dressings that involved close liaison with textile suppliers to develop fabrics of the right density. the production process may have to be adapted to accommodate a particular supplier’s technology. then it is likely. In such cases. 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 some cases. therefore. fit with other organisations’ production systems and cost effectiveness may also be considered. although if they have an interest as users of the purchased product. they are not going to be entirely absent from the other stages. Valla. assessing returns on investments. Johnson & Johnson. it is likely that the finance department will devolve budgets to appropriate managers. Finance will simply take on a monitoring role to ensure that there are no irregularities or variances and provide regular internal information.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. 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. 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). 1986. I Finance For routine production-orientated purchases. At the same time. for example pooling their expertise to use CAD systems to design components that both perform to the purchaser’s specifications and are feasible. 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). travel agencies would be required to bid on a regular basis. 1986). then further development work has to be done to reduce the costs or find alternatives. for . In addition. Production staff may. but could also be supplied in a form that would allow it to be easily and efficiently incorporated into a production run. for example. Applications engineers may work closely with suppliers to develop solutions to problems.
perhaps in terms of better quality or improved reliability. User may influence. representing the interests of the purchasing organisation’s own customers. May also be the buyer and/or influencer. Influencer Decider Decider Purchaser Buyer Handles the search for and negotiations with suppliers. Table 4. the more people are involved and the more formal and time consuming the process is likely to be. Marketers’ concerns. Parents pay the bill. The further removed the situation is from routine re-buys. just who is involved and in what capacity is an amalgam of many factors. Influencer Mother thinks about it and says. Organisational size.5 Comparison of DMUs in consumer and B2B markets Consumer Initiator Example Child pesters parents for a new bike. can also play different roles within the decision-making process that cross functional boundaries. Gatekeeper . structure and culture will also play a role in defining the process. as well as having functional roles and concerns. looks at these non-functional roles. May be a senior manager with either an active or a passive role in the whole process. Marketers are likely to approve of options that enhance the offering. thus favouring innovative. Overall. accountants. B2B User Example Machine breaks down. external consultants. perhaps he has grown out of the old one. I Marketing The marketing function is primarily concerned with the outputs of the production process. may also involve R&D staff. reliable suppliers. but under restraints imposed by parents’ credit card limit. the roles they play and the functional areas that may be involved. ‘Well. Secretarial staff preventing influencers reaching the decision maker. thus initiating the process.’ Father agrees and they all go to Toys ‘R’ Us where the final decision is the child’s. Table 4.5 compares buying centres in consumer and B2B markets. User The child. in relation to functional roles in the decision-making process. but it does have an influence in both shaping the feasible options and selecting the most appropriate supplier. for instance through the degree of delegation of responsibility and devolved decision-making. This section. and how they interact to form a buying centre or decision-making unit (DMU). The buying centre The previous section implied that individuals within the purchasing organisation. the operator reports it. therefore. sales reps. are making sure that the implications of whatever is purchased do not compromise the final product offering or its competitive edge. May also be asked to help with specs for replacement.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. It may not make the final decision. suppliers. R&D staff withholding information. therefore. indicating the membership.PROM_C04.
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. this may be the purchasing officer or someone in a functional role. depending on individual circumstances. but be someone who also has a functional role such as R&D or marketing. but the eventual authority may rest at board level. it is what it needs to be to do the job in hand. but also at the seniority of the members. information gathering and assessment. Bear in mind that the buying centre is not necessarily a fixed entity from transaction to transaction or even within a single transaction. I Influencers Influencers can affect the outcome of the decision-making process through their influence on others. I Buyers Buyers have the authority to select and negotiate with suppliers. Buyers with different levels of seniority may exist to handle different types of transaction. Thus. in that they can control the flow of information by denying access to key members of the buying centre. present and interpret information to other members of the buying centre. personal influence. 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. evolving to meet the changing demands of the unfolding situation. a bank’s decision to introduce a new account control system may be taken at a very senior level. Their prime role is in specification. Where devolved budgeting exists. Influence could stem formally from expertise. Technical staff can also act as gatekeepers in the way in which they choose to gather. In other words. For example. it can consist of two or three or many people. whereas the high-cost. for example a routine re-buy could be handled by a relatively junior clerical worker. high-risk new buy might require a senior purchasing manager of many years’ experience. will vary widely. Higher expenditure levels or purchases that have a critical impact on the organisation may involve much more senior management. a secretary or purchasing manager may prevent a sales representative from talking directly to an executive. for instance) or loosely informal (a chance chat over coffee in the canteen between the purchasing manager and an R&D scientist). or a secretary who will use a word processor. When analysing the make-up of the buying centre. we should look not only at the allocation of roles between the different functional areas of the organisation. or intercept brochures and mailshots and throw them in the wastepaper basket before they reach the decision maker. For routine re-buys. Of course. and may also be consulted in setting the specifications for whatever is to be bought. input from the lower levels of the hierarchy will help to shape the decision. The decider’s role and level of involvement. These people may trigger the purchasing process through reporting a need. the buyer may not belong to a formal purchasing department at all. I Deciders Deciders have the formal or informal authority to make the decision. it can be either formally constituted (for a major capital project. or it could be an informal. for example. therefore. but organisational structures may dictate that the final decision rests with top management. who are fed information and recommendations from below. . for example an operator who will use production machinery.PROM_C04. I Gatekeepers Gatekeepers have some control over the decision-making process. It can be fluid and dynamic.
in some areas closer technical cooperation is required. establishes quality procedures and sets supplier performance standards for appraisal. Nokia operates on formal contracts with suppliers. It believes in partnership. the buyer may also be the decider. 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.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. Global sourcing is the other organisation. By establishing clear lines of communication. It insists. with very little call for influencers. This arrangement simplifies the ordering procedures for Nokia’s local procurement teams. however. By aggregating demand from each of the production units. Given the worldwide scale of production and the need sometimes to adjust product specifications to meet local requirements. the owner/manager may be influencer and buyer as well as decider. but to ensure that adequate supplies of components are available for production. an individual’s contribution to it may not be limited to one role. and the company asks each supplier to present its plan for meeting those targets over the lifespan of the contract. for example. Nokia then arranges for carriers to handle the transport. Its primary role is not to source components. however. local procurement deals with day-to-day purchasing for the factories. etc. quantities. negotiates prices and terms. Nokia has refined its relationship approach to component suppliers over a number of years. 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. as it does not inspect goods on arrival. Nokia is able to get better terms from suppliers because of the scale of the contracts. Having thus established decision-making structures. purchasing has been divided into two different organisations. etc. Nokia insists on each supplier nominating an account manager regarded as being responsible for the relationship between the companies on a global basis. Whatever the structure. Similarly. In a small business. It is the supplier’s responsibility to adjust its own internal organisation to meet Nokia’s requirements. to ensure that components arrive on time at Nokia’s own plants. but it is the global sourcing operation that takes the necessary action with suppliers. capacity planning and allocation can be fed through one point. Targets are set for failure rates and robustness.PROM_C04. openness and trust to ensure that it can plan its capacity and production schedules with a . it is necessary for Nokia’s engineers to work closely with the supplier’s technical staff to create the most appropriate specification. 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. where routine re-buys are concerned. is that it could become locked into a single supplier and this in turn could. specifying prices. however fluid the buying centre is. 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. 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. regardless of where they were produced. it believes. It is up to the supplier to handle its own logistics to ensure that the various products arrive in time at that collection point. issues such as annual purchasing agreements to cover forecasting. Suppliers are expected to meet these standards and are monitored at a local level to ensure that they comply. It expects suppliers to take care of testing and to guarantee that they are meeting standards on a consistent basis. With ‘application-specific integrated circuits’ (purpose-designed complex microchips). Quality monitoring of components is critical so that Nokia can ensure that its own products meet standards. When problems do occur. It uses 250 million components every day which are purchased from some 400 subcontractors and supply partners. that a supplier should offer only one collection point in the world from which components can be collected. customs. First. jeopardise supply continuity. for example. in a larger organisation. The purchasing function’s fear about such arrangements. This actually sources materials. the next step is to examine the criteria applied during the process. Nokia has to be convinced. makes delivery arrangements. quality. 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. Although most of the collaboration is on commercial matters. they are normally identified at the local buying points. especially when the demand for a component is suddenly increased. marketing in action Nokia’s global sourcing Nokia is one of the market leaders in mobile phone development and manufacture.
since it reduces production delays due to substandard components or delivery failures. but one representing good value for money taking into account the whole service package on offer. of course. be short. (2003). 1997). safety and quality are dominant (Nolan. Instead. Buying criteria In the previous sections. The buying criteria are led completely by design and performance technology and the high specification of such cars often means locating special suppliers.saunalahti. Sources: Kandell (2001). thus reducing the costs of handling complaints and replacing goods. 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. The main point is the closeness of the match and the certainty that it will be maintained throughout the order cycle. formally recognised part of the decision-making process. however. Lead times can.PROM_C04. functionally orientated criteria. then it can offer a better package to its own customers.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. These task-related or economic criteria are certainly important and reinforce the view of the organisation as a rational thinking entity. with the rewards that brings.fi) Product specification Product specification involves finding the right product to meet the purchaser’s specified needs. Taimi (1996). This route can also result in lower total costs. Because of the high specification. and then some £5m of spares are needed every season. they can certainly cause friction and influence the outcomes of it. or that the supplier will be able to meet increasing and . eg Building a Formula One racing car from scratch is not an easy business. and also improves the quality consistency of the purchaser’s own end product. neither more nor less. Serant (2001). 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. Stewart Grand Prix’s three racing cars are each made from 1400 components sourced from over 1000 suppliers. If the purchasing organisation can make the best use of increased reliability. so the following are a summary of them. Such motives and goals may not form a direct. The main criteria have already been discussed in the previous sections of this chapter. superior performance. The costs per car can be staggering. To design and develop a car can cost £1m. There are. It is dangerous. Thus by pursuing international supply alliances Nokia is better able to keep at the forefront of its own rapidly changing technology. a similar amount is spent on tyres. the emphasis in terms of decision-making has largely been on rational. good relationships leading to component improvement. it is not always a matter of finding the lowest priced supplier. Sadowski et al. however. These suppliers are both local and international. better customer service and other technical or logistical supports from its suppliers. Appropriate prices The appropriate price is not necessarily the lowest. but nevertheless. various trade-offs between specification and price. reliability. who wants to be the buyer who saved a few pence on the component that caused a breakdown during the big race? (http://www. After all. especially if a re-work is necessary on a component that needs to be upgraded. price is nearly always of secondary importance in the buying decision.
Second. where there is little room for failure. This is particularly important in areas such as electronics where product lifecycles are getting shorter and shorter.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. friendship and social needs. but at the back of the mind there is always the question. .PROM_C04. they may be prepared to spend a little more when the office accommodation is refurbished on better-quality furnishings. one which is safe. 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. This is especially true for JIT systems. We look at each of these in turn. especially where JIT systems are involved. predictable and unspectacular. They want to be seen to be doing better than their competitors or other divisions within the same organisation. Some customer service is delivered even before the sale is made. 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. decor and facilities to impress. If the high-risk decision is made and it all goes wrong. there is the risk element. eg Velden Engineering (UK) manufactures a wide range of component parts and assemblies for various industries and applications. First. or more specifically the individuals who make up organisations. ‘What does this mean for my job?’. and one which is high risk. So. such as medical and aeronautical. what are the consequences? The individual may not want to be associated with such an outcome and thus will push for the safe route. instil confidence or even intimidate visitors to the site. it needs to ensure that everything supplied is right first time. Supply reliability and continuity The purchaser needs to be sure that adequate supplies of the product will be available as and when needed. Prestige Organisations. career security. They may well be chiefly and genuinely concerned with finding the best solution to the problem. This is a crucial factor in supplier selection. 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. hanker after ‘status’. but promises a high return. as failure can be very expensive indeed. I Non-economic influences Powers (1991) summarises non-economic influences under four main headings: prestige. 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. 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?’. and other personal needs. A problem may have two alternative solutions. 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. In such sensitive areas. Career security Few people involved in the decision-making process are truly objective about it.
These. for example. 1986). Remember too the individual’s personal profile. confidence and respect built on a personal level between individuals in the buying and selling organisations. coupled with factors like self-confidence and communication skills. From that trust can come a whole series of activities that can enhance the relationship. Trust can be built at an organisational level. 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. It is necessary. as considered in the following section. . Business colleagues talking at a conference. attitudes and beliefs.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. recent business graduate with forthright views. for example. A further dimension of non-economic forces is trust. but can also stem from a series of personal relationships between employees. however. issues such as demographic characteristics. It does help to reduce the perceived risk of the buyer–seller relationship. 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 their emphasis is still on the relationship between the individual. may provoke negative reactions in older managers who have progressed through more traditional routes and feel that they have accumulated a wealth of experience. to value trust. A young. discussed in Chapter 3 in the context of consumer behaviour.PROM_C04. Lorenz (1988). the job and the organisation. even if the graduate’s views are valid. found from a study of subcontracting in France that personal contacts were a major cause of organisational trust.
Angola and Kazakhstan in order to gain or retain business. given the economic and competitive pressures. Azerbaijan. ‘Grease payments’ to expedite performance. The problem is in defining the boundaries. i. This convention also implicates the giver as well as the receiver of bribes. a public official will give your company’s tender for a new £50m construction project favourable consideration. The investigation was thorough. So whether you paid the $10 and/or the 10 per cent commission you have given a bribe and participated in corruption. to custom officials to avoid import or export duties. certain subsidiaries had offered and/or paid over $1. Ecuador. ABB. paying to jump the queue for licences. Chile and Brazil) to adopt common rules to punish companies and individuals found guilty. It claims that bribery in government procurement adds between 20 and 25 per cent to costs and causes losses of some $400bn per year. said ‘Corruption robs countries of their potential. 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. One country’s normal practice of gift giving may be another’s bribe. the power and automation technology company. Venezuela and Yemen all . 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. is based in Switzerland. Facilitating payments may also be considered as legitimate.5m were imposed and $5. despite the OECD convention. Peter Eigen. Most countries involved have taken practical steps to ratify the protocols. scrutiny of its accounts showed that over a five-year period. Nigeria. Indonesia. B2B marketers will therefore need to take a much more careful approach in future.1m to government officials in Nigeria. The UK has. Cash to custom officials to avoid import or export duties. and 60 of those scored less than 3. Its Corruption Perceptions Index 2004 rated countries for ‘cleanliness’ on a 10-point scale. Kazakhstan. oilrich Angola. Sudan. When it wanted to sell some of these subsidiaries to a US investment group in 2004. but it is real and depending upon who you listen to. Chad. This can have serious and expensive consequences. This is contrary to the US Foreign Corrupt Practices Act (FCPA) and after further investigation. Transparency International (TI) is a global non-governmental organisation. however. A list quoted in Hamra (2000) includes: I I I I Bribes or kickbacks of cash or expensive gifts. 106 out of 146 countries included in the survey scored less than 5. Worryingly. with its stated mission ‘to create change towards a world free of corruption’. What would you do? These are the dilemmas of B2B negotiations in some countries. but a year later than planned. universal code of ethics. You may not like it. 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. permits etc. Russia. where 10 represents very low levels of perceived corruption. but has subsidiaries all over the world. Cash or gifts to avoid legal punishment for breaches of the rules.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. the OECD introduced an anti-bribery convention. Iraq. Of course. The rate of ‘commission’ can go as high as 20–30 per cent. Fines of $10. The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions commits all 30 OECD members and four non-members (Argentina. Hamra (2000) defined bribery as ‘an inducement that influences a public official to perform his or her duties in a manner contrary to the course that would otherwise be adopted’. to win contracts that would not otherwise have been awarded to your company.9m of profit relating to the illegal transactions had to be handed over. not least your own.e. Do you agree? OK. As the Corruption Perceptions Index 2004 shows. ABB is certainly not alone. some decide to go further and build personal fortunes. 2005). 100 interviews in 20 different countries and 4 million documents. involving over 100 lawyers. try this one then. is endemic in some countries. In 1999. It may be common practice in some countries to allow public officials business dealings to supplement their meagre salaries. Libya. suggesting rampant corruption. undertaken with the full cooperation of ABB and the investment group. The sale of the subsidiaries did then proceed. extending good practice from Sweden and the United States. 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.PROM_C04. For 10 per cent ‘commission’. That’s $50–80bn. Iran. Bulgaria. Bribery comes in many forms. The Chairman of TI. criminal proceedings were brought against two of the ABB subsidiaries that were being sold. been slow to prosecute directors responsible for bribery offences. Business customs vary widely across nations and there is no single. You believe you are offering the best deal anyway and it will guarantee hundreds of jobs back home.
Where there is a will . especially now that the OECD acknowledges that it ‘takes two to tango’. Cockcroft (1996). the OECD convention may be difficult to enforce. Hamra (2000). clear policies and guidelines.. for example. 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. training and a willingness to undergo external scrutiny as part of an essentially ethical approach to international contracting. A decision to continue (repurchase) is different from a decision to enhance or commit to a relationship. Porter (1990) goes further in suggesting that an organisation with advantageous relationships with supplier networks has a competitive edge. or setting up middlemen and agents or offshore accounts. then there may be mutual advantage in continuity.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. or in developing special . especially in dealings with countries where corruption is rampant. even at the cost of short-term sacrifice. because of the synergy between them in terms of joint problem solving and information exchange. The quality of the relationship between the buying organisation and an existing supplier could prove to be a major factor in reducing those risks. and thus convenience and possibly low price will be the main concerns. Economic dimension Joint development has already been mentioned a few times in this chapter.oecd. It is also fair to say that the lower-scoring countries are not those who have signed up to the OECD Convention. The history of previous transactions between two organisations leads to understanding.org). The value of building a closer. OECD (2000). effort and money in improving quality or products. Barnett (2000). watch out. such as becoming more covert. So. low risk purchasing situation there may be minimal concern about commitment to the relationship. as complexity increases and as it becomes apparent that value can be created by developing a stable. or the integration of some business functions (Selnes. 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. 1998). In these countries. been an increased focus in recent years on the place of buyer–seller relationships in explanations of marketing and decision-making in B2B markets. Hamra (2000) calls for leadership and value statements from senior management. well-tuned relationship. 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. are a standard product and there is plenty of choice in the market. and is inevitably going to influence decision-making processes.. There has. I Durability Durability refers to the longevity of relationships in B2B markets that might even outlast individuals and managerial generations. public contracting in the oil sector is plagued by revenues vanishing into the pockets of western oil executives. http://www. It may be at the other end of the spectrum but it is a continuum. The decision to commit to a relationship is often a strategic one and can involve exchanging confidential strategic information. Sources: Arminas (2004). However. 1998). despite it being agreed by all members. there are avoidance approaches.transparency.org. committed relationship emerges from two dimensions: economic and social. Moss (1997). Paperclips for the office. Koehler (2005). investing jointly in product development. the buyer has to decide whether a relationship should be continued (repurchase) or not. However.org. There is no such thing as a free lunch. Not all exchanges evolve into long-term durable relationships. Culture and habits will not change overnight.transparency. and whether it should be enhanced in scope (increased commitment to the supplier) (Selnes. therefore. After a first-time purchase. expectations and perhaps an active desire to continue to trade. next time you are offered a free afternoon of corporate hospitality.PROM_C04. middlemen and local officials’ (as quoted on http://www. http://www. If a supplier has invested time. despite the trend towards relationship marketing.
specification and quality. the purchaser cannot easily get the same thing from an alternative supplier and the supplier cannot easily find an alternative customer. then either party may become dependent on the other. while others will be developed as guaranteed.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. The purchaser is unlikely to be interested in helping the supplier unless there is a direct cost saving to be had. Social dimension There is a certain security and comfort in dealing with someone you know. thereby reducing the risks of taking on a new supplier or customer. the nature of the buyer–seller allocation of roles and responsibilities can change. It is difficult for an outsider to break into such well-developed and managed relationships. Some suppliers have the potential to be long-term important partners in joint innovative development. close ties are forged between buyer and seller and there is much interest and value in close cooperation and integration. based on need and value. a purchaser is likely to maintain a portfolio of suppliers and to develop different levels and intensity of relationship with each. Collaborative approaches are particularly crucial in JIT environments. the purchaser will not want to start the process from scratch with a new supplier. Strengths and weaknesses are known quantities. for example. reliability or intentions. there are two polarised approaches that lead to very different relationships. 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. reliable . There is an existing level of trust. knowledge and friendship to build on. where there are plenty of alternative sources of supply. however. it can still be a very powerful bond: if you believe that the other party will not let you down on expertise.. by insisting on short-term contracts and using multiple sourcing. I Supplier relationship portfolio The focus so far has been on the relationship between one purchaser and one supplier. According to Spekman (1988). keeps the supplier alert and sweating. Some relationships can be very long lasting and resistant to change. secure. flexible scheduling and delivery. Although trust can create vulnerability. the risks of becoming too ‘cosy’. operate a JIT system. To Bistritz et al. Collaborative approach In a collaborative approach. complacent and blinkered. 1993). Such an approach can support valuable work in product design.6 shows. (1998). In other words. In reality. Decisions to single source. Similarly. despite the temptations of competitors’ marketing wiles. or to delegate component building to one supplier. the product is fairly standard and price really is the driving criterion. Over long periods. all require a lot of trust. This purchaser will rarely need special products and services and certainly will rarely be prepared to pay for such things. This is a legitimate approach in appropriate circumstances. as well as the inherent dangers of mutual dependency. trust can provide a key competitive difference. Adversarial approach The purchasing organisation pressurises the supplier to minimise prices and. advanced production processes. and special inventory. high degrees of personal and organisational trust can develop. then the supplier will want the relationship to be sustained so that returns on that investment can be realised. neatly summarising the reasons that collaboration rather than confrontation should be considered in critical supply situations. but can deliver significant economic benefits to both parties. and therefore the purchaser may encourage cooperation in improving both technical capability and quality.PROM_C04. A number of studies have been undertaken into the duration of buyer–seller relationships. Trust has been defined as ‘a willingness to rely on an exchange partner in whom one has confidence’ (Moorman et al. There are. If the relationship has led to a specialist complex package. as Table 4.
Others. This could mean small trial orders and perhaps even some pre-order assessment.PROM_C04. planned communication • Integrated operations • Quality and time scales ‘designed in’ • Emphasis on lowest overall cost Source: Adapted from Spekman (1988). copyright © 1988 by The Trustees at Indiana University. There is high mutual trust and respect. stable nest round themselves. Most relationships remain in this stage.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. and will be retained at arm’s length somewhere nearer the adversarial end of the handling spectrum. a trade exhibition or any other means of making an initial contact. Slater (1997) has argued that maintaining relationships is becoming increasingly difficult in complex and turbulent marketing environments. (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. but as with any kind of relationship. changes its nature over time and is unlikely to last indefinitely. perhaps to the point where there is a high level of mutual dependency. mutual investment • Partnerships • Frequent. The stages are: Awareness Awareness occurs as each party learns of each other’s existence and potential. Both of these will deserve a collaborative approach to handling. and the seller has become a major supplier of special products and services. I Relationship lifecycle Much emphasis has been put on the potential durability of a buyer–seller relationship. testing each other out with no real commitment and with high uncertainty over the outcomes. The uncertainty is much reduced.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. will merit no special consideration. valuing the benefits. the novelty has worn off. Expansion Expansion has the characteristics of romance and the early days of marriage. Partners are working together. sources of supply. it is dynamic. and members of staff from the two organisations may be starting to build sound working and social relationships. well-developed personal networks. but a few move on to the next stage. building orders and mutual trust. It is about gaining experience. Kelley School of Business. There is a rising level of commitment and the partners may even be making special adaptations to suit each other better. This could come about as a result of a sales visit. It is the job of purchasing to advise on an appropriate portfolio. Exploration Exploration is about discovery and has all the insecurities of adolescent relationships. 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. Commitment In the commitment stage. but the partners are comfortable with each other and have built a predictable. Dwyer et al. however. for example where there are plenty of alternative sources readily available. This evolution can be broken down into five stages of the relationship lifecycle. .
. a plastic blow moulder. freed of the responsibility of churning out plastic bottles. to force the other party to yield if one partner believes they are in a dominant position. for example. then the most likely source of danger is complacency. found that its major customer was going to phase out its purchases from that supplier over the next two years. and maintaining quality standards. Problem solving. and Jeyes. 1997). Contending. but acted responsibly by phasing the supplier out over time rather than all at once. Dissolution is a strategic decision and managers should consider carefully its impact and how best to handle it (Giller and Matear. These include: I I I I Concession making. identified a range of behaviours that could be adopted to produce a desired outcome. which depended on this customer for 60 per cent of its business. with a conveyor belt running between the two for continuous production and supply. Jeyes switched from in-house production to buying in from LMG. a complex bundle of individual relationships can flourish to achieve a wide range of necessary tasks (Möller and Wilson. The risks of thus extending the supply chain were reduced when LMG located its factory next door to Jeyes’. The overall relationship usually evolves incrementally (Dwyer et al. Jeyes needed 200 different types of plastic bottle in a variety of sizes from 250 ml to 5 litre. . delivery reliability. Both parties benefited from this arrangement. 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. for example.’). more versatile supplier with a good marketing-orientated approach (‘I can tell your current supplier doesn’t understand you any more. could encourage the purchaser to turn to a younger.PROM_C04. to work together to find a new way of operating in a win-win framework. The customer had decided to make the components itself. Lack of innovation or service responsiveness on the seller’s part. cooperative behaviour. 2001). Seventeen machines were needed to produce the required volume of containers. giving it a secure foundation for building a wider customer base. As mentioned in Chapter 1. Walter and Gemünden (2000) proposed that relationship promoters in both the . 1995. A small supplier of engineering components. 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. eg Sometimes the dissolution can be carried out with respect and dignity. 1995). Narus and Anderson. social and structural bonding and other benefits.QXD 29/3/06 9:36 am Page 182 182 PA R T 2 · C U S T O M E R S A N D M A R K E T S eg A good example of the benefits of collaboration is seen in the relationship between the Lawson Mardon Group (LMG). engineering or R&D personnel. depending upon whether the parties wanted the relationship to be retained or dissolved. to allow the relationship to deteriorate towards termination. At least it now had two years to find alternative customers or to reorganise the business. Withdrawal. Within the overall buyer–seller relationship. The neatness of the stages should not suggest that relationships just happen or are bound to develop in a certain way. a consumer cleaning goods manufacturer. 1987) supported by partner-specific adaptations. Dissolution This stage is possibly the equivalent to disillusionment and divorce. to give up something of value to show you want to keep the relationship going. 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. Let me show you my blueprints . LMG had a long-term sevenyear supply contract with flexibility to allow for changing raw material prices. Good and Evans (2001) in an examination of the difficult periods in a relationship.. Jeyes was able to focus on its core business. yet retaining security and flexibility of supply.
and plan their marketing activities accordingly. leading to mutual cooperation and the full exploitation of synergy between the two organisations. Other less significant relationships can. and/or continue to invest in. social needs. trust and commitment to grow and strengthen the durability of the relationship against external challenges. service. Chapter summary The focus of this chapter has been B2B buying behaviour and buyer–seller relationships. such as purchasing. security. specification. personality) emanating from the individuals involved. B2B markets have a number of distinct characteristics. but also by non-economic influences (prestige. product specification. until dissolution. it is clear that when the relationship between two parties is examined in depth. however. to take longer and to involve more people. B2B buying is likely to involve higher value. production and R&D. Increasingly. organisations have to decide which relationships to initiate. The membership of the buying centre. Organisations also have to recognise that relationships develop over time and pass through a number of developmental stages. I B2B marketing is about exchanges between organisations. coordinated and develops for mutual benefit from an economic and social perspective. measurable economic criteria (price. will be involved in the process and form a buying centre. The ongoing buyer–seller relationship is increasingly being recognised as a major influencer of B2B marketing strategies. The decision-making process is affected not only by rational. The decision-making process that B2B purchasers go through has elements in common with consumer decision-making. Staff with various functional backgrounds. the roles played and who takes the lead may vary from transaction to transaction or even from stage to stage within a single process. their underlying determinants and the specific factors that trigger change. Relationships can be durable and resistant to change. be kept deliberately superficial. marketing. less frequently placed orders for products that are more likely to be customised than in consumer markets. therefore. Little is really known about the stages. Much remains to be explored in the evolution of buyer–seller relationships. the structure of demand (concentrated in size and in geography). accounting. including the nature of demand (derived. The purchasing organisation has to develop a portfolio of different relationships of varying closeness and depth to suit the whole spectrum of its needs.). 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 .PROM_C04. government bodies or institutions. and commitment to a long-term relationship. develop. etc. However.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. This allows satisfaction. supplier selection. but is likely to be formalised. whether they are commercial enterprises. perhaps through complacency. or one party’s neglect of the other. the complexity of the buying process and the risks inherent in it. joint and inelastic). patterns of evolution do emerge and the key decision points that shape the relationship become apparent. engineering. The stages in the decision-making process include precipitation. quality.
4 How might people in different functional roles (for example R&D or marketing) participate in B2B buying? 4. close buyer–seller relationships? case study 4.PROM_C04.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. Questions for discussion 4.5 Define the main economic and non-economic influences on B2B decision-making.3 What factors influence the complexity and the amount of time spent on each stage of the organisational decision-making process? 4.500? 4.3 What are the stages in the buyer–seller relationship lifecycle. It is able to combine components. In the energy field.2 How are supplier-handling strategies changing as organisations seek to improve their competitiveness? 4. employing over 140. as Alstom is now a major supplier of energy and transport infrastructure to China. With 60 new power stations in various stages of construction that means an awful lot of potential business for Alstom to target. be local and be prepared to wait five years before gaining a reasonable return on investment’. Most of your contracts are awarded by tender. With that kind of expertise. systems and services to design. According to Geoff Ball. What would your attitude be to the following offers from potential suppliers. and how is each characterised? What difference might the stages make to the seller’s marketing approaches? 4.4 You are the purchasing manager of a large organisation with an enormous annual spend. a position achieved by carefully building a reputation through effective B2B relationships with key decision makers.000 megawatts each year at a cost annually of €18. it has around 20 per cent of the world’s installed power generation capacity – that’s 650 gigawatts. manufacture and commission power generation infrastructure to customers’ specifications. founded on state-ofthe-art research and development and considerable project experience.1 Alstom China Alstom is a France-based global organisation with sales of over €22bn. to be successful in doing business in China one must ‘be patient.1 From the supplier’s point of view.000 people in over 70 countries. how might the marketing approaches aimed at a customer making a new task purchase differ from those aimed at a routine re-buy customer? 4. it is perhaps not surprising that the Chinese authorities have taken a keen interest in accessing Alstom technology. 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) £1.75bn. It is already involved in 17 .5 What do you think are the advantages and disadvantages of long-term. President of Alstom China.2 What are the main differences between B2B and consumer buying behaviour? 4. 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. He should know. 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.
Source: Alstom http://www. It has tough competition from Siemens. In reality. GE and Mitsubishi. It is important for Alstom to keep a close watch on market developments in China to spot opportunities early. any slip-up soon becomes well known among other potential buyers. performance and even bid prices. In total. it is becoming increasingly difficult to differentiate between the global players on quality. The industrialisation of the western provinces of China and Tibet is currently a major priority for increasing power generation capability. It could take anything up to two years before projects are started and a further two to three years before they are finally commissioned. For effective B2G (business to government) marketing.com Feasibility study The state-owned Electrical Design Institute is one of the pivotal organisations that can influence outcomes. and to gain formal approval for the project from the state. Issues such as foreign exchange considerations. Lead times tend to be a minimum of three years and. performance output is often very similar. the Shanghai Waigaoqiao phase three power plant which provides high steam conditions but reduces the heat and emission rate by 10 per cent. critical in ensuring that the technical solutions offered are well understood and. the provincial governments. including the Three Gorges hydroelectric power plant. 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. Late in 2004. The rapid development of China’s industrial infrastructure is a good opportunity for Alstom to further develop its long-term business interests there. attracting financial . therefore. etc. as every project is very high profile across the nation. Within the Institute are the technical specialists capable of advising on various alternative solutions and their cost profiles. For more advanced projects. indicating the importance of the market in China as well as its importance to Alstom’s global organisation. It also decides the type of power generation required. the largest of its kind in the world. Alstom thus has to perform to high standards. 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. gas. Alstom had an order intake of €600m from the power generation sector in 2004. the various influencers and deciders need to be identified and a communications strategy developed to move from project conception to the final bid acceptance. hydro. for example. Most power generation purchases are made by the eventual users. efficiency. to establish specifications.PROM_C04. hopefully. Maintaining good relations with the technical specialists in the Design Institute is. The size of individual orders can be very large. Its role is to examine the expected demand for power proposed by the provincial governments. 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. Energy power planning is a critical part of the industrial infrastructure and with such a dynamic economy. 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. Project decision The SDPC in Beijing is the formal body that considers economic and political factors before making a decision to proceed. all global players. these plans need to be at least five years ahead.alstom. the technical staff of the Institute may initiate discussions about state-of-the-art alternatives. as well as an increasing number of local Chinese companies which are often in alliance with the global players.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. Alstom is not alone in targeting the market. along with smaller niche manufacturers. Although the systems and solutions offered may be different. however. and finally the Daya Bay nuclear power plant. This stage can take between six months and one year and the output is a report to the State Development and Planning Committee (SPDC). although their role in the buying process is not that great. coal. 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. favoured.
the percentage of localised production or the technical requirements are not met. allowing more time to be spent with the preferred bidders. draft contracts are often issued so that all the clauses can be considered and discussed before a final selection is made. If a supplier cannot meet the requirements at this stage it means disqualification. local companies will eventually be substituted. for example. 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. 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. The localisation of supply contracts can be an important feature at this stage. meeting with a large number of experts from the buying committee. However. 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. pre-quotes are requested as an initial expression of interest. Preliminary evaluation of proposals At this stage. serious technology transfer has to be built into the project along with appropriate management development strategies. as often the other technical factors have been used to pre-qualify bids. Even when a price has been tendered. local and international. although access to all the decision makers can be difficult. Normally. went through a difficult period for a few months after Thomson supplied satellite technology to Taiwan. The SPDC has the power to overrule any recommendation from the Design Institute. these negotiations rarely take place in formal sessions. Global suppliers are primarily used to supply cutting-edge technologies at a time when China does not have the expertise. there is little point in a prospective supplier spending further time on the project. for example on the Lanzhou power generation project it was 40 per cent for phase one and 60 per cent for phase two. for example.PROM_C04. Normally a two. it is not unusual for two or three further attempts to be made to reduce it still further. Formal tender invitations The committee. whether to seek local or global bids or the political issues associated with dealing with certain countries are all considered. formal proposal evaluation takes place to reduce the number of bidders down to two or three. Some high-level lobbying is possible at this stage. The trend is clear to see. Usually at this stage. More subtle PR and indirect communications strategies may be needed. Bid evaluation and decision The committee’s final evaluation and decision often revolves around the final contract negotiation. 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. In the experience of Alstom.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. If. the Design Institute’s technical proposals are accepted by the SPDC although some reshaping may be required. This enables those with a dubious record or an uncompetitive proposal to be weeded out early on. Bidding specification approved At this stage. Draft contracts prepared As part of the tendering stage. The meetings often . then invites named suppliers to prepare a detailed tender and to enter into formal negotiations. involve all the parties involved with the project. This can be a long process with extensive discussions involving specialists from both sides. This enables questions to be asked and clarification to be sought before initial evaluation. however: unless the overseas supplier remains ahead in R&D. In addition. 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. French companies. Once formal bidding is initiated the specifications tend to be rigid. it is the degree of localisation that is the key factor after technical and cost criteria have been met. Typically it may mean between ten and fifteen people on each side around the negotiation table.or three-month timescale is allowed. Contracts for coal-fired power stations up to 6 gigawatts now tend to be awarded only to local companies. having eliminated many initial bidders. 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. but are conducted the night before on an informal basis. Sometimes the final decision can be ‘political’ to ensure that each of the main global competitors retains a continued interest in bidding.
in terms of safety. Sources: with grateful thanks to Geoff Ball. Virgin. In a risk-avoidance environment.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. 2005. increasingly. 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. launched in 1976 are still going strong in 2006! This poses a challenge to manufacturers in deciding how much capacity they should retain. franchised and regional operators. 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. 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. for example. economic and political issues. however.com. as the new train operating franchisees placed large orders to modernise their fleets. or earlier in the process. is to position the company to make most of the opportunity by demonstrating that the best technical and economic solution lies with them. 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. President. During the whole process.4bn to refurbish 1738 cars for London Underground. 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. as it now has one of the youngest train fleets in Europe. such a high level of contact reduces the personal risks for lower-order decision-makers in selecting the company. given the size of the order and its political significance to both parties. This is a far cry from the days in the 1920s when every private railway company had its own manufacturing facility. Class 125. the tenyear period from 1996 was regarded as a feast.alstom. 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. to ensure that such visits are not regarded as ‘jollies’ or free holidays. http://www. for example. The challenge throughout the process.PROM_C04. As that order will not . This allows the possibility for decision makers to meet a wider range of staff and to look at installations in practice. The meeting of Chairman and CEO of Alstom. produced a photograph for the corporate literature that ‘says a thousand words’. They are normally signed with the maximum publicity. which could take up to two years. The high-speed trains. completely renewed its fleets for the West Coast and Cross Country lines. Either at this stage. to replace rolling stock. Alstom corporate literature.2 Supplying rolling stock The journey to work by train in Europe would not be the same without specialist builders such as Bombardier. marked the beginning of a famine period for the UK. Alstom. Given that build cycles vary around the world. a delegation is formed to visit Alstom in France if it is bidding. In the UK. By the end of 2005 only Bombardier’s Derby plant represented significant UK manufacturing capacity because it had future large orders worth £3. Pierre Bilger with Chinese Premier Zhu Rongji. manufacturers need to spot emerging opportunities early on and keep up-to-date information on the age of operators’ fleets and the pressures on them. China. The industry is characterised by feast and famine. but especially in the early and late stages. however. The lifecycle of rolling stock means that replacement will not be necessary for another ten years or more. Lobbying can take place at the most senior level under the guise of invitations and gestures. Some care is taken. This means identifying projects early and getting in early to lobby for that position during the negotiation stage. 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. Siemens and Alstom. suppliers like Alstom have to consider when to lobby and when to enter into normal sales and technical discussions.
and although Hitachi priced its bid for the West Coast regional trains competitively. such as Hitachi from Japan. it was just pipped by Siemens. while in famine it can be a struggle to retain capacity.000 and 12. having insufficient capacity can be an issue. Manufacturing locally is therefore becoming less and less important to the industry. is to use the slack time to engage in refurbishment and heavy repairs. This included cars for the Neihu line in Taiwan. The remaining suppliers will be required to work even closer with Siemens during the specification and contract negotiation with . the Chinese company bid at £650.bombardier. Reliability and performance are vital to a train operator. the rate of replacement of stock in central Europe where EU membership is bringing funds for upgrading. Central to any marketing strategy is the ability to produce on cost. 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. the Chinese builder. although the aftersales maintenance and refurbishment work is very useful to the manufacturers for bridging the gaps between large new build orders. Although it became the preferred bidder. the eventual order was delayed due to a change of franchise arrangements.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. From this early prototype. Companies scoring below 50 per cent face a bleak future unless they are in a strategic supply area in which choices are limited. The only other option for a plant. Siemens went on to win contracts for West Yorkshire trains and a large order for South West Trains franchise. are now taking a keen interest. Bombardier has been undergoing a pan-European rationalisation programme.000 suppliers down to around half that number. Siemens. although it has been suggested that it lost money on the contract in order to gain a foothold in the UK. if it is not manufacturing.000. This places a premium on the efficiency and effectiveness of the builder’s supply chain. the rolling stock buyers. Again the technology is tried and tested and highly dependable with no technological leap. The manufacturers are undertaking a supplier rationalisation programme. also deliberately used price to try to enter the UK market. Furthermore. the lifecycle cost of components must also be considered. especially when cancelled or late services can invite financial penalties. provided the rolling stock for the Docklands Light Railway. Source: Bombardier http://www. Siemens estimates that 70 per cent of its supplies by volume come from just 300 suppliers so there is scope for considerable rationalisation. Asian manufacturers such as Hitachi don’t compete just on price: Japanese trains have tended to perform better. as manufacturers are increasingly taking responsibility for maintaining the vehicles they supply. All suppliers are being ranked on a points system that covers delivery performance and quality consistency as well as unit cost. When the Northern franchise declared an interest in replacing its Pacer fleet. expecting a price per vehicle of around £1m. Cultivating a smaller number of strategic supply relationships creates opportunities for closer working and joint problem solving as well as transaction efficiencies. however. CSR Ziyang.com come into full swing until 2008. It aggressively pitched for the Heathrow Express Class 332 contract and won the order. aiming to cut a typical supply base from between 10. Asian firms. a French company. the company decided to switch some interim work to Derby from elsewhere to offset the 55 per cent capacity usage. have proven to be more reliable and have focused on small incremental improvements rather than the design breakthroughs which can prove problematic (such as the tilting train). the German multinational. but the rate of change will be determined by factors such as whether the German Deutsche Bahn would start placing orders again. The whole sector is under pressure from the penultimate customer. There is little point in saving money today only to have to spend more three years down the line. 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. on time and within agreed reliability and performance levels. Siemens is now one of the top two suppliers in the UK. and orders for high-speed trains in Spain. Such bidding is. 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. provides a good example of how national boundaries count for little in this market. 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. From that base. In the feast times.PROM_C04.
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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? .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. are likely to influence their choice of MTV. internal and external.